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 March 31, 2007.
|_| 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) No.) Identification
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 May 4, 2007:
Class A Common Stock 19,233,422
Class B Common Stock 775,760
1
PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets - March 31, 2007 (unaudited) and
June 30, 2006.
Condensed Consolidated Statements of Operations (unaudited) - Three
and nine months ended March 31, 2007 and March 31, 2006.
Condensed Consolidated Statements of Cash Flows (unaudited) - Nine
months ended March 31, 2007 and March 31, 2006.
Notes to Condensed Consolidated Financial Statements - March 31, 2007.
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
Signatures
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
ASSETS 2007 2006
___________ __________
(unaudited)
Current assets:
Cash and cash equivalents $ 4,250,075 $ 1,820,105
Accounts receivable, net of allowance for
doubtful accounts of $3,393,907 at March
31, 2007 and $3,100,586 at June 30, 2006 6,974,749 6,955,475
Pharmaceutical receivables 1,926,604 1,470,019
Prepaid expenses 647,252 490,655
Other receivables and advances 722,484 751,791
Deferred income tax asset 2,605,645 3,110,000
___________ __________
Total current assets 17,126,809 14,598,045
Accounts receivable, non-current 35,000 40,000
Other receivable 47,680 53,457
Property and equipment, net 2,312,231 1,799,888
Deferred financing costs, net of amortization
of $134,138 at March 31, 2007 and $106,422
June 30, 2006 89,307 117,023
Customer relationships, net of amortization
of $350,000 at March 31, 2007 and
$260,000 at June 30, 2006 2,050,000 2,140,000
Goodwill 3,508,576 2,664,643
Other assets 1,703,529 571,931
___________ ___________
Total assets $26,873,132 $21,984,987
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (includes short term
notes payable of $166,646 and $8,956) $ 1,832,105 $ 1,518,615
Current maturities of long-term debt 1,156,028 909,057
Revolving credit note 1,256,127 1,603,368
Deferred revenue 500,716 385,742
Current portion of obligations under capital
leases 210,945 57,881
Accrued payroll, payroll taxes and benefits 2,173,886 1,619,672
Accrued expenses and other liabilities 1,367,111 1,026,419
___________ ___________
Total current liabilities 8,496,918 7,120,754
Long-term debt 1,010,498 1,021,546
Obligations under capital leases 168,763 61,912
Deferred tax liability 325,000 325,000
___________ ___________
Total liabilities 10,001,179 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, 19,369,833 and 17,874,966
shares issued at March 31, 2007 and June 30,
2006, respectively 193,698 178,749
Class B common stock, $.01 par value, 2,000,000
shares authorized, 775,760 issued and
outstanding at March 31, 2007 and June 30,
2006, respectively, each convertible into one
share of Class A common Stock 7,758 7,758
Additional paid-in capital 26,259,276 23,718,197
Treasury stock, 199,098 shares of Class A
common stock at March 31, 2007 and June 30,
2006, at cost (191,700) (191,700)
Accumulated deficit (9,397,079) (10,257,229)
___________ ___________
Total stockholders' equity 16,871,953 13,455,775
Total liabilities and stockholders' equity $26,873,132 $21,984,987
=========== ===========
See Notes to Condensed Consolidated Financial Statements
3
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2007 2006 2007 2006
______________________________________________________
Revenues:
Patient care, net $10,022,611 $7,292,804 $25,845,713 $20,471,140
Pharmaceutical studies 1,164,195 1,523,277 3,089,498 3,913,370
Contract support services 1,131,237 1,137,878 3,397,398 3,216,788
___________ __________ ___________ ___________
Total revenues 12,318,043 9,953,959 32,332,609 27,601,298
___________ __________ ___________ ___________
Operating expenses:
Patient care expenses 4,978,321 3,787,166 13,177,504 10,341,470
Patient care expenses,
pharmaceutical 601,737 552,477 1,510,223 1,626,465
Cost of contract support
services 776,893 713,438 2,302,622 1,898,300
Provision for doubtful
accounts 426,812 334,248 1,226,795 1,466,903
Administrative expenses 4,298,040 2,815,164 10,511,594 8,193,940
Administrative expenses,
pharmaceutical 598,085 638,486 1,806,748 1,810,776
___________ __________ ___________ ___________
Total operating expenses 11,679,888 8,840,979 30,535,486 25,337,854
___________ __________ ___________ ___________
Income from operations 638,155 1,112,980 1,797,123 2,263,444
___________ __________ ___________ ___________
Other income (expense):
Interest income 52,775 11,281 119,432 49,542
Other income (expense) (3,430) 25,309 (7,508) 57,357
Interest expense (168,797) (153,594) (501,068) (483,150)
___________ __________ ___________ ___________
Total other expenses, net (119,452) (117,004) (389,144) (376,251)
___________ __________ ___________ ___________
Income before provision for
taxes 518,703 995,976 1,407,979 1,887,193
Provision for income taxes 202,924 45,427 547,829 205,655
___________ __________ ___________ ___________
Net income $ 315,779 $ 950,549 $ 860,150 $ 1,681,538
=========== ========== =========== ===========
Basic net income per common
share $ 0.02 $ 0.05 $ 0.05 $ 0.09
=========== ========== =========== ===========
Basic weighted average number
of shares outstanding 19,858,979 18,187,750 19,037,806 18,145,789
========== ========== ========== ==========
Fully diluted net income per
common share $ 0.02 $ 0.05 $ 0.04 $ 0.09
=========== ========== =========== ===========
Fully diluted weighted
average number of shares
outstanding 20,626,118 19,212,589 19,644,201 19,242,777
========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
March 31
2007 2006
___________________________
Cash flows from operating activities:
Net income $ 860,150 $1,681,538
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 526,912 543,991
Non-cash interest expense 129,585 41,796
Deferred income tax provision 504,355 (23,670)
Non-cash stock-based compensation 163,766 118,286
Change in allowance for doubtful
accounts 293,321 1,160,263
Changes in:
Accounts receivable (729,096) (2,026,900)
Prepaid expenses and other current assets (156,597) (374,309)
Other assets (151,939) (103,277)
Accounts payable 313,490 711,379
Accrued expenses and other liabilities 1,009,880 (156,861)
__________ ___________
Net cash provided by operating activities 2,763,827 1,572,236
Cash flows from investing activities:
Acquisition of property and equipment (675,953) (753,933)
Equity investment in unconsolidated subsidiary (400,000) --
Construction in Progress (431,377) --
___________ ___________
Net cash used in investing activities (1,507,330) (753,933)
__________ ___________
Cash flows from financing activities:
Revolving debt, net (347,241) (345,024)
Proceeds from borrowings on long-term debt -- 7,309
Principal payments on long-term debt (871,548) (462,895)
Deferred financing costs -- (15,000)
Costs related to issuance of capital stock (34,800) --
Issuance of common stock 2,427,062 73,727
Purchase of treasury stock -- (36,613)
__________ ___________
Net cash provided by (used in) financing
activities 1,173,473 (778,496)
__________ ___________
Net increase in cash and cash equivalents 2,429,970 39,807
Beginning cash and cash equivalents 1,820,105 917,630
__________ ___________
Ending cash and cash equivalents $4,250,075 $ 957,437
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 369,522 $ 483,150
Income taxes 295,931 253,109
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Pivotal Acquisition Note B earn out consideration
recorded $ 843,933 $ --
Obligations under capital leases 393,867 --
Issuance of common stock in cashless exercise of
warrants 63,333 24,242
Issuance of common stock in cashless exercise of
options 29,940 18,577
Value of warrants issued in connection with the
Pivotal acquisition -- 51,860
See Notes to Condensed Consolidated Financial Statements.
5
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2007
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 twelve psychiatric treatment locations which include Harbor Oaks Hospital, a
64-bed psychiatric hospital located in New Baltimore, Michigan, Detroit
Behavioral Institute, a 50-bed psychiatric facility dedicated to adjudicated
juveniles located in Detroit, Michigan and ten outpatient behavioral health
locations (one in New Baltimore, Michigan operating in conjunction with Harbor
Oaks Hospital, five in Las Vegas, Nevada and one in Bullhead City, Arizona,
operating as Harmony Healthcare and three locations operating as Pioneer
Counseling Center in the Detroit, Michigan metropolitan area);
Pharmaceutical study services, including three clinical study sites: two in
Arizona, in Peoria and Mesa 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, a
smoking cessation contract with a major defense contractor and a call center
contract with Wayne County Michigan. The call centers both operate under the
name 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 and nine
months ended March 31, 2007 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.
Estimates and assumptions
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reports amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. Such
estimates include patient care billing rates, realizability of receivables from
third-party payors, rates for Medicare and Medicaid and the realization of
deferred tax benefits represent a significant portion of the estimates made by
management.
6
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.
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
nine months ended March 31, 2007 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
03/31/2007 74 171 52
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.
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.
7
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
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. The Company follows the provisions of SFAS No.
123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), using the Statement's
modified prospective application method. 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.
The expense recorded in the three months ended March 31, 2007 of $68,501, is the
Black-Scholes value of the vested portion of the options issued during the
period and the Black-Scholes value of new vesting during the period of
previously issued options. The expense recorded in the nine months ended March
31, 2007 includes $91,684 for the vesting of options previously issued based on
the terms of the agreements. Under the provisions of SFAS 123R, the Company
recorded $72,083 and $27,413 of stock-based compensation on its consolidated
condensed statement of operations for the three months ended March 31, 2007 and
2006, respectively, and $163,766 and $112,625 for the nine months ended March
31, 2007 and 2006, respectively.
The Company had the following activity in its stock option plans for the nine
months ended March 31, 2007:
Number Weighted-Average Intrinsic Value
Of Exercise Price At
Shares Per Share March 31, 2007
________________________________________________
Balance - June 30, 2006 1,234,250 $1.45
Granted 152,500 $2.77
Exercised (172,000) $0.77
Expired (26,000) $2.65
__________
Balance - March 31, 2007 1,188,750 $1.69 $ 1,854,770
__________ _____ ___________
Exercisable 865,312 $1.36 $ 1,622,520
========== ===========
The total intrinsic value of options exercised during the nine-months ended
March 31, 2007 was $345,685.
The following summarizes the activity of the Company's stock options that have
not vested for the nine months ended March 31, 2007.
Number Weighted-
of Average
Shares Fair Value
________ __________
Nonvested at July 1, 2006 300,938 $1.17
Granted 152,500 1.58
Expired/Forfeited (7,500) 1.24
Vested (122,500) 1.31
________ _______
Nonvested at March 31, 2007 323,438 $1.31
======= ======
8
The compensation cost related to the fair value of these unvested options of
$444,384 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 March 31, 2007 and March 31, 2006 was $1.86 and
$1.29, respectively and the weighted-average fair value of the options granted
for the nine months ended March 31, 2007 and March 31, 2006 was $1.58 and $1.19,
using the following assumptions:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
March 31, 2007 March 31, 2006 March 31, 2007 March 31, 2006
________________________________________________________________
Average risk-free
interest rate 4.60% 4.50% 4.60% 4.44%
Expected dividend
yield None None None None
Expected life 8.12 years 8.52 years 6.97 years 5.87 years
Expected volatility 48.0% 50.0% 48.0% 47.8%
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 March 31, 2006 amounts have been reclassified to be consistent with the
March 31, 2007 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:
March 31, 2007
Revenues - external
customers $10,022,611 $1,164,195 $1,131,237 $ -- $ -- $12,318,043
Revenues - intersegment -- -- 18,645 924,000 (942,645) --
Segment net income (loss) 1,151,444 (80,203) 288,880 (1,044,342) -- 315,779
Capital Expenditures 242,834 224 12,264 17,208 -- 272,530
Depreciation & Amortization 103,483 38,231 14,038 13,826 -- 169,578
Interest Expense 98,456 44,721 1,071 24,549 -- 168,797
Income tax expense 138,839 -- 66,829 (2,744) -- 202,924
9
Note E - Business Segment Information (continued):
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
__________________________________________________________________________________
For the three months ended:
March 31, 2006
Revenues - external
customers $7,292,804 $1,523,277 $1,137,878 $ -- $ -- $9,953,959
Revenues - intersegment 16,600 -- 22,615 816,000 (855,215) --
Segment net income (loss) 1,129,901 317,240 416,891 (913,483) -- 950,549
Capital Expenditures 52,939 14,738 53,474 5,006 -- 126,157
Depreciation & Amortization 121,764 42,738 19,304 13,513 -- 197,319
Interest Expense 123,801 15,074 1,246 13,473 -- 153,594
Income tax expense 39,000 -- 6,303 124 -- 45,427
For the nine months ended:
March 31, 2007
Revenues - external
customers $25,845,713 $3,089,498 $3,397,398 $ -- $ -- $32,332,609
Revenues - intersegment 4,500 -- 59,755 2,772,000 (2,836,255) --
Segment net income (loss) 3,159,463 (380,073) 959,224 (2,878,464) -- 860,150
Capital Expenditures 397,695 25,532 13,829 53,054 -- 490,110
Depreciation & Amortization 280,810 115,608 65,069 37,709 -- 499,196
Interest Expense 291,419 152,745 3,464 53,440 -- 501,068
Income tax expense 372,196 -- 175,634 (1) -- 547,829
Identifiable Assets 10,946,514 6,813,658 1,014,280 8,577,680 -- 27,352,132
Goodwill 969,098 2,539,478 -- -- -- 3,508,576
March 31, 2006
Revenues - external
customers $20,471,140 $3,913,370 $3,216,788 $ -- $ -- $ 27,601,298
Revenues - intersegment 34,250 -- 66,895 2,448,000 (2,549,145) --
Segment net income (loss) 2,382,277 407,712 1,287,953 (2,396,404) -- 1,681,538
Capital Expenditures 510,642 41,029 138,618 63,644 -- 753,933
Depreciation & Amortization 313,555 123,548 38,551 68,337 -- 543,991
Interest Expense 379,651 64,577 3,675 35,247 -- 483,150
Income tax expense 171,231 3,840 26,860 3,724 -- 205,655
For the period ended
June 30, 2006
Identifiable assets 10,399,918 5,584,753 844,784 5,155,532 -- 21,984,987
Goodwill 969,099 1,695,544 -- -- -- 2,664,643
Note F - Debt covenants
For the period and quarter ended March 31, 2007, the Company was not in
compliance with its long term debt covenants related TO 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 ended March 31, 2007. We
experienced high expenses related to the start of the new contract in Nevada.
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 before the end of the fiscal year.
10
Note G - Equity investment in unconsolidated subsidiary
During the quarter, the Company, through it's Seven Hills Hospital, Inc.
subsidiary, purchased a 15.24% membership interest, for $400,000, in the 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.
This amount is included in Other assets on the accompanying balance sheet.
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
Subsequent to quarter end, the Company's registration statement on form S-3 was
brought effective by the Securities and Exchange Commission on April 2, 2007.
This registration statement was required by the private placement of Class A
Common Stock issued by the Company to Camden Partners Limited Partnership on
December 19, 2006. (See the Company's report on 8-K filed with the Securities
and Exchange Commission on December 21, 2006 for more information regarding this
transaction.)
Also subsequent to March 31, 2007, the Company invested $1,362,000 in the
construction in progress on the Seven Hills Hospital in Las Vegas. The Company
anticipates the opening of this hospital early in calendar year 2008.
11
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 ten 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. Contract start up costs are generally included as
administrative expenses and may cause unusual spikes in this amount as a
percentage of revenue. 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. Contract Support
services are provided by the Company through two call centers located in Utah
and Michigan. Services provided include employee assistance programs for major
railroads, smoking cessation services, credentialing services for professionals
and mental health registration and reference services for the residents of Wayne
County, Michigan. 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. The Government Medicare Program's
prospective payment system, although not fully implemented, has increased the
reimbursement rates for behavioral health care. The Company has one Medicare
facility, Harbor Oaks Hospital and is exploring the possibility of becoming a
Medicare provider at its other in-patient facilities.
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
12
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. When amounts are due as a result of cost report settlements, they
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 two "at-risk" contracts. The contracts call 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 these contracts 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.
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 nine months ended March 31, 2007 for
revenue booked in prior years resulted in an increase in net revenue of
approximately $13,503. 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 March 31, 2007 a cost report
settlement of $103,800 from Medicare was received and recorded during the three
months ended March 31, 2007. During the nine months ended March 31, 2007 a total
of $255,646 in cost report settlements were received and recorded.
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 March 31, 2007, 2006 and June 30, 2006, for
our treatment services segment.
Net Revenue by Payor (in thousands)
For the Three For the Nine For the Twelve
Months Ended Months Ended Months Ended
March 31, March 31, June 30,
2007 2006 2007 2006 2006
$ % $ % $ % $ % Amount Percentage
_______________________________________________________________________________________
Private Pay $ 481 5 $ 331 5 $ 1,164 4 $ 928 5 $ 1,207 5
Commercial 6,925 69 4,755 65 16,739 65 13,354 65 17,572 63
Medicare * 320 3 219 3 1,001 4 776 4 946 3
Medicaid 2,297 23 1,988 27 6,942 27 5,413 26 8,137 29
Net Revenue $10,023 -- $7,293 $25,846 $20,471 $27,862
======= ======= ======= ======= ========
* includes Medicare settlement revenue as noted above
13
Accounts Receivable Aging (Net of allowance for bad debts- in thousands)
As of March 31, 2007
Payor Current Over Over Over Over Over Over Over
30 60 90 120 150 270 360 Total
___________________________________________________________________________________
Private Pay $ 158 $ 143 $138 $ 82 $ 62 $ 727 $ 31 $ 5 $1,346
Commercial 1,575 916 399 163 157 368 117 122 3,817
Medicare 98 44 39 1 -- 50 -- -- 232
Medicaid 1,121 126 43 33 26 266 -- -- 1,615
______ ______ _____ _____ _____ ______ ____ ____ ______
Total $2,952 $1,229 $619 $279 $245 $1,411 $148 $127 $7,010
Fiscal Year Ended June 30, 2006
Payor Current Over Over Over Over Over Over Over
30 60 90 120 150 270 360 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.
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.
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 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
14
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 March 31, 2007 and December 31. 2006, the
Company recorded an additional $343,933 and $500,000, respectively, in goodwill
as a result of the Pivotal acquisition earn-out.
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 months ended For the nine months ended
March 31, March 31,
2007 2006 2007 2006
Amount % Amount % Amount % Amount %
_____________________________________________________________________
Revenue $12,318 100.0 $9,954 100.0 $32,333 100.0 $27,601 100.0
Cost and Expenses:
Patient care expenses 5,580 45.3 4,340 43.6 14,688 45.4 11,968 43.4
Contract expenses 777 6.3 713 7.2 2,303 7.1 1,898 6.9
Administrative expenses 4,896 39.7 3,454 34.7 12,318 38.1 10,005 36.3
Provision for bad debts 427 3.5 334 3.4 1,227 3.8 1,467 5.3
Interest expense 169 1.4 154 1.5 501 1.5 483 1.7
Other (income) expenses, net (49) (0.4) (37) (0.4) (112) (0.3) (107) (0.4)
Total Expenses 11,799 95.8 8,958 90.0 30,925 95.6 25,714 93.2
Income before provision for
taxes 519 4.2 996 10.0 1,408 4.4 1,887 6.8
Provision for income taxes 203 1.6 45 0.5 548 1.7 205 0.7
Net income $ 316 2.6 $ 951 9.5 $ 860 2.7 $ 1,682 6.1
Results of Operations
Revenue by category
Total net revenue from operations increased 23.8% to $12,318,043 for the three
months ended March 31, 2007 from $9,953,959 for the three months ended March 31,
2006 and 17.1% to $32,332,609 for the nine months ended March 31, 2007 from
$27,601,298 for the nine months ended March 31, 2006.
Net patient care revenue increased 37.4% to $10,022,611 for the three months
ended March 31, 2007 from $7,292,804 for the three months ended March 31, 2006
and 26.3% to $25,845,713 for the nine months ended March 31, 2007 from
$20,471,140 for the nine months ended March 31, 2006. This increase in revenue
is due to a 3.4% increase in patient days at our in patient facilities and the
additional revenue produced by the BHO contract which was effective January 1,
2007.
Two of the 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 results
in higher census, which coupled with a more favorable payor mix (more patients
with higher paying insurance contracts or paying privately) usually results in
higher profitability. Therefore, patient census and payor mix are monitored very
closely.
Revenue from pharmaceutical studies decreased 23.6% to $1,164,195 for the three
months ended March 31, 2007 from $1,523,277 for the three months ended March 31,
2006 and decreased 21.1% to $3,089,498 for the nine months ended March 31, 2007
15
from $3,913,370 for the same period last year. 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. We have experienced an increase in study starts and study
participants in the current quarter.
Contract support services revenue provided by Wellplace remained stable with a
minimal decrease of 0.6% to $1,131,237 for the three months ended March 31, 2007
from $1,137,878 for the three months ended March 31, 2006 and increased 5.6% to
$3,397,398 for the nine months ended March 31, 2007 from $3,216,788 for the nine
months ended March 31, 2006. Since all revenue related to Wellplace is based on
fixed contract rates, the revenue will fluctuate minimally from quarter to
quarter without the introduction of a new contract or additional services on an
existing contract. There were no additional contracts started in the current
period.
Operating expenses by category
Patient care expenses increased by 31.5% to $4,978,321 for the three months
ended March 31, 2007 from $3,787,166 for the three months ended March 31, 2006
and 27.4% to $13,177,504 for the nine months ended March 31, 2007 from
$10,341,470 for the nine months ended March 31, 2006. The increases in expenses
for the quarter is due to the addition of the contract entered into 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, which began January 1, 2007.
Patient care expenses related to our pharmaceutical research division increased
8.9% to $601,737 for the three months ended March 31, 2007 from $552,477 for the
three months ended March 31, 2006 and decreased 7.2% to $1,510,223 for the nine
months ended March 31, 2007 from $1,626,465 for the nine months ended March 31,
2006. This decrease is due to the decline in study activity and directly relates
to the decrease in research revenue.
Contract support services expenses increased 8.9% to $776,893 for the three
months ended March 31, 2007 from $713,438 for the three months ended March 31,
2006 and 21.3% to $2,302,622 for the nine months ended March 31, 2007 from
$1,898,300 for the nine months ended March 31, 2006. This increase was due to
expenses incurred in the commencement of the smoking cessation contract
mentioned in previous filings. 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. The software was designed to accommodate any future Smoking cessation
contract needs.
Provision for doubtful accounts increased 27.7% to $426,812 for the three months
ended March 31, 2007 from $334,248 for the three months ended March 31, 2006,
primarily due to the 37.4% increase in net patient care revenue, and decreased
16.4% to $1,226,795 for the nine months ended March 31, 2007 from $1,466,903 for
the nine months ended March 31, 2006. 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. In the current
quarter, although the provision increased over the same quarter last year, the
Company recorded approximately 4% of net patient care revenue as the provision
for doubtful accounts which is below the expected percentage of revenue because
of the large increase in patient care revenue.
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.
Administrative expenses increased 52.7% to $4,298,040 for the three months ended
March 31, 2007 from $2,815,164 for the three months ended March 31, 2006 and
28.3% to $10,511,594 for the nine months ended March 31, 2007 from $8,193,940
for the nine months ended March 31, 2006. These increases are primarily due to
the addition of the contract entered into 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, which began January 1, 2007.
The most significant increases include a 34% increase in administrative payroll,
largely due to the additional staff and time required to put systems in place to
process the volume created by the contract, and a 22% increase in related
payroll taxes a 36% increase in Office expenses and a 43% increase in rent
expense. We also continue to train on the Meditech software which also creates
the need for additional staff time to cover normal operations. This amount also
includes a $65,000 one time listing fee for the American Stock Exchange.
Administrative expenses related to the research division decreased 6.3% to
$598,085 for the three months ended March 31, 2007 from $638,486 for the three
months ended March 31, 2006 and 0.2% to $1,806,748 for the nine months ended
March 31, 2007 from $1,810,776 for the nine months ended March 31, 2006. This
16
decrease is primarily due to the reduction in salary expenses related to the
elimination of the Michigan location and the reduction in the accrued bonuses.
Other income and expenses by category
Interest income increased 367.8% to $52,775 for the three months ended March 31,
2007 from $11,281 for the three months ended March 31, 2006 and 141.1% to
$119,432 for the nine months ended March 31, 2007 from $49,542 for the nine
months ended March 31, 2006. This increase is a result of increased cash in our
investment accounts resulting in increased interest earnings.
Other income (expense) decreased 113.6% to $(3,430) for the three months ended
March 31, 2007 from $25,309 for the three months ended March 31, 2006 and 113.1%
to $(7,508) for the nine months ended March 31, 2007 from $57,357 for the nine
months ended March 31, 2006. This change is due to recording of the losses from
theft, which was partially offset by insurance payments.
Interest expense increased 9.9% to $168,797 for the three months ended March 31,
2007 from $153,594 for the three months ended March 31, 2006 and 3.7% to
$501,068 for the nine months ended March 31, 2007 from $483,150 for the same
period last year. 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 and the
monthly interest now being recorded for the note. As required by GAAP, this Note
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 $202,924 for the three month period
ended March 31, 2007 and $547,829 for the nine months ended March 31, 2007 is
based on an estimated combined tax rate of approximately 39% for both Federal
and State taxes based on Company earnings projections. For the nine months ended
March 31, 2006, the estimated combined tax rate of 10.5% reflected a full
valuation on the Federal net operating loss carry forwards. 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 $2,763,827 for the
nine months ended March 31, 2007 compared to $1,572,236 for the same period last
year. Cash flow from operations in the nine months ended March 31, 2007 consists
of net income of $860,150 plus depreciation and amortization of $526,912,
non-cash interest expense of $129,585, non-cash stock based compensation of
$163,766, a $293,321 increase in allowance for doubtful accounts, a $504,355
decrease in deferred tax asset, a $1,009,880 increase in accrued expenses and
other liabilities and a $313,490 increase in accounts payable, offset by an
$729,096 increase in accounts receivable, $156,597 increase in prepaid expenses
and a $151,939 decrease in other assets.
Cash used in investing activities in the nine months ended March 31, 2007
consisted of $1,507,330 in capital expenditures compared to $753,933 in capital
expenditures in the same period last year. Included in investing activities for
the current fiscal year is $675,953 in property and equipment acquisition, which
includes $185,843 in deferred expenses related to the software installation,
$431,377 related to the Seven Hills construction in progress and $400,000 which
was invested in the Seven Hills Psych Center, LLC, an unconsolidated subsidiary,
during the current quarter. 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 July 2007. Leased equipment is listed as supplemental
information on the cash flow statement.
Cash provided by financing activities of $1,173,473 in the nine months ended
March 31, 2007 was the result of $2,392,262 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 $347,241 and
repayments on long term debt of $871,548.
The Company's expansion in the Las Vegas area is expected to negatively impact
its cash flow from operations as we invest in the build-out of the new office
space at Seven Hills and the construction of the Seven Hills Hospital until the
construction is complete, the new facility is opened, the staff is on board and
fully trained, census is stabilized and cash flow from the services provided is
realized.
17
A significant factor in the liquidity and cash flow of the Company is the timely
collection of its accounts receivable. As of March 31, 2007, accounts receivable
from patient care, net of allowance for doubtful accounts, increased less than
one percent to $7,009,749 from $6,995,475 on June 30, 2006. The total amount of
accounts receivable outstanding over 150 days as of March 31, 2007, decreased
$333,000 or 16% from the total of June 30, 2006. This minimal increase in
receivables and considerable decrease in aging of receivables is the result of
increased collection efforts. The Company monitors accounts receivable closely.
Over the years, we have increased staff, standardized 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. 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 March 31, 2007 are as
follows (in thousands):
YEAR ENDING OPERATING
March 31 TERM NOTES CAPITAL LEASES * LEASES TOTAL
Principal Interest Principal Interest
2008 $1,156 $ 26 $ 211 $ 45 $1,532 $2,970
2009 791 21 174 29 1,540 2,555
2010 55 17 131 16 1,367 1,586
2011 46 13 114 8 754 935
2012 49 9 18 1 234 311
2013 54 4 -- -- -- 58
Thereafter 16 0 -- -- -- 16
______ ____ _____ ____ ______ ______
Total $2,167 $ 90 $ 648 $ 99 $5,427 $8,431
* 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 $514,628 which
represents the earn out for the Pivotal acquisition through December 31, 2005
net of payments made through March 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. On February 1, 2007 an additional
$343,934 was recorded as the earn-out for the twelve months ended December 31,
2006. The total amount of $851,434 is also included in Term notes in the above
table. Note repayment began on Note B 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 $177,437 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 $292,136 at March 31, 2007, 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.
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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.
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 March 31, 2007 was
$1,256,128. 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 March 31, 2007 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 March 31, 2007, 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. We experienced high expenses related to the start up of
the new contract in Nevada, and the hospital at Seven Hills in Nevada.
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 before the end of the fiscal year.
The Company has operated ongoing operations profitably for twenty-five
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 $3,940.
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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.
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 $7,009,749 at
March 31, 2007, $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 March 31, 2007 and June 30, 2006,
respectively, and Bad Debt Expense for the nine months ended March 31,
2007 and the year ended June 30, 2006:
Allowance
Accounts for Doubtful Bad Debt
Receivable Accounts Expense
March 31, 2007 $10,403,656 $3,393,907 $1,226,795
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 at the reasonable assurance level.
During the quarter we became aware of a loss from a theft of funds by an
individual who had the responsibility for processing the payroll at one of our
facilities. We immediately began an investigation to determine the extent of the
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theft and to gauge the adequacy of our internal controls. We do not believe the
total amount of the theft to be material. To date we have recorded approximately
$20,000 in loss related to this theft. While the investigation was being
conducted, in order to avoid any similar event, we have strengthened our
internal controls as they relate to payroll at all facilities by establishing
additional review requirements at both the facility level and the corporate
level.
Change in Internal Controls
There were no significant changes in our internal control over financial
reporting that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
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PART II OTHER INFORMATION
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.
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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: May 15, 2007 /s/ Bruce A. Shear
________________________________
Bruce A. Shear
President
Chief Executive Officer
Date: May 15, 2007 /s/ Paula C. Wurts
_______________________________
Paula C. Wurts
Treasurer
Chief Financial Officer
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