Note U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO
___________
Commission file number 0-22916
PHC, INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2601571
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Lake Street, Suite 102, Peabody MA 01960
(Address of principal executive offices) (Zip Code)
978-536-2777
(Registrant telephone number)
_______________________________________________________________________________
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes___ No X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes___ No X
Number of shares outstanding of each class of common equity, as of October 21,
2005:
Class A Common Stock 17,369,201
Class B Common Stock 776,991
-- 1 --
PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets - September 30, 2005 and June
30, 2005.
Condensed Consolidated Statements of Income - Three months ended
September 30, 2005 and September 30, 2004.
Condensed Consolidated Statements of Cash Flows - Three months ended
September 30, 2005 and September 30, 2004.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on form 8-K
Signatures
-- 2 --
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
ASSETS 2005 2005
(unaudited)
_______________________________________________________________________________
Current assets:
Cash and cash equivalents $1,504,697 $ 917,630
Accounts receivable, net of allowance
for doubtful accounts of $2,710,835
at September 30, 2005 and $1,956,984
at June 30, 2005 6,228,354 6,265,381
Pharmaceutical receivables 1,576,637 1,414,340
Prepaid expenses and other current assets 612,888 146,988
Other receivables and advances 361,210 638,654
Deferred income tax assets 1,375,800 1,375,800
___________ ___________
Total current assets 11,659,586 10,758,793
___________ ___________
Accounts receivable, non-current 55,000 65,000
Other receivables 81,835 84,422
Property and equipment, net 1,803,166 1,516,114
Deferred financing costs, net of amortization
of $80,917 at September 30, 2005 and $62,507
at June 30, 2005 127,528 145,938
Customer relationships, net of amortization
of $170,000 at September 30, 2005 and
$140,000 at June 30, 2005 2,230,000 2,260,000
Goodwill 2,648,209 2,648,209
Other assets 446,171 417,172
___________ ___________
Total assets $19,051,495 $17,895,648
___________ ___________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,189,746 $ 907,569
Current maturities of long-term debt 806,053 769,599
Revolving credit note 2,573,707 2,385,629
Deferred revenue 124,635 85,061
Current portion of obligations under capital
leases 18,877 29,777
Accrued payroll, payroll taxes and benefits 1,358,365 1,411,653
Accrued expenses and other liabilities 435,456 1,063,189
___________ ___________
Total current liabilities 7,506,839 6,652,477
Long-term debt, net of current maturities 1,712,365 1,900,022
Obligations under capital leases, net of
current maturities 9,757 12,210
Deferred tax liabilities 229,000 229,000
___________ ___________
Total liabilities 9,457,961 8,793,709
___________ ___________
Stockholders' equity:
Preferred Stock, 1,000,000 shares authorized,
none issued or outstanding -- --
Class A common stock, $.01 par value, 30,000,000
shares authorized, 17,552,799 and 17,490,818
shares issued at September 30, 2005 and June
30, respectively 175,527 174,908
Class B common stock, $.01 par value, 2,000,000
shares authorized, 776,991 issued and
outstanding September 30 and June 30, 2005 each
convertible into one share of Class A common
stock 7,770 7,770
Additional paid-in capital 23,502,361 23,377,059
Treasury stock, 191,098 shares and 181,738
shares of Class A common stock at September
30, 2005 and June 30, 2005 respectively,
at cost (173,620) (155,087)
Accumulated deficit (13,918,504) (14,302,711)
___________ ___________
Total stockholders' equity 9,593,534 9,101,939
___________ ___________
Total liabilities and stockholders' equity $19,051,495 $17,895,648
___________ ___________
See Notes to Condensed Consolidated Financial Statements
-- 3 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
2005 2004
___________ __________
Revenues:
Patient care, net $ 6,712,980 $ 6,209,499
Pharmaceutical studies 1,306,009 1,086,590
Contract support services 925,837 661,426
___________ __________
Total revenues 8,944,826 7,957,515
___________ __________
Operating expenses:
Patient care expenses 3,261,911 3,040,982
Patient care expenses, pharmaceutical 563,154 389,963
Cost of contract support services 597,795 516,909
Provision for doubtful accounts 656,887 254,109
Administrative expenses 2,629,676 2,179,661
Administrative expenses, pharmaceutical 633,999 691,056
___________ __________
Total operating expenses 8,343,422 7,072,680
___________ __________
Income from operations 601,404 884,835
___________ ___________
Other income (expense):
Interest income 22,864 17,039
Other income 10,785 12,809
Interest expense (155,218) (113,055)
___________ ___________
Total other expenses, net (121,569) (83,207)
___________ ___________
Income before provision for taxes 479,835 801,628
Provision for income taxes 95,628 26,000
___________ ___________
Net income applicable to common
shareholders $ 384,207 $ 775,628
=========== ===========
Basic net income per common
share $ 0.02 $ .04
=========== ===========
Basic weighted average number of shares
outstanding 18,099,342 17,360,604
=========== ==========
Fully diluted net income per common
share $ .02 $ .04
=========== ==========
Fully diluted weighted average number of
shares outstanding 19,270,164 18,155,364
=========== ==========
See Notes to Condensed Consolidated Financial Statements.
-- 4 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
September 30,
2005 2004
___________ ____________
Cash flows from operating activities:
Net income $ 384,207 $ 775,628
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 135,976 99,025
Non-cash interest expense 13,932 --
Non-cash stock-based compensation 75,497 6,926
Deferred tax asset -- (94,600)
Changes in operating assets and
liabilities:
Accounts receivable 164,761 (1,010,959)
Prepaid expenses and other current
assets (465,900) (365,832)
Other assets (33,769) (18,015)
Accounts payable 1,282,177 355,976
Accrued expenses and other liabilities (641,447) 117,018
___________ ____________
Net cash provided by (used in) operating
activities 915,434 (134,831)
___________ ____________
Cash flows from investing activities:
Acquisition of property and equipment (369,848) (254,804)
Costs related to business acquisition -- (18,853)
___________ ____________
Net cash used in investing activities (369,848) (273,657)
___________ ____________
Cash flows from financing activities:
Revolving debt, net 188,078 237,678
Long-term debt, net (178,488) (204,772)
Deferred financing costs -- (60,000)
Proceeds from issuance of common stock,
net 50,424 11,600
Purchase of treasury stock (18,533) (13,880)
___________ ___________
Net cash provided by (used in) financing
activities 41,481 (29,374)
___________ ____________
Net increase (decrease) in cash and cash
equivalents 587,067 (437,864)
Beginning cash and cash equivalents 917,630 594,823
___________ ____________
Ending cash and cash equivalents $1,504,697 $ 156,959
___________ ____________
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 155,218 $ 104,927
Income taxes 108,300 77,500
See Notes to Condensed Consolidated Financial Statements.
-- 5 --
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2005
Note A - The Company
PHC, Inc. (the "Company") is a national health care company, which operates
subsidiaries specializing in behavioral health services including the treatment
of substance abuse, which includes alcohol and drug dependency and related
disorders and the provision of psychiatric services. The Company also conducts
pharmaceutical research studies, operates help lines for employee assistance
programs, call centers for state and local programs and provides management,
administrative and online behavioral health services. The Company primarily
operates under four business segments:
Behavioral health treatment services, including two substance abuse
treatment facilities: Highland Ridge Hospital, located in Salt Lake City, Utah,
which also treats psychiatric patients, and Mount Regis Center, located in
Salem, Virginia, and seven psychiatric treatment locations which include Harbor
Oaks Hospital, a 64-bed psychiatric hospital located in New Baltimore, Michigan,
Detroit Behavioral Institute, a 30-bed psychiatric hospital (increased to 50
beds October 2005) dedicated to adjudicated juveniles located in Detroit,
Michigan and six outpatient behavioral health locations (one in New Baltimore,
Michigan operating in conjunction with Harbor Oaks Hospital, two in Las Vegas,
Nevada operating as Harmony Healthcare and three locations operating as Pioneer
Counseling Center in the Detroit, Michigan metropolitan area);
Pharmaceutical study services, including four clinical study sites: two in
Arizona, in Peoria and Mesa, one in Royal Oak, Michigan and one in Midvale,
Utah. These research sites conduct studies of the effects of specified
pharmaceuticals on a controlled population through contracts with major
manufacturers of the pharmaceuticals. All of the Company's research sites
operate as Pivotal Research Centers;
Call center and help line services (contract services), including two call
centers: one operating in Midvale, Utah and one in Detroit, Michigan. The
Company provides help line services through contracts with major railroads and a
call center contract with Wayne County, Michigan. The call centers both operate
as Wellplace; and
Behavioral health administrative services, including delivery of management
and administrative and online services. The parent company provides management
and administrative services for all of its subsidiaries and online services for
its behavioral health treatment subsidiaries and its call center subsidiaries.
It also provides behavioral health information through its website
Wellplace.com.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2006. The accompanying financial
statements should be read in conjunction with the June 30, 2005 consolidated
financial statements and footnotes thereto included in the Company's 10-K filed
on September 28, 2005.
-- 6 --
Note C- Stock Based Compensation
The Company issues stock options to its employees and directors and
provides employees the right to purchase stock pursuant to stockholder approved
stock option and stock purchase plans. Effective July 1, 2005, the Company
adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment"
(SFAS No. 123R), using the Statement's modified prospective application method.
Prior to July 1, 2005, the Company followed Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock compensation.
Under the provisions of SFAS No. 123R, the Company recognizes the fair
value of stock compensation in net income, over the requisite service period of
the individual grantees, which generally equals the vesting period. All of the
Company's stock compensation is accounted for as an equity instrument and there
have been no liability awards granted.
At June 30, 2005, the Company accelerated the vesting on all previously
granted options. Therefore, as of the date of adoption there is no unrecognized
expense of these options and the expense recorded in the quarter ended September
30, 2005 is for options issued and vested during that period. The unrecognized
expense of awards not yet vested will be recognized in net income in the periods
in which they vest. Under the provisions of SFAS 123R, the Company recorded
$75,497 of stock-based compensation on its consolidated condensed statement o
operations for the three months ended September 30, 2005, included in the
following expense categories:
Three Months Ended
September 30, 2005
__________________
Professional fees $ 5,640
Employee compensation 69,837
________
Total $75,497
The Company utilized the Black-Scholes valuation model for estimating the
fair value of the stock compensation granted after the adoption of SFAS 123R.
The weighted-average fair values of the options granted under the stock option
plans for the three months ended September 30, 2005 was $1.21, using the
following:
Three Months Ended
September 30, 2005
__________________
Average risk-free interest rate 4.5%
Expected dividend yield None
Expected life 5 years
Expected volatility 45%
The dividend yield of zero is based on the fact that the Company has never
paid cash dividends and has no present intention to pay cash dividends. Expected
volatility is based on the historical volatility of our common stock over the
period commensurate with the expected life of the options. The risk-free
interest rate is the U.S. Treasury rate on the date of grant. The expected life
was calculated using the Company's historical experience for the expected term
of the option.
Based on the Company's historical voluntary turnover rates for individual
in the positions who received options in the period, there was no forfeiture
rate assessed. It is assumed these options will remain outstanding for the full
term of issue. Under the true-up provisions of SFAS 123R, a recovery of prior
expense will be recorded if the actual forfeiture is higher than estimated.
SFAS 123R requires the presentation of pro forma information for the
comparative period prior to the adoption as if all of the Company's employee
stock options had been accounted for under the fair value method of the original
SFAS 123. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation to the prior-year period.
Three Months Ended
September 30, 2004
__________________
Net income, as reported $ 775,628
Less: Stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects (28,025)
Pro forma net income (loss) $ 747,603
Earnings (loss) per share:
Basic - as reported $ 0.04
Basic - pro forma $ 0.04
Diluted - as reported $ 0.04
Diluted - pro forma $ 0.04
During the three months ended September 30, 2004, the weighted-average fair
value of the options granted under the stock option plans was $0.51, using the
following:
Three Months Ended
September 30, 2005
__________________
Average risk-free interest rate 4.0%
Expected dividend yield None
Expected life 5 years
Expected volatility 45%
Note D - Business Segment Information
The Company's behavioral health treatment services have similar economic
characteristics, services, patients and clients. Accordingly, all behavioral
health treatment services are reported on an aggregate basis under one segment.
The Company's segments are more fully described in Note A above. Residual income
and expenses from closed facilities are included in the administrative services
segment. The following summarizes the Company's segment data:
Pharmaceutical
Treatment Study Contract Administrative
Services Services Services Services Eliminations Total
__________________________________________________________________
For the three months ended
September 30, 2005
Revenue-external customers $6,712,980 $1,306,009 $925,837 $ -- $ -- $ 8,944,826
Revenues - intersegment 2,750 -- -- 816,000 (818,750) --
Net income (loss) 684,935 92,828 336,500 (730,056) -- 384,207
-- 7 --
Total assets 10,398,368 5,748,511 411,728 2,492,888 -- 19,051,495
Capital expenditures 333,348 15,495 6,170 14,835 -- 369,848
Depreciation &
amortization 86,503 39,863 2,304 7,306 -- 135,976
Goodwill 969,099 1,679,110 -- -- -- 2,648,209
Interest expense 119,479 16,028 -- 19,711 -- 155,218
Income tax expense
(benefit) 81,071 -- 14,557 -- -- 95,628
Note D - Business Segment Information (continued)
Pharmaceutical
Treatment Study Contract Administrative
Services Services Services Services Eliminations Total
__________________________________________________________________
For the three months ended
September 30, 2004
Revenue-external customers $6,209,499 $1,086,590 $661,426 $ -- $ -- $7,957,515
Revenues - intersegment -- -- 11,282 654,000 (665,282) --
Net income (loss) 1,280,646 60,257 138,517 (703,792) -- 775,628
Capital expenditures 211,342 3,895 1,042 38,525 -- 254,804
Depreciation & amortization 41,622 34,862 897 21,644 -- 99,025
Interest expense 93,764 2,314 -- 16,977 -- 113,055
Income tax expense (benefit) 20,000 -- 6,000 -- -- 26,000
For the period ended June 30,
2005
Total Assets 9,333,260 5,596,917 669,229 2,296,242 -- 17,895,648
Goodwill 969,099 1,679,110 -- -- -- 2,648,209
Note E - Debt covenants
For the quarter ended September 30, 2005, the Company was not in compliance
with its long term debt covenants primarily due to the software failure at the
Harbor Oaks facility, which delayed billing and postponed collection effort
while the system was being recovered. CapitalSource, the compamny's lender has
provided the Company with a waiver of these covenants for the period.
Note F - Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 (R) supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS
No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123 (R) is
similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values. Pro-forma disclosure is no longer an alternative. The Company
implemented SFAS No. 123 (R) on July 1, 2005. As a result of it's implementation
the Company expensed $69,837 in compensation cost based on the Black-Scholes
value of the 230,000 options issued this quarter.
In May 2005 the FASB issued SFAS No 154 "Accounting Changes and Error
Corrections" which replaces APB Opinion No. 20 "Accounting Changes" and FASB
Statement No. 3 "Reporting Accounting Changes in Interim Financial Statements,"
and changes the requirements from the accounting for a reporting of a change in
accouting principle. SFAS No. 154 requires retrospective application to prior
periods financial statements of changes in accounting principle, unless it is
impracticable to determinme either the period specific effects or the cumulative
effect of the change. SFAS No. 154 shall be effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date of SFAS No. 154 was issued. At the
present time, we do not believe the adoptions of SFAS 154 will have a material
effect on our financial position, results of operations or cash flows.
-- 8 --
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
In addition to historical information, this report contains statements
relating to future events or our future results. These statements are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933,as amended, and Section 21E of the Securities Act of 1934, as
amended (the "Exchange Act") and are subject to the Safe Harbor provisions
created by the statute. Generally words such as "may", "will", "should",
"could", "anticipate", "expect", "intend", "estimate", "plan", "continue", and
"believe" or the negative of or other variation on these and other similar
expressions identify forward-looking statements. These forward-looking
statements are made only as of the date of this report. We do not undertake to
update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise. Forward-looking statements are based on
current expectations and involve risks and uncertainties and our future results
could differ significantly from those expressed or implied by our
forward-looking statements.
Overview
The Company presently provides behavioral health care services through two
substance abuse treatment centers, two psychiatric hospitals and five outpatient
psychiatric centers (collectively called "treatment facilities"). The Company's
revenue for providing behavioral health services through these facilities is
derived from contracts with managed care companies, Medicare, Medicaid, state
agencies, railroads, gaming industry corporations and individual clients. The
profitability of the Company is largely dependent on the level of patient census
and the payor mix at these treatment facilities. Patient census is measured by
the number of days a client remains overnight at an inpatient facility or the
number of visits or encounters with clients at outpatient clinics. Payor mix is
determined by the source of payment to be received for each client being
provided billable services. The Company's administrative expenses do not vary
greatly as a percentage of total revenue but the percentage tends to decrease
slightly as revenue increases. Although the Company has changed the focus and
reduced expenses of its internet operation, Behavioral Health Online, Inc.
continues to provide behavioral health information through its web site at
Wellplace.com but its primary function is technology and internet support for
the Company's other subsidiaries and their contracts. As such, the expenses
related to Behavioral Health Online, Inc. are included as corporate expenses.
The Company's research division, Pivotal Research Centers, Inc., contracts with
major manufacturers of pharmaceuticals to assist in the study of the effects of
certain pharmaceuticals in the treatment of specific illness through its clinics
in Arizona, Michigan and Utah.
The healthcare industry is subject to extensive federal, state and local
regulation governing, among other things, licensure and certification, conduct
of operations, audit and retroactive adjustment of prior government billings and
reimbursement. The extent of any future regulatory changes and their impact on
the Company's business is unknown. The current administration has put forth
proposals to mandate equality in the benefits available to those individuals
suffering from mental illness (The Parity Act). If passed, this legislation will
improve access to and reimbursement for the Company's programs. Managed care has
had a profound impact on the Company's operations, in the form of shorter
lengths of stay, extensive certification of benefits requirements and, in some
cases, reduced payment for services. As part of the Government Medicare Program,
reimbursement rates for behavioral health care have increased. When fully
implemented, this increase may have a positive impact on performance at the
Company's one Medicare facility, Harbor Oaks Hospital. The Company is exploring
the possibility of becoming a Medicare provider at its other in-patient
facilities.
-- 9 --
Critical Accounting Policies
The preparation of our financial statements in accordance with accounting
principles generally accepted in the United States of America, requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. On an on-going
basis, we evaluate our estimates and assumptions, including but not limited to
those related to revenue recognition, accounts receivable reserves, income tax
valuation allowances, and the impairment of goodwill and other intangible
assets. We base our estimates on historical experience and various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Revenue recognition and accounts receivable:
Patient care revenues and accounts receivable are recorded at established
billing rates or at the amount realizable under agreements with third-party
payors, including Medicaid and Medicare. Revenues under third-party payor
agreements are subject to examination and contractual adjustment, and amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
provided and subsequent settlements are recorded in operations in the year of
settlement. Any amounts due as a result of cost report settlements are recorded
and listed separately on the consolidated balance sheets as "Other receivables,
third party". The provision for contractual allowances is deducted directly from
revenue and the net revenue amount is recorded as accounts receivable. The
allowance for doubtful accounts does not include the contractual allowances.
The Company currently has one "at-risk" contract. The contract calls for
the Company to provide for all of the inpatient and outpatient behavioral health
needs of the insurance carrier's enrollees in Nevada for a fixed monthly fee per
member per month. Revenues are recorded monthly based on this formula and the
expenses related to providing the services under this contract are recorded as
incurred. The Company provides most of the outpatient care directly and, through
utilization review, monitors closely, and pre-approves all inpatient and
outpatient services not provided directly. The contract is considered "at-risk"
because the payments to third-party providers for services rendered could equal
or exceed the total amount of the revenue recorded.
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and accepted
based on study criteria and billable units of service are provided. Where a
contract requires completion of the study by the patient, no revenue is
recognized until the patient completes the study program.
Contract support service revenue is a result of fixed fee contracts to
provide telephone support. Revenue for these services is recognized ratably over
the service period.
All revenues reported by the Company are shown net of estimated allowances
and charity care provided. When payment is made, if the contractual adjustment
is found to have been understated or overstated, appropriate adjustments are
made in the period the payment is received in accordance with the AICPA "Audit
and Accounting Guide for Health Care Organizations."
Allowance for doubtful accounts:
The provision for bad debts is calculated based on a percentage of each
aged accounts receivable category beginning at 0-5% on current accounts and
increasing incrementally for each additional 30 days the account remains
outstanding until the account is over 360 days outstanding, at which time the
provision is 80-100% of the outstanding balance. These percentages vary by
facility based on each facility's experience in and expectations for collecting
older receivables. The Company compares this required reserve amount to the
current "allowance for doubtful accounts" to determine the required bad debt
expense for the period. This method of determining the required "Allowance for
doubtful accounts" has historically resulted in an allowance for doubtful
accounts of 20% or greater of the total outstanding receivables balance.
-- 10 --
Income Taxes:
The Company follows the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
prescribes an asset and liability approach, which requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of the
assets and liabilities. The Company's policy is to record a valuation allowance
against deferred tax assets unless it is more likely than not that such assets
will be realized in future periods. The Company considers estimated future
taxable income or loss and other available evidence when assessing the need for
its deferred tax valuation allowance. During the fiscal year ended June 30,
2005, the Company recognized a tax benefit of approximately $209,000, related to
a decrease in its valuation allowance, based on budgeted taxable income for the
next fiscal year. The Company's policy is to recognize tax benefit for only the
next fiscal year based on the uncertainties surrounding the healthcare industry.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are initially created as a result of
business combinations or acquisitions. The values the Company records for
goodwill and other intangible assets represent fair values calculated by
independent third-party appraisers. Such valuations require the Company to
provide significant estimates and assumptions, which are derived from
information obtained from the management of the acquired businesses and the
Company's business plans for the acquired businesses. Critical estimates and
assumptions used in the initial valuation of goodwill and other intangible
assets include, but are not limited to: (i) future expected cash flows from
services to be provided, customer contracts and relationships, and (ii) the
acquired market position. These estimates and assumptions may be incomplete or
inaccurate because unanticipated events and circumstances may occur. If
estimates and assumptions used to initially value goodwill and intangible assets
prove to be inaccurate, ongoing reviews of the carrying values of such goodwill
and intangible assets may indicate impairment which will require the Company to
record an impairment charge in the period in which the Company identifies the
impairment. The Company uses an outside valuation expert to assess the value of
intangibles annually and will continue to do so unless circumstances require an
earlier evaluation.
Results of Operations
The following table sets forth for the periods indicated, our operating
results (dollars in thousands):
Selected Statements of Income Data:
For the three month period ended
September 30,
2005 2004
Amount % Amount %
_______________________________________________
Revenue $8,945 100.0% 7,958 100.0%
Cost and Expenses:
Patient care expenses 3,825 42.8% 3,431 43.1%
Contract expenses 598 6.7% 517 6.5%
Administrative expenses 3,264 36.5% 2,871 36.1%
Provision for bad debts 657 7.3% 254 3.2%
Interest expense 155 1.7% 113 1.4%
Other (income) expenses, net (33) (0.4%) (30) (0.4%)
Total Expenses 8,466 94.6% 7,156 89.9%
Income before provision for
taxes 479 5.4% 802 10.1%
Provision for income taxes 96 1.1% 26 .3%
Net Income 384 4.3% 776 9.8%
-- 11 --
Total net revenue from operations increased 12.4% to $8,944,826 for the
three months ended September 30, 2005 from $7,957,515 for the three months ended
September 30, 2004.
Net patient care revenue increased 8.1% to $6,712,980 for the three months
ended September 30, 2005 from $6,209,499 for the three months ended September
30, 2004. This increase in revenue is due primarily to the addition of the 30
adjudicated juvenile beds at Detroit Behavioral Institute which helped to create
a 16.0% increase in patient days for the three months ended September 30, 2005
over the same period last year. Without Detroit Behavioral Institute, combined
census in our other inpatient facilities would have decreased 5.5% largely due
to the economy and increased competition for a more limited number of patients.
Renewed marketing efforts have helped increase census in these facilities in the
current quarter.
Two key indicators of profitability of inpatient facilities are patient
days, or census, and payor mix. Patient days is the product of the number of
patients times length of stay. Increases in the number of patient days result in
higher census, which coupled with a more favorable payor mix (more patients with
higher paying insurance contracts or paying privately) will usually result in
higher profitability. Therefore, patient census and payor mix are monitored very
closely.
Revenue from pharmaceutical studies increased 20.2% to $1,306,009 for the
three months ended September 30, 2005 from $1,086,590 for the three months ended
September 30, 2004. This increase is due to an increased number of studies and
higher revenues produced by our Michigan site. Revenues from pharmaceutical
studies vary greatly from period to period based on the number of active studies
and available qualified participants for each active study.
Contract support services revenue provided by Wellplace increased 40.0% to
$925,837 for the three months ended September 30, 2005 from $661,426 for the
three months ended September 30, 2004. This increase in revenue is due to the
October 2004 increase in the Michigan call center contract, which increased the
monthly revenue on this contract from $157,000 to $240,000 per month.
Patient care expenses in our treatment centers increased 7.3% to $3,261,911
for the three months ended September 30, 2005 from $3,040,982 for the three
months ended September 30, 2004. This increase in expenses is due primarily to
the increased in patient days noted above with the majority of the increases in
expenses directly related to patient census such as payroll, food and pharmacy.
Lower census in some facilities tends to result in a higher acuity requiring a
higher staffing ratio and higher pharmacy costs.
Patient care expenses related to our research division increased 44.4% to
$563,154 for the three months ended September 30, 2005 from $389,963 for the
three months ended September 30, 2004. This is due to the increased number of
study patients receiving stipends for participation in studies.
Contract support services expenses increased 15.6% to $597,795 for the
three months ended September 30, 2005 from $516,909 for the three months ended
September 30, 2004. This increase was a result of the increase in the Michigan
call center contract which required increased staff and improved technology to
adequately support the services required by the contract. This resulted in
increased payroll, rent, telephone and depreciation on new equipment.
Administrative expenses increased 20.6% to $2,629,676 for the quarter ended
September 30, 2005 from $2,179,661 for the quarter ended September 30, 2004.
These changes are a result of the increased administrative payroll and employee
benefits related to the set up and opening of Detroit Behavioral Institute.
Administrative payroll increased 20.2% and employee benefits increased 42.6%.
Fees and Licenses increased 840.8% or $74,657 due to fees related to the JACAHO
accreditation at Harbor Oaks and Highland Ridge, the Quality Assurance fee
assessed in Michigan and increased consultant fees related to an accounts
receivable software failure at Harbor Oaks. The software was replaced and the
system brought up to date during the month of October, which resulted in
additional costs during the current quarter of approximately $15,000. Insurance
expense increased 21.4% for the quarter ended September 30, 2005. Utilities
increased approximately 14.4% for the quarter ended September 30, 2005.
-- 12 --
Administrative expenses related to the research division decreased 8.3% to
$633,999 for the three months ended September 30, 2005 from $691,056 for the
three months ended September 30, 2004. This decrease is primarily due to the
reduction in salaries expenses related to the elimination of the Nevada location
and the reduction in the accrued bonuses.
Provision for doubtful accounts increased 158.5% to $656,887 for the three
months ended September 30, 2005 from $254,109 for the three months ended
September 30, 2004. The Company's policy is to maintain reserves based on the
age of its receivables. The increase in the provision for doubtful accounts is
largely attributable to the accounts receivable software failure at Harbor Oaks,
which is our largest in-patient facility. The software conversion required by
the crash slowed the billing process and diverted staff attention from
collections, while we reentered the receivables into the new software. This
delay in the billing and collection process increased the amount and age of the
Company's receivables therefore, increasing the reserves required by formula and
the provision for doubtful accounts. The systems are now fully restored and we
expect the reserve requirement will decrease in future quarters as collection
activity returns to normal.
The environment the Company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the Company has increased staff, standardized some
procedures for collecting receivables and instituted a more aggressive
collection policy. During the current quarter, the previously mentioned
receivables software and hardware failure at our largest facility resulted in a
delay of billing and collections while the systems were restored. Largely as a
result of this delay and increased revenue, the Company's gross accounts
receivable from patient care have increased 8.5% over the past three months with
equivalent increases in aging.
Interest income increased 34.2% to $22,864 for the three months ended
September 30, 2005 from $17,039 for the three months ended September 30, 2004.
This is a result of a change in the Company's policy, which now charges finance
charges when extending credit to patients. Although patients requiring credit to
pay for services have always signed an agreement to pay finance charges, the
Company recently implemented the policy to charge for credit to discourage long
term credit for services.
Other income decreased 15.8% to $10,785 for the three months ended
September 30, 2005 from $12,809 for the three months ended September 30, 2004.
This change is due to a reduced number of requests for medical records which
makes up the majority of other income.
Interest expense and financing costs increased 37.3% to $155,218 for the
three months ended September 30, 2005 from $113,055 for the three months ended
September 30, 2004. This increase is due to the interest on Note A of the
Pivotal acquisition and financing costs related to the recent refinancing of the
Company's long-term debt and receivables financing.
The Company's provision for income taxes of $95,628 for the three months
ended September 30, 2005 is significantly below the Federal statutory rate of
34% primarily due to the availability of net operating loss carry-forwards.
Total income tax expense for the period represents state income taxes for
certain subsidiaries with no available net operating loss carry-forwards. The
Company has provided a significant valuation allowance against its deferred tax
asset based on the volitily of the healthcare industry.
Liquidity and Capital Resources
The Company's net cash provided by operating activities was $915,434 for
the three months ended September 30, 2005 compared to $134,833 of cash used in
operations for the three months ended September 30, 2004. Cash flow provided by
operations in the three months ended September 30, 2005 consists of net income
-- 13 --
of $384,207 plus depreciation and amortization of $135,976, non-cash interest
expense $13,932, non-cash equity based charges of $75,497 and an increase in
accounts payable and other liabilities of $640,730 less cash used for net
changes in accounts receivable and other operating assets of $334,908.
Cash used in investing activities in the three months ended September 30,
2005 consisted of $369,848 in capital expenditures compared to $254,804 in
capital expenditures during the same period last year and costs related to a
business acquisition of $18,853.
Cash provided by financing activities of $41,481 in the three months ended
September 30, 2005 was from the result of the issuance of common stock for the
exercise of options and warrants and an increase in the borrowings on the
revolving credit facility offset by required reductions in long term debt and
the purchase of treasury shares.
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. As of September 30, 2005, accounts
receivable from patient care, net of allowance for doubtful accounts, decreased
less than one percent to $6,283,354 on September 30, 2005 from $6,330,381 on
June 30, 2005. This decrease is a result in a 38.5% increase in our allowance
for doubtful accounts. This relates to the previously mentioned system failure
at our largest facility, which delayed billing and collections for several
months. New systems are in place at this time and we expect increased
collections on the recent billings to reduce the allowance considerably in
future months. The Company monitors increases in accounts receivable closely
and, based on the aging of the receivables outstanding is confident that the
increase is not indicative of a payor problem. Over the years, we have increased
staff, standardization of some procedures for determining insurance eligibility
and collecting receivables and established a more aggressive collection policy.
The increased staff has allowed the Company to concentrate on current accounts
receivable and resolve any issues before they become uncollectible. The
Company's collection policy calls for earlier contact with insurance carriers
with regard to payment, use of fax and registered mail to follow-up or resubmit
claims and earlier employment of collection agencies to assist in the collection
process. Our collectors will also seek assistance through every legal means,
including the State Insurance Commissioner's office, when appropriate, to
collect claims. At the same time, the Company continues to closely monitor
reserves for bad debt based on potential insurance denials and past difficulty
in collections.
Contractual Obligations
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes as of June 30, 2005 are as
follows:
Year Ending Term Capital Operating
June 30 Notes Leases Leases Total
_______________________________________________________________________________
2006 $ 769,599 $29,777 $1,299,529 $2,098,905
2007 808,817 10,087 1,033,996 1,852,900
2008 517,797 2,123 919,895 1,439,815
2009 207,099 -- 861,110 1,068,209
2010 212,609 -- 388,467 601,076
Thereafter 153,699 -- 94,730 248,429
_________ ________ __________ __________
Total minimum payments $2,669,620 $41,987 $4,597,727 $7,309,334
-- 14 --
In addition to the above, the Company is also subject to three contingent
notes with a total face value of $2,500,000 as part of the Pivotal acquisition.
Of these notes, two totaling $1,500,000, one for $1,000,000 and one for
$500,000, bear interest at 6% per annum. These notes are subject to additional
adjustment based on the earnings of the acquired operations. Since adjustment
can be positive or negative based on earnings, with no ceiling or floor, the
liability for only one of these notes was recorded as of September 30, 2005.
This treatment is in accordance with SFAS No. 141, "Business Combinations",
which states that contingent consideration should be recognized only when
determinable beyond a reasonable doubt. Payments on the $1,000,000 note began on
January 1, 2005. The above table includes the outstanding balance on this note
of $1,068,510 which represents the earn out for the Pivotal acquisition through
December 31, 2004 net of payments made through June 30, 2005. No payment is due
on the $500,000 note as earn-out requirements have not been attained. The final
note for $1,000,000 does not bear interest, is also subject to adjustment based
on earnings but has a minimum value of $200,000 to be paid in PHC, Inc. Class A
common stock on March 31, 2009. This minimum liability has been recorded with
imputed interest of 6% and $159,793 is included in the schedule above.
In October 2004, the Company entered into a revolving credit, term loan and
security agreement with CapitalSource Finance, LLC to replace the Company's
primary lender and provide additional liquidity. Each of the Company's material
subsidiaries, other than Pivotal Research Centers, Inc, is a co-borrower under
the agreement. The agreement includes a term loan in the amount of $1,400,000
and an accounts receivable funding revolving credit agreement with a maximum
loan amount of $3,500,000, including $900,000 available as an overline for
growth.
The term loan note carries interest at prime plus 3.5%, but not less than
9%, with twelve monthly principal payments of $25,000, 12 monthly principal
payments of $37,500, and eleven monthly principal payments of $50,000 beginning
November 1, 2004 with balance due at maturity, on October 1, 2007 and is
included in the above table.
The revolving credit note carries interest at prime plus 2.25%, but not
less than 6.75% paid through lock box payments of third party accounts
receivable. The revolving credit term is three years, renewable for two
additional one-year terms. The balance on the revolving credit agreement as of
June 30, 2005 was $2,385,629. For additional information regarding this
transaction, see the Company's current report on form 8-K filed with the
Securities and Exchange Commission on October 22, 2004. The balance outstanding
as of June 30, 2005 is included in the above table.
For the quarter ended September 30, 2005, the Company was not in compliance
with financial covenants of this agreement primarily due to the software failure
at the Harbor Oaks facility, which delayed billing and postponed collection
effort while the system was being recovered. CapitalSource, the company's
lender, has provided the Company with a waiver of these covenants for the
period.
The Company has operated ongoing operations profitably for eighteen
consecutive quarters with the exception of the litigation settlement and related
legal costs incurred in the third quarter of fiscal year 2004. While it is
difficult to project, if the current positive business environment towards
behavioral health treatment and new business opportunities continue, we are
confident that we will see continued improved results.
-- 15 --
Off Balance Sheet Arrangements
The Company has no off-balance-sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to the Company.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The market price of our common stock could be volatile and fluctuate
significantly in response to various factors, including:
o Differences in actual and estimated earnings and cash flows;
o Operating results differing from analysts' estimates;
o Changes in analysts' earnings estimates;
o Quarter-to-quarter variations in operating results;
o Changes in market conditions in the behavioral health care industry;
o Changes in market conditions in the research industry;
o Changes in general economic conditions; and
o Fluctuations in securities markets in general.
Our interest expense is sensitive to changes in the general level of
interest rates. With respect to our interest-bearing liabilities, all of our
long-term debt outstanding is subject to rates at prime plus 2.25% and prime
plus 3.5%, which makes interest expense increase with changes in the prime rate.
Failure to meet targeted revenue projections could cause us to be out of
compliance with covenants in our debt agreements. (For additional information
see Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations").
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified within the
SEC's Rules and Forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management was necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures to meet the
criteria referred to above. Based on the foregoing, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective.
Change in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluations.
-- 16 --
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.
Exhibit List
Exhibit No. Description
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The Company filed one report on form 8-K during the quarter ended September
30, 2005. This report provided the same earnings information to the public as
shown in the Company's quarterly press release as required by Item 2.02 of the
instructions for form 8-K.
-- 17 --
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHC, Inc.
Registrant
Date: November 14, 2005 /s/ Bruce A. Shear
___________________
Bruce A. Shear
President
Chief Executive Officer
Date: November 14, 2005 /s/ Paula C. Wurts
___________________
Paula C. Wurts
Controller
Treasurer
-- 18 --