UNITED STATES
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 December 31, 2006.
|_| 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's 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 Securities Exchange Act of 1934 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer __ Accelerated filer __ Non accelerated filer 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
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding of each class of common equity, as of January 29,
2007:
Class A Common Stock 19,047,327
Class B Common Stock 775,760
1
PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets - December 31, 2006 (unaudited)
and June 30, 2006.
Condensed Consolidated Statements of Operations (unaudited) - Three
and six months ended December 31, 2006 and December 31, 2005.
Condensed Consolidated Statements of Cash Flows (unaudited) - Three
months ended December 31, 2006 and December 31, 2005.
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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
Signatures
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 2006 2006
(unaudited)
Current assets:
Cash and cash equivalents $ 4,150,210 $ 1,820,105
Accounts receivable, net of allowance for
doubtful accounts of $3,389,836 at December
31, 2006 and $3,100,586 at June 30, 2006 6,736,235 6,955,475
Pharmaceutical receivables 1,466,484 1,470,019
Prepaid expenses 863,292 490,655
Other receivables and advances 853,165 751,791
Deferred income tax asset 2,918,779 3,110,000
___________ __________
Total current assets 16,988,165 14,598,045
Accounts receivable, non-current 35,000 40,000
Other receivable 47,680 53,457
Property and equipment, net 2,018,990 1,799,888
Deferred financing costs, net of amortization
of $124,899 at December 31, 2006 and $106,422
June 30, 2006 98,546 117,023
Customer relationships, net of amortization of
$320,000 at December 31, 2006 and $260,000 at
June 30, 2006 2,080,000 2,140,000
Goodwill 3,164,643 2,664,643
Other assets 828,190 571,931
___________ ___________
Total assets $25,261,214 $21,984,987
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (includes short term notes
payable of $336,683 and $5,000) $ 1,903,578 $ 1,518,615
Current maturities of long-term debt 1,120,998 909,057
Revolving credit note 1,105,949 1,603,368
Deferred revenue 388,967 385,742
Current portion of obligations under
capital leases 203,401 57,881
Accrued payroll, payroll taxes and benefits 1,510,571 1,619,672
Accrued expenses and other liabilities 1,248,154 1,026,419
___________ __________
Total current liabilities 7,481,618 7,120,754
Long-term debt 1,006,783 1,021,546
Obligations under capital leases 74,619 61,912
Deferred tax liability 325,000 325,000
___________ ___________
Total liabilities 8,888,020 8,529,212
___________ ___________
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, 19,175,592 and 17,874,966 shares
issued at December 31, 2006 and June
30, 2006, respectively 191,756 178,749
Class B common stock, $.01 par value, 2,000,000
shares authorized, 775,760 issued and outstanding
at December 31, 2006 and June 30, 2006,
respectively, each convertible into one share of
Class A common sTOCK 7,758 7,758
Additional paid-in capital 26,078,238 23,718,197
Treasury stock, 199,098 shares of Class A common
stock at December 31, 2006 and June 30, 2006, at
cost (191,700) (191,700)
Accumulated deficit (9,712,858) (10,257,229)
___________ ___________
Total stockholders' equity 16,373,194 13,455,775
Total liabilities and stockholders' equity $25,261,214 $21,984,987
=========== ===========
See Notes to Condensed Consolidated Financial Statements
3
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
_______________________ _____________________
2006 2005 2006 2005
__________ __________ __________ __________
Revenues:
Patient care, net $ 7,946,670 $ 6,465,356 $15,823,102 $13,178,336
Pharmaceutical studies 873,920 1,084,084 1,925,303 2,390,093
Contract support services 1,131,770 1,153,073 2,266,161 2,078,910
___________ ___________ ___________ __________
Total revenues 9,952,360 8,702,513 20,014,566 17,647,339
Operating expenses:
Patient care expenses 4,243,531 3,292,393 8,199,183 6,554,304
Patient care expenses,
pharmaceutical 421,549 510,834 908,486 1,073,988
Cost of contract support
services 687,174 587,067 1,525,729 1,184,862
Provision for doubtful
accounts 347,458 475,768 799,983 1,132,655
Administrative expenses 3,118,099 2,749,100 6,213,554 5,378,776
Administrative expenses,
pharmaceutical 529,555 538,291 1,208,663 1,172,290
___________ ___________ ___________ ___________
Total operating
expenses 9,347,366 8,153,453 8,855,598 16,496,875
___________ ___________ ___________ ___________
Income from operations 604,994 549,060 1,158,968 1,150,464
___________ ___________ ___________ __________
Other income (expense):
Interest income 33,808 15,397 66,657 38,261
Other income (expense) (3,135) 21,263 (4,078) 32,048
Interest expense (212,441) (174,338) (332,271) (329,556)
___________ ___________ __________ __________
Total other expenses,
net (181,768) (137,678) (269,692) (259,247)
___________ ___________ __________ _________
Income before provision for
taxes 423,226 411,382 889,276 891,217
Provision for income taxes 162,138 64,600 344,905 160,228
___________ ___________ __________ _________
Net income $ 261,088 $ 346,782 $ 544,371 $ 730,989
=========== =========== =========== ===========
Basic net income per common
share $ 0.01 $ 0.02 $ 0.03 $ 0.04
=========== =========== =========== ===========
Basic weighted average number
of shares outstanding 18,758,151 18,159,188 18,636,146 18,125,265
=========== =========== ========== ==========
Fully diluted net income per
common share $ 0.01 $ 0.02 $ 0.03 $ 0.04
=========== =========== =========== ===========
Fully diluted weighted
average number of shares
outstanding 19,409,232 19,301,486 19,280,727 19,302,592
=========== =========== =========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
December 31,
2006 2005
__________ ________
Cash flows from operating activities:
Net income $ 544,371 $730,989
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization 34,924 331,319
Non-cash interest expense 113,018 27,864
Deferred income taxes 191,221 (23,670)
Non-cash stock-based compensation 91,684 90,872
Change in allowance for doubtful accounts 289,250 1,216,020
Changes in:
Accounts receivable (157,072) (1,515,378)
Prepaid expenses and other current assets (35,954) (67,975)
Other assets (272,301) (28,685)
Accounts payable 48,280 668,460
Accrued expenses and other liabilities 115,859 (556,073)
__________ ___________
Net cash provided by operating activities 1,263,280 873,743
__________ ___________
Cash flows from investing activities:
Acquisition of property and equipment (217,580) (627,776)
__________ ___________
Net cash used in investing activities (217,580) (627,776)
__________ ___________
Cash flows from financing activities:
Revolving debt, net (497,419) 137,406
Principal payments on long-term debt (499,540) (288,880)
Proceeds from issuance of common stock, net 2,281,364 53,100
Purchase of treasury stock -- (36,613)
__________ ___________
Net cash provided by financing activities 1,284,405 (134,987)
__________ ___________
Net increase in cash and cash equivalents 2,330,105 110,980
Beginning cash and cash equivalents 1,820,105 917,630
__________ ___________
Ending cash and cash equivalents $4,150,210 $1,028,610
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 268,612 $ 329,556
Income taxes 118,561 235,171
SUPPLEMENTAL DISCLOSURE OF NONCASH
OPERATING INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in cashless
exercise of warrants $ 30 $ 24,242
Obligations under capital leases 241,927 --
Pivotal acquisition Note B recorded 500,000
Issuance of common stock in cashless exercise
of options -- 18,577
Value of warrants issued in connection with the
Pivotal acquisition -- 51,860
Short Term Note payable 500,873 508,039
See Notes to Condensed Consolidated Financial Statements.
5
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2006
Note A - The Company
PHC, Inc. (the "Company") is a national healthcare 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:
(1) 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 eight psychiatric treatment
locations which include Harbor Oaks Hospital, a 64-bed psychiatric
hospital located in New Baltimore, Michigan, Detroit Behavioral
Institute, a 50-bed residential facility 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);
(2) Pharmaceutical research study services, including three clinic study
sites: two in Arizona, in Peoria and Mesa and one in Midvale, Utah.
The Company closed its research site in Royal Oak, Michigan at the end
of last quarter. 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;
(3) Call center and help line services (contract services), including two
call centers, one operating in Midvale, Utah and one in Detroit,
Michigan, provides help line services through contracts with major
railroads and a call center contract with Wayne County, Michigan. The
call centers both operate under the brand name Wellplace; and
(4) 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 and six
months ended December 31, 2006 are not necessarily indicative of the results
that may be expected for the year ending June 30, 2007. The accompanying
financial statements should be read in conjunction with the June 30, 2006
consolidated financial statements and footnotes thereto included in the
Company's 10-K filed on October 13, 2006.
Revenue Recognition
The Company bills for its behavioral healthcare services at its inpatient
and outpatient facilities using different software platforms for each type of
service; however, in all cases the charges are contractually adjusted at the
time of billing using adjustment factors based on agreements or contracts with
the insurance carriers and the specific plans held by the individuals. This
method may still require additional adjustment based on ancillary services
provided and deductibles and copays due from the individuals which are estimated
at the time of admission based on information received from the individual.
Adjustments to these estimates are recognized as adjustments to revenue during
the period identified, usually when payment is received.
6
The Company's policy is to collect estimated co-payments and deductibles at
the time of admission. Payments are made by way of cash, check or credit card.
If the patient does not have sufficient resources to pay the estimated
co-payment in advance, the Company's policy is to allow payment to be made in
three installments- one third due upon admission, one third due upon discharge
and the balance due 30 days after discharge. At times the patient is not
physically or mentally stable enough to comprehend or agree to any financial
arrangement. In this case the Company will make arrangements with the patient
once his or her condition is stabilized. At times, this situation will require
the Company to extend payment arrangements beyond the three payment method
previously outlined. Whenever extended payment arrangements are made, the
patient, or the individual who is financially responsible for the patient, is
required to sign a promissory note to the Company, which includes interest on
the balance due.
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. All revenues and
receivables from our research division are derived from pharmaceutical companies
with no related bad debt allowance.
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 and receivables from our contract services
division are based on a prorated monthly allocation of the total contract amount
and usually paid within 30 days of the end of the month.
The Company's days sales outstanding ("DSO") are significantly different
for each type of service and each facility based on the payors for each service.
Overall, the DSO for the combined operations of the Company were 76 days for the
six months ended December 31, 2006 and 65 days the fiscal year ended June 30,
2006. The table below shows the DSO by segment for the same periods.
Period Treatment Pharmaceutical Contract
End Services Services Services
__________ _________ ______________ ________
12/31/2006 78 140 60
06/30/2006 91 93 51
This increase in the Pharmaceutical Services DSO's is related to the high
DSO's normally associated with research receivables coupled with the recent
start up of a large research contract. Contract Services DSO's may fluctuate
dramatically by the delay in payment of a few days for any of our large
contracts. There was such a delay in payments for the Michigan call center at
the end of the quarter ended December 31, 2006, inflating the DSO's for the
period.
Note C- Stock Based Compensation
The Company has three active stock plans: a stock option plan, an employee
stock purchase plan and a non-employee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 1,300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
of the Board of Directors has the authority to select the optionees and
determine the terms of the options including: (i) the number of shares, (ii)
option exercise terms, (iii) the exercise or purchase price (which in the case
of an incentive stock option will not be less than the market price of the Class
A common stock as of the date of grant), (iv) type and duration of transfer or
other restrictions and (v) the time and form of payment for restricted stock
upon exercise of options.
The employee stock purchase plan provides for the purchase of Class A
common stock at 85 percent of the fair market value at specific dates, to
encourage stock ownership by all eligible employees. A maximum of 500,000 shares
may be issued under this plan.
The non-employee directors' stock option plan provides for the grant of
nonstatutory stock options automatically at the time of each annual meeting of
the Board. Under the plan a maximum of 350,000 shares may be issued. Each
7
outside director is granted an option to purchase 20,000 shares of Class A
common stock annually at fair market value on the date of grant, vesting 25%
immediately and 25% on each of the first three anniversaries of the grant and
expiring ten years from the grant date.
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. Any income tax benefit related to stock
compensation is shown under the financing section of the Cash Flow Statement.
Based on the Company's historical voluntary turnover rates for individuals 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.
At June 30, 2005, the Company accelerated the vesting on all previously
granted options. Therefore, as of the date of adoption there was no unrecognized
expense for options issued prior to June 30, 2005. The expense recorded in the
three months ended December 31, 2006, $20,903, is the Black-Scholes value of the
vested number of options issued during the period. The expense recorded in the
six months ended December 31, 2006 also includes $70,781 for the vesting of
options previously issued based on the terms of the agreements. Under the
provisions of SFAS 123R, the Company recorded $20,903 and $5,500 of stock-based
compensation on its consolidated condensed statement of operations for the three
months ended December 31, 2006 and 2005, respectively, and $91,684 and $75,338
for the six months ended December 31, 2006 and 2005, respectively.
The Company had the following activity in its stock option plans for the
six months ended December 31, 2006:
Number Weighted-Average Intrinsic Value
Of Exercise Price At
Shares Per Share December 31, 2006
_______________________________________________
Balance - June 30, 2006 1,234,250 $1.45
Granted 56,250 $2.07
Exercised (104,500) $0.75
Expired (12,000) $2.30
__________
Balance - December 31, 2006 1,174,000 $1.53 $1,935,045
__________ _____ __________
Exercisable 899,000 $1.29 $1,700,689
__________ _____ __________
The total intrinsic value of options exercised during the six-months ended
December 31, 2006 was $169,545.
The following summarizes the activity of the Company's stock options that
have not vested for the six months ended December 31, 2006.
Number Weighted-
Of Average
Shares Fair Value
______ ___________
Nonvested at July 1, 2006 300,938 $1.17
Granted 56,250 1.10
Expired/Forfeited (2,500) 1.24
Vested (79,688) 1.15
________ ______
Nonvested at December 31, 2006 275,000 $1.16
________ ______
8
The compensation cost related to the fair value of these shares of $276,320
will be recognized when these options vest over the next three years.
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 December 31, 2006 was $1.10 and the
weighted-average fair value of the options granted for the six months ended
December 31, 2006 and 2005 was $1.10 and $1.12, using the following assumptions:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
December December December December
31, 2006 31, 2005 31, 2006 31, 2005
____________ ____________ __________ _________
Average risk-free
interest RATE 4.60% 4.50% 4.60% 4.50%
Expected dividend yield None None None None
Expected life 5 years 4 years 5 years 4 years
Expected volatility 48.0% 45.0% 48.0% 45.0%
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.
Note D- Reclassifications
Certain December 31, 2005 amounts have been reclassified to be consistent
with the December 31, 2006 presentation.
Note E - 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:
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
___________________________________________________________________________________
For the three months
ended:
December 31, 2006
Revenues - external
customers $7,946,670 $ 873,920 $1,131,770 $ -- $ -- $9,952,360
Revenues - intersegment -- -- 19,470 924,000 (943,470) --
Net income (loss) 968,831 (168,603) 375,829 (914,969) -- 261,088
Capital Expenditures 49,393 4,040 -- 11,188 -- 64,621
Depreciation & Amortization 88,563 40,010 13,278 12,574 -- 154,425
Interest Expense 105,566 91,419 1,115 14,341 -- 212,441
Income tax expense 94,859 -- 68,462 (1,183) -- 162,138
9
Note E - Business Segment
Information (continued
December 31, 2005
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
___________________________________________________________________________________
Revenues - external
customers $ 6,465,356 $1,084,084 $1,153,073 $ -- $ -- $ 8,702,513
Revenues - intersegment 23,900 -- 21,265 816,000 (861,165) --
Net income (loss) 544,426 (2,356) 557,577 (752,865) -- 346,782
Capital Expenditures 124,355 10,797 78,974 43,803 -- 257,929
Depreciation &
Amortization 123,698 40,947 16,943 12,842 -- 194,430
Interest Expense 136,371 33,475 2,429 2,063 -- 174,338
Income tax expense 51,160 3,840 6,000 3,600 -- 64,600
For the six months ended:
December 31, 2006
Revenues - external
customers $15,823,102 $1,925,303 $2,266,161 $ -- $ -- $20,014,566
Revenues - intersegment 4,500 -- 41,110 1,848,000 (1,893,610) --
Net income (loss) 2,042,469 (295,370) 631,394 (1,834,122) -- 544,371
Capital Expenditures 154,861 25,308 1,565 35,846 -- 217,580
Depreciation &
Amortization 177,327 77,377 37,858 23,883 -- 316,445
Interest Expense 192,963 108,024 2,393 28,891 -- 332,271
Income tax expense 233,357 -- 2,743 -- -- 344,905
Identifiable assets 10,538,634 6,078,733 1,019,944 7,623,903 -- 25,261,214
Goodwill and customer
relationships 969,099 4,275,544 -- -- -- 5,244,643
December 31, 2005
Revenues - external
customers $13,178,336 $2,390,093 $2,078,910 $ -- $ -- $17,647,339
Revenues - intersegment 35,650 -- 44,280 1,632,000 (1,711,930) --
Net income (loss) 1,252,376 90,472 871,062 (1,482,921) -- 730,989
Capital Expenditures 457,703 26,291 85,144 58,638 -- 627,776
Depreciation &
Amortization 191,791 80,810 19,247 20,148 -- 311,996
Interest Expense 255,850 49,503 2,429 21,774 -- 329,556
Income tax expense 132,231 3,840 20,557 3,600 -- 160,228
At June 30, 2006:
Identifiable assets 10,399,918 5,584,753 844,784 5,155,532 -- 21,984,987
Goodwill and customer
relationships 969,099 1,695,544 -- -- -- 2,664,643
Note F - Debt covenants
For the period and quarter ended December 31, 2006, the Company was not in
compliance with its long term debt covenants related Earnings Before Interest
Taxes Depreciation and Amortization. These covenants are based on the Company's
projections using an equally distributed average of the Company's annual
10
projections, which we failed to meet for the quarter ended December 31, 2006.
The first and second quarters of each year tend to be less profitable than the
third and fourth quarters each year because of lower adolescent census during
the summer months and lower Chemical Dependency census during November and
December. CapitalSource, the Company's lender, has provided the Company with a
waiver of this covenant for the period and has agreed to modify these covenants,
restructure the debt and lower interest rates. The Company expects to execute a
new agreement by the end of the current quarter.
Note G - Private Placement
On December 19, 2006, the Company entered into an agreement pursuant to
which the Company sold $2,000,000 in unregistered Class A Common Stock to a
single investor to provide the equity component for the build-out of the
Company's Las Vegas hospital project, Seven Hills.
The agreement allowed the investor, Camden Partners Limited Partnership, to
purchase $2,000,000 in PHC, Inc. Class A Common Stock at $2.08 per share, which
is the average selling price per share over the 20 trading days prior to the
sale, minus 4%. In addition to providing a certificate evidencing the 961,539
unregistered shares within three business days from the close of the
transaction, the Company is also obligated to file a Registration Statement with
the Securities and Exchange Commission within 90 days of the close of the
transaction to register the shares issued, to put forth it's best efforts to
cause the Registration Statement to brought effective within 120 days of the
close of the transaction and to maintain the Registration Statement's current
status for a period of two years from the date of the close of the transaction.
If the Company fails to meet such 120 day deadline, it would be required to
pay to the investor, in cash or shares (at the Company's option), 1% of the
aggregate purchase price for each monthly period or pro rata portion thereof in
which the Company is not in compliance with its registration obligations.
The total amount of consideration that the Company could be required to
transfer under this registration payment arrangement would be $480,000. If the
Company was to exercise its option to settle the above liability using its
Common Stock, the Company potentially could have to issue 230,769 shares based
upon the per share purchase price of $2.08.
At December 31, 2006, the Company has not recorded a liability in its
accompanying financial statements based on its assessment of the likelihood of
default under any of these provisions. (For additional information see the
Company's current report filed with the Securities and Exchange Commission on
Form 8-K dated December 20, 2006).
Note H - Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an
interpretation of FASB Statement No. 109, (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements,
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 108, "Considering the Effects on Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108"). SAB 108 requires registrants to quantify errors using
both the income statement method (i.e. iron curtain method) and the rollover
method and requires adjustment if either method indicates a material error. If a
correction in the current year relating to prior year errors is material to the
current year, then the prior year financial information needs to be corrected. A
correction to the prior year results that are not material to those years, would
not require a "restatement process" where prior financials would be amended. SAB
108 is effective for fiscal years ending after November 15, 2006. We do not
anticipate that SAB 108 will have a material effect on our financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
to define fair value, establish a framework for measuring fair value in
accordance with generally accepted accounting principles, and expand disclosures
about fair value measurements. SFAS No. 157 will be effective for fiscal years
beginning after November 15, 2007, the beginning of the Company's 2008 fiscal
year. The Company is assessing the impact the adoption of SFAS No. 157 will have
on the Company's financial position and results of operations.
Note I - Subsequent Events
11
Subsequent to December 31, 2006, through it's subsidiary Harmony
Healthcare, the Company finalized an agreement with Behavioral Healthcare
Options (BHO), a subsidiary of Sierra Health Services, Inc., to operate four
clinics in the BHO network in Las Vegas and northwest Arizona. Harmony
Healthcare will provide a full array of services including inpatient
hospitalization, utilization and case management, outpatient services including
individual and group therapy, medication management, psychological testing, as
well as crisis and triage care for all Sierra members accessing BHO services.
Harmony will operate four clinics, two in greater Las Vegas and two in northwest
Arizona, formerly operated by BHO.
Also, subsequent to December 31, 2006, the Company, through it's Seven
Hills Hospital, Inc. subsidiary, entered into an agreement to purchase a 15.24%
membership interest, for $400,000, in the Seven Hills Psych Center, LLC. Seven
Hills Psych Center, LLC is the corporation that owns the property and will own
the building that will house our Seven Hills Hospital operations in Las Vegas.
The Company anticipates the opening of this hospital by the end of the calendar
year.
12
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, a psychiatric hospital, a residential
treatment facility and six 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. The Company's
internet operation, Behavioral Health Online, Inc., continues to provide
behavioral health information through its web site at Wellplace.com but its
primary function is Internet technology support for the 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 illnesses through its clinics in Utah and Arizona.
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. In addition, there are on-going debates and initiatives regarding
the restructuring of the health care system in its entirety. The extent of any
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. If
passed, this legislation may improve access to 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.
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
13
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. Amounts due as a result of cost report settlements is recorded and
listed separately on the consolidated balance sheets as "Other receivables". 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. Subsequent to quarter end,
the Company entered into an additional "at-risk" contract with Behavioral
Healthcare Options (BHO), a subsidiary of Sierra Health Services, Inc., to
operate four clinics in the BHO network in Las Vegas and northwest Arizona
formerly operated by BHO. Harmony Healthcare will provide a full array of
services including inpatient hospitalization, utilization and case management,
outpatient services including individual and group therapy, medication
management, psychological testing, as well as crisis and triage care for all
Sierra members accessing BHO services. This contract mirrors the above
referenced contract with a greater number of members resulting in an expected
higher utilization of services.
All revenues reported by the Company are shown net of estimated contractual
adjustment 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." Net
Contractual adjustments recorded in the six months ended December 31, 2006 for
revenue booked in prior years resulted in an increase in net revenue of
approximately $12,122. Net contractual adjustments recorded in fiscal 2006 for
revenue booked in prior years resulted in an increase in net revenue for the
year of approximately $343,700.
During the fiscal year ended June 30, 2006, a Medicare cost report
settlement of $158,100 was received. During the quarter ended December 31, 2006
a cost report settlement of $53,446 from Medicare and $98,400 from Blue Cross
were received and recorded during the three months ended December 31, 2006.
Our accounts receivable systems are capable of providing an aging based on
responsible party or payor. This information is critical in estimating our
required allowance for bad debts. Below is revenue by payor and the accounts
receivable aging information as of December 31, 2006, 2005 and June 30, 2006,
for our treatment services segment.
<c> <c> <c> <c>
Net Revenue by Payor (in thousands)_
For the Three Months For the Six Months For the Twelve
Ended December 31, Ended December 31, Months Ended
2006 2005 2006 2005 June 30, 2006
________________________________________________________________________________
$ % $ % $ % $ % Amount Percentage
Private Pay $ 343 4 $ 287 4 $ 682 4 $ 598 5 $ 1,207 5
Commercial 4,933 62 4,128 64 9,815 62 8,599 65 17,572 63
Medicare * 322 4 264 4 681 4 556 4 946 3
Medicaid 2,349 30 1,786 28 4,645 30 3,425 26 8,137 29
_______ ______ _______ ______ ________
Net Revenue $ 7,947 $6,465 $15,823 $13,178 $ 27,862
======= ======= ======= ======= ========
* includes Medicare settlement revenue as noted above
14
Accounts Receivable Aging (Net of allowance for bad debts- in thousands)
As of December 31, 2006
Over Over Over Over Over Over Over
Payor Current 30 60 90 120 180 270 360 Total
______ _____ _____ ___ ___ ______ ____ ____ ______
Private Pay 247 242 205 135 92 693 66 25 $1,705
Commercial 1,302 627 281 246 189 565 95 159 3,464
Medicare 122 15 34 25 5 54 -- -- 255
Medicaid 902 126 90 22 41 166 -- -- 1,347
______ _____ _____ ___ ___ ______ ____ ____ ______
Total 2,573 1,010 610 428 327 1,478 161 184 $6,771
Fiscal Year Ended June 30, 2006
Over Over Over Over Over Over Over
Payor Current 30 60 90 120 180 270 360 Total
______ _____ _____ ___ ___ ______ ____ ____ ______
Private Pay $ 113 $ 119 $106 $113 $ 84 $ 593 $ 33 $ 23 $1,184
Commercial 1,499 595 364 284 229 836 126 92 4,025
Medicare 133 38 6 17 18 73 -- -- 285
Medicaid 971 152 69 32 34 243 -- -- 1,501
______ _____ _____ ____ ____ ______ ____ ____ ______
Total $2,716 $ 904 $545 $446 $365 $1,745 $159 $115 $6,995
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. All revenues and
receivables from our research division are derived from pharmaceutical companies
with no related bad debt allowance.
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 and receivables from our contract services
division are based on a prorated monthly allocation of the total contract amount
and usually paid within 30 days of the end of the month.
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.
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
15
will be realized in future periods. During the fourth quarter of fiscal year
ended June 30, 2006, the Company recognized 100% of its federal deferred tax
benefit based on past profitability and future projections. The total tax
benefit recorded was $1,638,713.
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 are reviewed by the Company, at least
annually, and represent fair values. 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. During the quarter ended December 31, 2006 the Company recorded an
additional $500,000 in goodwill as a result of the Pivotal acquisition earn-out.
Results of Operations
The following table illustrates our consolidated results of operations for
the three and six months ended December 31, 2006 and 2005 (in thousands):
For the Three Months Ended For the Six Months ended
December 31, December 31,
2006 2005 2006 2005
______________________________________________________________________________
(in thousands)
Statements of
Operations Data:
Amount % Amount % Amount % Amount %
Revenue $9,952 100.0 $8,703 100.0 $20,015 100.0 $17,647 100.0
______ ______ ______ ______ _______ ______ _______ _____
Cost and Expenses:
Patient care
expenses 4,665 46.87 3,803 43.70 9,108 45.51 7,628 43.23
Contract expenses 687 6.90 587 6.75 1,526 7.62 1,185 6.71
Administrative
expenses 3,649 36.66 3,288 37.77 7,422 37.08 6,550 37.12
Provision for bad
debts 347 3.49 476 5.47 800 4.00 1,133 6.42
Interest expense 212 2.14 174 2.00 332 1.66 330 1.87
Other (income)expenses,
net (31) -0.31 (37) -0.42 (63) -0.31 (70) -0.40
______ ______ ______ ______ _______ ______ _______ _____
Total expenses 9,529 95.75 8,291 95.27 19,125 95.56 16,756 94.95
______ ______ ______ ______ _______ ______ _______ _____
Income before income taxes 423 4.25 412 4.73 889 4.44 891 5.05
Provision for income taxes 162 1.63 65 0.74 345 1.72 160 0.91
______ ______ ______ ______ _______ ______ _______ _____
Net income 261 2.62 47 3.98 $ 544 2.72 $ 731 4.14
______ ______ ______ ______ _______ ______ _______ _____
Results of Operations
Total net revenue from operations increased 14.4% to $9,952,360 for the
three months ended December 31, 2006 from $8,702,513 for the three months ended
December 31, 2005 and 13.4% to 20,014,566 for the six months ended December 31,
2006 from $17,647,339 for the six months ended December 31, 2005.
Net patient care revenue increased 22.9% to $7,946,670 for the three months
ended December 31, 2006 from $6,465,356 for the three months ended December 31,
2005 and 20.1% to $15,823,102 for the six months ended December 31, 2006 from
16
$13,178,336 for the six months ended December 31, 2005. This increase in revenue
is due primarily to the addition of the 20 adjudicated juvenile beds at Detroit
Behavioral Institute which helped to create a 12.2% and 16.8% increase in
patient days for the three months and six months ended December 31, 2006,
respectively, over the same periods last year. Excluding Detroit Behavioral
Institute, combined census in our other inpatient facilities increased 1.1% and
2.1% for the same periods.
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 decreased 19.4% to $873,920 for the
three months ended December 31, 2006 form $1,084,084 for the three months ended
December 31, 2005 and 19.5% to $1,925,303 for the six months ended December 31,
2006 from $2,390,093 for the six months ended December 31, 2005. This decrease
is due to the cyclical nature of the pharmaceutical research business, where the
size and number of clinical trial starts and stops changes daily. As a result,
revenues from pharmaceutical studies vary greatly from period to period based on
the type of study, the number of active studies and available qualified
participants for each active study.
Contract support services revenue provided by Wellplace decreased 1.9% to
$1,131,770 for the quarter ended December 31, 2006 from $1,153,073 for the three
months ended December 31, 2005 and increased 9.0% to $2,266,161 for the six
months ended December 31, 2006 from $2,078,910 for the six months ended December
31, 2005. This increase in revenues is due to the start of the smoking cessation
contract with a government contractor in October 2005.
Patient care expenses in our treatment centers increased 28.9% to
$4,243,531 for the three months ended December 31, 2006 from $3,292,393 for the
three months ended December 31, 2005 and 25.1% to $8,199,183 for the six months
ended December 31, 2006 from 6,554,304 for the six months ended December 31,
2005. This increase in expenses is due primarily to the increase in patient days
noted above with the majority of the increases in expenses directly related to
patient census such as payroll, nursing and medical agency fees, hospital
supplies, food lab and pharmacy expense. Lower census in some facilities tends
to result in a higher acuity requiring a higher staffing ratio and higher
ancillary costs.
Patient care expenses related to our pharmaceutical or research division
decreased 17.5% to $421,549 for the three months ended December 31, 2006 from
$510,834 for the three months ended December 31, 2005 and 15.4% to 908,486 for
the six months ended December 31, 2005 from 1,073,988 for the six months ended
December 31, 2005. This is due to the decrease in the number of study patients
receiving stipends for participation in studies and a decrease in the
professional fees related to study services.
Contract support services expenses increased 17.1% to $687,174 for the
three months ended December 31, 2006 from $587,067 for the three months ended
December 31, 2005 and 28.8% to $1,525,729 for the six months ended December 31,
2006 from $1,184,862 for the six months ended December 31, 2005. This increase
was due to expenses incurred in the commencement of the new smoking cessation
contract previously mentioned. This resulted in increased payroll and related
expenses and additional depreciation cost related to new equipment purchases and
amortization of software designed specifically for our smoking cessation
program.
Administrative expenses increased 13.4% to $3,118,099 for the three months
ended December 31, 2006 from $2,749,100 for the three months ended December 31,
2005 and 15.5% to $6,213,554 for the six months ended December 31, 2006 from
$5,378,776 for the six months ended December 31, 2005. These changes are a
result of the increased administrative payroll and employee benefits related to
the establishment and opening of the additional beds at Detroit Behavioral
Institute. Administrative payroll increased 11.7% and employee benefits
increased 21.5%, for the three months ended December 31, 2006, partially due to
the increase in expense attributable to stock based compensation and the
increase in staffing in preparation for the new contract implemented at Harmony
on January 1, 2007. Office expense increased 37% during the quarter related to
housing the Meditech hardware in a hosted environment. Rent expense increased
approximately 111% due to the increase in space at Detroit Behavioral Institute
for the girls unit and insurance expense increased 121% for the six months ended
December 31, 2006.
Administrative expenses related to the research division decreased 1.6% to
$529,555 for the three months ended December 31, 2006 from $538,291 for the
three months ended December 31, 2006 and increased 3.1% to $1,208,663 for the
six months ended December 31, 2006 from $1,172,290 for the six months ended
December 31, 2005. These minimal changes in Administrative expenses are due to
tight expense controls maintained while the study census is low with the
majority of the increase in Advertising and Marketing expenses.
17
Provision for doubtful accounts decreased 27.0% to $347,458 for the three
months ended December 31, 2006 from 475,768 for the three months ended December
31, 2005 and 29.4% to 799,983 for the six months ended December 31, 2006 from
$1,132,655 for the six months ended December 31, 2005. The Company's policy is
to maintain reserves based on the age of its receivables. This decrease in the
provision for doubtful accounts is largely attributable to the additional
provision amount last year because of the software failure at Harbor Oaks. With
the software issues largely resolved the provision for doubtful accounts is
leveling off at a more reasonable amount of approximately 5% to 6% of net
patient care revenue as opposed to the 10% or higher that was recorded last
year.
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.
Interest income increased 119.6% to $33,808 for the three months ended
December 31, 2006 form $15,397 for the three months ended December 31, 2005 and
74.22% to $66,657 for the six months ended December 31, 2006 from $38,261 for
the six months ended December 31, 2005. This increase is a result of increased
cash in our investment accounts resulting in higher interest earnings.
Other income / expense decreased 114.7% to $(3,135) for the three months
ended December 31, 2006 from $21,263 for the three months ended December 31,
2005 and 112.7% to ($4,078) for the six months ended December 31, 2006 from
$32,048 for the six months ended December 31, 2005. This change is due to
processing of the amount lost from the theft at our smallest inpatient facility.
The amount of the loss was partially offset by an insurance settlement of
$10,000.
Interest expense increased 21.9% to $212,441 for the three months ended
December 31, 2006 from $174,338 for the three months ended December 31, 2005 and
increased 0.8% to $332,271 for the six months ended December 31, 2006 from
$329,556 for the six months ended December 31, 2005. This increase is due to the
recording of $80,000 of interest on an earn-out note issued at the time of the
Pivotal acquisition. As required by GAAP, this Note B and none of the interest
due on the Note B was booked since the entire principle balance of the Note was
contingent on future earnings.
The Company's provision for income taxes of $162,138 for the three month
period ended December 31, 2006 and $344,905 for the six months ended December
31, 2006 is based on an estimated combined tax rate of approximately 39% for
both Federal and State taxes based on Company earnings projections. If this
estimate is found to be high or low, adjustments will be made in the period of
the determination. This will most likely be at year end when tax estimates can
be more accurately made.
Liquidity and Capital Resources
The Company`s net cash provided by operating activities was $1,263,280 for
the six months ended December 31, 2006 compared to $873,743 for the six months
ended December 31, 2005. Cash flow provided by operations in the six months
ended December 31, 2006 consists of net income of $544,371 plus depreciation and
amortization of $334,924, non-cash interest expense $113,018, non-cash equity
based charges of $91,684, a decrease in deferred taxes of $191,221 and an
increase in net accounts payable of $384,963, an increase in accrued expenses of
$115,859 and a decrease in net accounts receivable of $157,072, less cash used
in other operating assets of $272,301 and an increase in prepaid expenses of
$372,637.
Cash used in investing activities in the six months ended December 31, 2006
consisted of $217,580 in capital expenditures compared to $627,776 in capital
expenditures during the same period last year. The Company has a lease line that
is currently being used to purchase the hardware and software for the Meditech
system. These assets are being put into place but will not be depreciated until
fully operational which is expected to be April 2007. Leased equipment is listed
as supplemental information on the cash flow statement.
Cash provided by financing activities of $1,284,405 in the six months ended
December 31, 2006 was the result of $2,281,364 in net proceeds from the issuance
of common stock in a private placement and for the exercise of warrants and
options, offset by a reduction in the revolving credit debt of $497,419 and
repayments on long term debt of $499,540.
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. As of December 31, 2006, accounts
receivable from patient care, net of allowance for doubtful accounts, decreased
3.2% to $6,771,235 from $6,995,475 on June 30, 2006. This decrease is a result
of increased collection efforts. The Company monitors accounts receivable
closely. Over the years, we have increased staff, standardization of some
18
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. The Company has
begun the process of changing its software related to the recording, billing and
collecting of Accounts Receivable. This system will assist staff in the timely
billing and collection of receivables. 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 December 31, 2006 are
as follows (in thousands):
YEAR ENDING CAPITAL OPERATING
December 31. TERM NOTES LEASES * LEASES TOTAL
_____________ ___________________ _____________________ ________ ______
Principal Interest Principal Interest
2007 $1,121 $27 $203 $ 49 $1,523 $2,923
2008 599 23 184 33 1,531 2,370
2009 228 18 147 19 1,477 1,889
2010 48 14 113 10 871 1,056
2011 48 10 51 2 356 467
2012 53 5 -- -- -- 58
Thereafter 30 1 -- -- -- 31
______ ___ ____ ____ ______ ______
Total $2,127 $98 $698 $113 $5,758 $8,794
* This amount includes scheduled payments on the Master lease for the
hardware and software which has not yet been recorded as debt.
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 June 30, 2006. The
liability for the second Note was recorded as of December 31, 2006. 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 $588,145
which represents the earn out for the Pivotal acquisition through December 31,
2005 net of payments made through December 31, 2006. On December 31, 2006 the
earn-out requirements on the $500,000 Note were attained, therefore the $500,000
balance plus accrued interest of $80,000 was recorded and is included in Term
notes in the above table. Note repayment began on the $500,000 Note on January
1, 2007. 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 $174,802 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,
with a balance of $440,704 at December 31, 2006, 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, twelve 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.
19
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
December 31, 2006 was $1,105,949. 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 December 31, 2006 is not included in the above table.
During the fiscal year ended June 30, 2006, the Company amended the above
agreement on two separate occasions, first to modify the required covenants to
more closely reflect the fluctuations in the Company's normal business flow and
second to extend the period of the agreement for an additional year through
October 19, 2008.
For the quarter ended December 31, 2006, the Company was not in compliance
with its long term debt covenants related Earnings Before Interest Taxes
Depreciation and Amortization. These covenants are based on the Company's
projections using an equally distributed average of the Company's annual
projections, which we failed to meet for the quarter. The first and second
quarters tend to be less profitable than the third and fourth quarters each year
because of lower adolescent census during the summer months and lower chemical
dependency census during November and December. CapitalSource, the Company's
lender, has provided the Company with a waiver of the covenants for the period.
The Company has operated ongoing operations profitably for twenty-four
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 whether the current positive business environment towards
behavioral health treatment and the new business opportunities will continue, it
gives us confidence to foresee continued improved results.
Off Balance Sheet Arrangements
The Company has no off-balance-sheet arrangements, except the contingent
notes disclosed in contractual obligations, 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.
Financial Risk
o 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. On this debt, each 25 basis point increase
in the prime rate will affect an annual increase in interest expense
of approximately $2,340.
o Failure to meet targeted revenue projections could cause us to be out
of compliance with covenants in our debt agreements requiring a waiver
from our lender. A waiver of the covenants may require our lender to
perform additional audit procedures to assure the stability of their
security which could require additional fees.
20
Operating Risk
o Aging of accounts receivables could result in our inability to collect
receivables. As our accounts receivable age and become uncollectible
our cash flow is negatively impacted. Our accounts receivable from
patient accounts (net of allowance for bad debts) were $6,771,235 at
December 31, 2006, $6,995,475 at June 30, 2006 and $6,330,381 at June
30, 2005. As we expand, we will be required to seek payment from a
larger number of payors and the amount of accounts receivable will
likely increase. We have focused on better accounts receivable
management through increased staff, standardization of some procedures
for collecting receivables and a more aggressive collection policy in
order to keep the change in receivables consistent with the change in
revenue. We have also established a conservative reserve policy,
allowing greater amounts of reserves as accounts age from the date of
billing. If the amount of receivables, which eventually become
uncollectible, exceeds such reserves, we could be materially adversely
affected. The following chart represents our Accounts Receivable and
Allowance for Doubtful Accounts at December 31, 2006 and June 30,
2006, respectively, and Bad Debt Expense for the six months ended
December 31, 2006 and the year ended June 30, 2006:
Allowance for
Accounts Doubtful
Receivable Accounts Bad Debt Expense
___________ _______________ ________________
December 31, 2006 $10,161,071 $3,389,836 $ 799,983
June 30, 2006 10,096,061 3,100,586 1,912,516
o The Company relies on contracts with more than ten clients to maintain
patient census at its inpatient facilities and the loss of any of such
contracts would impact our ability to meet our fixed costs. We have
entered into relationships with large employers, health care
institutions and labor unions to provide treatment for psychiatric
disorders, chemical dependency and substance abuse in conjunction with
employer-sponsored employee assistance programs. The employees of such
institutions may be referred to us for treatment, the cost of which is
reimbursed on a per diem or per capita basis. Approximately 30% of our
total revenue is derived from these clients. No one of these large
employers, health care institutions or labor unions individually
accounts for 10% or more of our consolidated revenues, but the loss of
any of these clients would require us to expend considerable effort to
replace patient referrals and would result in revenue losses and
attendant loss in income.
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 evaluation.
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PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on December 20, 2006.
In addition to the election of directors (with regards to which (i) proxies were
solicited pursuant to Regulation 14A under the Securities and Exchange Act of
1934, as amended, (ii) there was no solicitation in opposition to the
management's nominees as listed on the proxy statement, and (iii) all of such
nominees were elected), the shareholders voted to ratify the selection of
Eisner, LLP, Registered Public Accounting firm, to audit the Company's books and
records for the fiscal year ending June 30, 2007. No other matters were brought
before the shareholders.
Item 6. Exhibits
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.
22
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: February 14, 2007 /s/ Bruce A. Shear
_______________________________
Bruce A. Shear
President
Chief Executive Officer
Date: February 14, 2007 /s/ Paula C. Wurts
_______________________________
Paula C. Wurts
Treasurer
Chief Financial Officer
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