U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended June 30, 2005
[ ] Transition report under 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 Identification No.)
Incorporation or Organization)
200 LAKE STREET, SUITE 102, PEABODY, MA 01960
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (978) 536-2777
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
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 preceding 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 if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. No Disclosure X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
As of December 31, 2004 the aggregate market value of the shares of common stock
of the registrant held by non-affiliates of the registrant was approximately
$23.1 million.
As of August 5, 2005, 17,332,330 shares of the registrant's Class A Common Stock
and 776,991 shares of the issuer's Class B Common Stock were outstanding.
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PART I All references in this Annual Report on Form 10-K to "Pioneer," "PHC,"
"the Company," "we," "us," or "our" mean, unless the context otherwise requires,
PHC, Inc. and its consolidated subsidiaries.
Item 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Our Company is a national healthcare company, which, through wholly owned
subsidiaries, provides psychiatric services to individuals who have behavioral
health disorders including alcohol and drug dependency and to individuals in the
gaming and transportation industries. Our subsidiaries operate substance abuse
treatment facilities in Utah and Virginia, four outpatient psychiatric
facilities in Michigan, two outpatient psychiatric facilities in Nevada and two
inpatient psychiatric facilities in Michigan. We provide management,
administrative and help line services through contracts with major railroads and
a call center contract with Wayne County, Michigan. Through another subsidiary,
at four sites, we conduct studies on the effects of psychiatric pharmaceuticals
on a controlled population through contracts with the manufacturers of these
pharmaceuticals. In fiscal 2004, we expanded our operations related to
pharmaceutical studies through the acquisition of Pivotal Research Centers, LLC.
We also operate a website, Wellplace.com, which provides education and training
for the behavioral health professional and internet support services to all of
our subsidiaries.
Our Company provides behavioral health services through inpatient and
outpatient facilities. Our substance abuse facilities provide specialized
treatment services to patients who typically have poor recovery prognoses and
who are prone to relapse. These services are offered in small specialty care
facilities, which permit us to provide our clients with efficient and customized
treatment without the significant costs associated with the management and
operation of general acute care hospitals. We tailor these programs and services
to "safety-sensitive" industries and concentrate our marketing efforts on the
transportation, oil and gas exploration, heavy equipment, manufacturing, law
enforcement, gaming and health services industries. Our psychiatric facilities
provide inpatient psychiatric care, intensive outpatient treatment and partial
hospitalization programs to children, adolescents and adults. Our outpatient
mental health clinics provide services to employees of major employers, as well
as to managed care companies and Medicare and Medicaid clients. The psychiatric
services are offered in a larger, more traditional setting than PHC's substance
abuse facilities, enabling PHC to take advantage of economies of scale to
provide cost-effective treatment alternatives.
The Company treats employees who have been referred for treatment as a
result of compliance with Subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as the Drug Free Workplace Act), which requires employers who
are Federal contractors or Federal grant recipients to establish drug-free
awareness programs which, among other things, inform employees about available
drug counseling, rehabilitation and employee assistance programs. We also
provide treatment under the Department of Transportation implemented
regulations, which broaden the coverage and scope of alcohol and drug testing
for employees in "safety sensitive" positions in the transportation industry.
The Company was incorporated in 1976 and is a Massachusetts corporation.
Our corporate offices are located at 200 Lake Street, Suite 102, Peabody, MA
01960 and our telephone number is (978) 536-2777. As used herein, our Company
refers to and includes the Company and each of its subsidiaries through which
substantially all of our business and operations are conducted.
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PSYCHIATRIC SERVICES INDUSTRY
Substance Abuse Facilities
Industry Background
The demand for substance abuse treatment services increased rapidly in the
last decade. The Company believes that the increased demand is related to
clinical advances in the treatment of substance abuse, greater societal
willingness to acknowledge the underlying problems as treatable illnesses,
improved health insurance coverage for addictive disorders and chemical
dependencies and governmental regulation which requires certain employers to
provide information to employees about drug counseling and employee assistance
programs.
To contain costs associated with behavioral health issues in the 1980s,
many private payors instituted managed care programs for reimbursement, which
included pre-admission certification, case management or utilization review and
limits on financial coverage or length of stay. These cost containment measures
have encouraged outpatient care for behavioral problems, resulting in a
shortening of the length of stay and revenue per day in inpatient chemical abuse
facilities. The Company believes that it has addressed these cost containment
measures by specializing in treating relapse-prone patients with poor prognoses
who have failed in other treatment settings. These patients require longer
lengths of stay and come from a wide geographic area. The Company continues to
develop alternatives to inpatient care including partial day and evening
programs in addition to onsite and offsite outpatient programs.
The Company believes that because of the apparent unmet need for certain
clinical and medical services, its strategy has been successful despite national
trends towards outpatient treatment, shorter inpatient stays and rigorous
scrutiny by managed care organizations.
Company Operations
The Company has been able to secure insurance reimbursement for longer-term
inpatient treatment as a result of its success with poor prognosis patients. The
Company's two substance abuse facilities work together to refer patients to the
center that best meets the patient's clinical and medical needs. Each facility
caters to a slightly different patient population including high-risk,
relapse-prone chronic alcoholics, drug addicts, Native Americans and dual
diagnosis patients (those suffering from both substance abuse and psychiatric
disorders). The Company concentrates on providing services to insurers, managed
care networks and health maintenance organizations for both adults and
adolescents. The Company's clinicians often work directly with managers of
employee assistance programs to select the best treatment facility possible for
their clients.
Each of the Company's facilities operates a case management program for
each patient including a clinical and financial evaluation of a patient's
circumstances to determine the most cost-effective modality of care from among
outpatient treatment, detoxification, inpatient, day care, specialized relapse
treatment and others. In addition to any care provided at one of the Company's
facilities, the case management program for each patient includes aftercare.
Aftercare may be provided through the outpatient services provided by a
facility. Alternatively, the Company may arrange for outpatient aftercare, as
well as family and mental health services, through its numerous affiliations
with clinicians located across the country once the patient is discharged.
In general, the Company does not accept patients who do not have either
insurance coverage or adequate financial resources to pay for treatment. Each of
the Company's substance abuse facilities does, however, provide treatment free
of charge to a small number of patients each year who are unable to pay for
treatment, but who meet certain clinical criteria and who are believed by the
Company to have the requisite degree of motivation for treatment to be
successful. In addition, the Company provides follow-up treatment free of charge
to relapse patients who satisfy certain criteria. The number of patient days
attributable to all patients who receive treatment free of charge in any given
fiscal year is less than 5% of the total patient days.
The Company believes that it has benefited from an increased awareness of
the need to make substance abuse treatment services accessible to the nation's
workforce. For example, Subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as The Drug Free Workplace Act), requires employers who are
Federal contractors or Federal grant recipients to establish drug free awareness
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programs to inform employees about available drug counseling, rehabilitation and
employee assistance programs and the consequences of drug abuse violations. In
response to the Drug Free Workplace Act, many companies, including many major
national corporations and transportation companies, have adopted policies that
provide for treatment options as an alternative to termination of employment.
Although the Company does not directly provide federally approved mandated
drug testing, the Company treats employees who have been referred to the Company
as a result of compliance with the Drug Free Workplace Act, particularly from
companies that are part of the gaming industry as well as safety sensitive
industries such as railroads, airlines, trucking firms, oil and gas exploration
companies, heavy equipment companies, manufacturing companies and health
services.
HIGHLAND RIDGE - Highland Ridge is a 41-bed, freestanding alcohol and drug
treatment hospital, which the Company has been operating since 1984. The
hospital increased its bed capacity to 41 from 32 in November 2003. It is the
oldest facility dedicated to substance abuse in Utah. Highland Ridge is
accredited by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO") and is licensed by the Utah Department of Health. Highland Ridge is
recognized nationally for its excellence in treating substance abuse disorders.
Most patients are from Utah and surrounding states. Individuals typically
access Highland Ridge's services through professional referrals, family members,
employers, employee assistance programs or contracts between the Company and
health maintenance organizations located in Utah.
Highland Ridge was the first private for-profit hospital to address
specifically the special needs of chemically dependent women in Salt Lake
County. In addition, Highland Ridge has contracted with Salt Lake County to
provide medical detoxification services targeted to women. The hospital also
operates a specialized continuing care support group to address the unique needs
of women and minorities.
A pre-admission evaluation, which involves an evaluation of psychological,
cognitive and situational factors, is completed for each prospective patient. In
addition, each prospective patient is given a physical examination upon
admission. Diagnostic tools, including those developed by the American
Psychological Association, the American Society of Addiction Medicine and the
Substance Abuse Subtle Screening Inventory are used to develop an individualized
treatment plan for each client. The treatment regimen involves an
interdisciplinary team which integrates the twelve-step principles of self-help
organizations, medical detoxification, individual and group counseling, family
therapy, psychological assessment, psychiatric support, stress management,
dietary planning, vocational counseling and pastoral support. Highland Ridge
also offers extensive aftercare assistance at programs strategically located in
areas of client concentration throughout the United States. Highland Ridge
maintains a comprehensive array of professional affiliations to meet the needs
of discharged patients and other individuals not admitted to the hospital for
treatment.
Highland Ridge periodically conducts or participates in research projects.
Highland Ridge was the site of a research project conducted by the University of
Utah Medical School. The research explored the relationship between individual
motivation and treatment outcomes. The research was regulated and reviewed by
the Human Subjects Review Board of the University of Utah and was subject to
federal standards that delineated the nature and scope of research involving
human subjects. Highland Ridge benefited from this research by expanding its
professional relationships within the medical school community and by applying
the findings of the research to improve the quality of services the Company
delivers. In the past, Highland Ridge contracted with a major pharmaceutical
manufacturer to participate in a research study in cooperation with a local
nursing home. In the future all pharmaceutical research will be provided through
our research subsidiary, Pivotal Research Centers, Inc.
MOUNT REGIS - Mount Regis is a 25-bed, freestanding alcohol and drug treatment
center located in Salem, Virginia, near Roanoke. The Company acquired the center
in 1987. It is the oldest of its kind in the Roanoke Valley. Mount Regis is
accredited by the JCAHO and licensed by the Department of Mental Health, Mental
Retardation and Substance Abuse Services of the Commonwealth of Virginia. In
addition, Mount Regis operates Changes, an outpatient clinic, at its Salem,
Virginia location. The Changes clinic provides structured intensive outpatient
treatment for patients who have been discharged from Mount Regis and for
patients who do not need the formal structure of a residential treatment
program. The program is licensed by the Commonwealth of Virginia and approved
for reimbursement by major insurance carriers.
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Mount Regis Center's programs are sensitive to the needs of women and
minorities. The majority of Mount Regis clients are from Virginia and
surrounding states. In addition, because of its relatively close proximity and
accessibility to New York, Mount Regis has been able to attract an increasing
number of referrals from New York-based labor unions. Mount Regis has also been
able to attract a growing number of clients through the Internet. Mount Regis
has established programs that allow the Company to better treat dual diagnosis
patients (those suffering from both substance abuse and psychiatric disorders),
cocaine addiction and relapse-prone patients. The multi-disciplinary case
management, aftercare and family programs are key to the prevention of relapse.
General Psychiatric Facilities
Introduction
The Company believes that its proven ability to provide high quality,
cost-effective care in the treatment of substance abuse has enabled it to grow
in the related behavioral health field of psychiatric treatment. The Company's
main advantage is its ability to provide an integrated delivery system of
inpatient and outpatient care. As a result of integration, the Company is better
able to manage and track patients.
The Company offers inpatient and partial hospitalization psychiatry
services through Harbor Oaks Hospital. The Company also provides residential
treatment to adjudicated juveniles through Detroit Behavioral Institute, Inc.
The Company also currently operates six outpatient psychiatric facilities.
The Company's philosophy at these facilities is to provide the most
appropriate and efficacious care with the least restrictive modality of care. An
attending physician, a case manager and a clinical team, work together to manage
the care plan. The integrated delivery system allows for better patient tracking
and follow-up and fewer repeat procedures and therapeutic or diagnostic errors.
Qualified, dedicated staff members take a full history on each new patient, and
through test and evaluation procedures, they provide a thorough diagnostic
write-up of the patient's condition. In addition a physician does a complete
physical examination for each new patient. This information allows the
caregivers to determine which treatment alternative is best suited for the
patient and to design an individualized recovery program for the patient.
Managed health care organizations, state agencies, physicians and patients
themselves refer patients to our facilities. These facilities have a patient
population ranging from children as young as five years of age to senior
citizens. Compared to the substance abuse facilities, the psychiatric facilities
treat a larger percentage of female patients.
HARBOR OAKS - The Company acquired Harbor Oaks Hospital, a 64-bed psychiatric
hospital located in New Baltimore, Michigan, approximately 20 miles northeast of
Detroit, in September 1994. Harbor Oaks Hospital is licensed by the Michigan
Department of Commerce, Medicare certified and accredited by JCAHO. Harbor Oaks
provides inpatient psychiatric care, partial hospitalization and outpatient
treatment to children, adolescents and adults. Harbor Oaks Hospital has treated
clients from Macomb, Oakland and St. Clair counties and has expanded its
coverage area to include Wayne, Sanilac and Livingston counties.
Harbor Oaks has become a primary provider for Medicaid patients from Wayne,
Macomb and St. Clair counties. Utilization of a short-term crisis management
model in conjunction with strong case management has allowed Harbor Oaks to
successfully enter this segment of the market. Reimbursement for these services
is comparable to traditional managed care payors. Given the current climate of
public sector treatment availability, Harbor Oaks anticipates continued growth
in this sector of the business.
On February 10, 1997, Harbor Oaks Hospital opened an 8-bed residential unit
serving adolescents with substance abuse problems and co-existing mental
disorders who have been adjudicated to have committed criminal acts and who have
been referred or required to undergo psychiatric treatment by a court or family
service agency. The patients in the program range from 13 to 18 years of age.
The program provides patients with educational and recreational activities and
adult life functioning skills as well as treatment. Typically, a patient is
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admitted to the unit for an initial period of 30 days to six months. A case
review is done for any patient still in the program at six months, and regularly
thereafter, to determine if additional treatment is required. State
authorization allowed the Company to increase the number of beds in the
adjudicated residential unit to twelve on May 1, 1998 and twenty on June 26,
1998. In the fourth quarter of fiscal 2005, Harbor Oaks began operating an
outpatient site near New Baltimore, Michigan. Its close proximity to the
hospital allows for a continuum of care for patients after discharge.
DETROIT BEHAVIORAL INSTITUTE - Detroit Behavioral Institute operates a thirty
bed residential unit, located in downtown Detroit, serving delinquents with a
substance abuse problem and a co-existing mental disorder who have been
adjudicated to have committed criminal acts and who have been referred or
required to undergo psychiatric treatment by a court or family service agency.
The patients in the program are male, ranging from 12 to 18 years of age, with a
minimum IQ of 70. The program provides individual, group and family therapy
sessions for medication orientation, anger management, impulse control, grief
and loss, family interactions, coping skills, stress management, substance
abuse, discharge and aftercare planning (home visits and community
reintegration), education, recreation therapy and sexual/physical abuse
counseling as required. Typically, a patient is admitted to the unit for an
initial period of 30 days to six months. A case review is done for any patient
still in the program at six months, and each subsequent six-month period
thereafter, to determine if additional treatment is required. The Company is in
the process of acquiring the final permits to open an additional twenty-bed unit
for adjudicated females in the same age range. This unit will be located in the
same building on the floor above the adjudicated male unit.
HARMONY HEALTHCARE - Harmony Healthcare, which consists of two psychiatric
clinics in Nevada, provides outpatient psychiatric care to children, adolescents
and adults in the local area. Harmony also operates employee assistance programs
for railroads, health care companies and several large gaming companies
including Boyd Gaming Corporation, the MGM Grand and the Venetian with a rapid
response program to provide immediate assistance 24 hours a day and seven days a
week. Harmony also provides outpatient psychiatric care and inpatient
psychiatric case management through a capitated rate behavioral health carve-out
with PacifiCare Insurance.
NORTH POINT-PIONEER, INC. - North Point consists of three outpatient psychiatric
clinics in Michigan. The clinics provide outpatient psychiatric and substance
abuse treatment to children, adolescents and adults operating under the name
Pioneer Counseling Center. The three clinics are located in close proximity to
the Harbor Oaks facility, which allows for more efficient integration of
inpatient and outpatient services and provides for a larger coverage area and
the ability to share personnel which results in cost savings. In the first
fiscal quarter of 2005 North Point was awarded a contract with Macomb County
Office of Substance Abuse (MCOSA) to provide behavioral health outpatient and
intensive out-patient services for indigent and Medicaid clients residing in
Macomb County. The contract is renewable annually with an estimated value of
$55,000 annually.
Call Center Operations
WELLPLACE, INC. - In the spring of 1994, the Company began to operate a crisis
hotline service under contract with a major transportation client. The hotline,
Wellplace, formerly known as Pioneer Development Support Services, or PDS2,
shown as contract support services on the accompanying statement of operations,
is a national, 24-hour telephone service, which supplements the services
provided by the client's Employee Assistance Programs. The services provided
include information, crisis intervention, critical incidents coordination,
employee counselor support, client monitoring, case management and health
promotion. The hotline is staffed by counselors who refer callers to the
appropriate professional resources for assistance with personal problems. Three
major transportation companies subscribed to these services as of June 30, 2005.
Wellplace operated the smoking cessation quitlines for the State of Nebraska
until the contract expiration in May 2004 and the State of Kansas until the
contract expiration in May 2005. This operation is physically located in
Highland Ridge Hospital, but a staff dedicated to Wellplace provides the
services from a separate designated area of the Hospital. Wellplace also
contracts with Wayne County Michigan to operate its call center. This call
center is located in downtown Detroit, Michigan. In the second fiscal quarter of
2005 this contract was expanded to provide credentialing services to Detroit
Wayne County Community Mental Health Carve-out providers and Agency staff.
Wellplace also signed a contract with Behavioral Health Providers Incorporated
to provide credentialing services. Wellplaces' primary focus is now on growing
its operations to take advantage of current opportunities and capitalize on the
economies of scale in providing similar services to other companies and
government units.
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Research Operations
PIVOTAL RESEARCH CENTERS, INC. - (formerly PIONEER PHARMACEUTICAL RESEARCH, INC.
- - PPR) - Pivotal Research Centers works with major manufacturers of
pharmaceuticals to assist in the study of the effects of certain pharmaceuticals
in the treatment of specific illness. In April 2004, the Company expanded our
operations related to pharmaceutical studies through the acquisition of 100% of
the membership interest in Pivotal Research Centers, LLC. Pivotal performs all
phases of clinical research for Phase I-IV drugs under development through four
dedicated research sites, including one of the largest single psychiatric
research sites in the country. Pivotal currently has approximately 43 enrolling
studies and an additional 53 ongoing studies with approximately 75-80 percent of
Pivotal's research activity in central nervous system (CNS) research. With a
current client base including Alza, AstraZeneca, Bristol Meyers Squibb,
Cephalon, Forest, GlaxoSmithKline, Hisamitsu, Lilly, Merck, Mylan, Novartis,
Organon, Sepracor and Wyeth, the Company currently has protocols in Alzheimer's
disease, ADHD, Diabetes Type II, Fibromyalgia, Generalized Anxiety Disorder,
Healthy Volunteers, Insomnia, Major Depressive Disorder, Obesity, Pain,
Parkinson's Disease, Restless leg syndrome and Shift Work Sleep Disorder.
Pivotal currently operates at four sites. Two in Arizona and one each in Utah
and Michigan. Although the Company's other facilities may still provide study
patients, all future Studies will be supervised by the Company's research arm,
Pivotal Research Centers, Inc.
Internet Operations
BEHAVIORAL HEALTH ONLINE, INC. - Behavioral Health Online designs, develops and
maintains the Company's web site, Wellplace.com, in addition to providing
Internet support services and maintaining the web sites of all of the other
subsidiaries of the Company. The Company's web sites provide behavioral health
professionals with the educational tools required to keep them abreast of
behavioral health breakthroughs and keeps individuals informed of current issues
in behavioral health of interest to them.
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Operating Statistics
The following table reflects selected financial and statistical information
for all psychiatric services.
Year Ended June 30,
(unaudited)
2005 2004 2003 2002 2001
______________________________________________________________________
Inpatient
Net patient service $18,469,578 $14,845,163 $14,430,069 $14,130,471 $13,507,124
revenues
Net revenues per $ 436 $ 414 $ 417 $ 413 $ 418
patient day (1)
Average occupancy rate 78.8% 76.7% 77.7% 76.9% 72.0%
(2)
Total number of
licensed beds at end
of period 160 130 122 122 122
Source of Revenues:
Private (3) 61.79% 61.62% 62.20% 76.82% 82.00%
Government (4) 38.21% 38.38% 37.80% 23.18% 18.00%
Partial Hospitalization
and Outpatient
Net Revenues:
Individual $ 5,557,298 $ 5,647,752 $ 4,865,392 $ 4,678,493 $ 5,283,278
Contract $ 2,060,212 $ 1,925,440 $ 1,947,716 $ 2,300,140 $ 2,297,071
Sources of revenues:
Private 97.2% 97.7% 98.0% 98.1% 97.9%
Government 2.8% 2.3% 2.0% 1.9% 2.1%
Other Services:
Wellplace(5) $ 3,466,832 $ 2,984,477 $ 1,649,374 $ 842,345 $ 944,567
Pharmaceutical
Studies (6) $ 4,509,338 $ 1,246,013 $ 940,772 $ 0 $ 0
Practice
Management (7) $ 0 $ 0 $ 0 $ 0 $ 345,111
(1) Net revenues per patient day equals net patient service revenues divided by
total patient days.
(2) Average occupancy rates were obtained by dividing the total number of
patient days in each period by the number of beds available in such period.
(3) Private pay percentage is the percentage of total patient revenue derived
from all payors other than Medicare and Medicaid.
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(4) Government pay percentage is the percentage of total patient revenue
derived from the Medicare and Medicaid programs.
(5) Wellplace, formerly PDS2, Pioneer Development and Support Services,
provides clinical support, referrals management and professional services
for a number of the Company's national contracts and operates the Wayne
County Michigan call center.
(6) Pharmaceutical Studies includes research studies of the Company prior to
the acquisition of 100% of the membership interest in Pivotal Research
Centers, LLC on April 30, 2004 and ongoing operations of all research
sites.
(7) Practice Management revenue was produced through BSC-NY and PHC, Inc.
During the fiscal year ended June 30, 2001, the Company closed its practice
management operations.
Business Strategy
The Company's objective is to become the leading national provider of
behavioral health services.
The Company focuses its marketing efforts on "safety-sensitive" industries
such as transportation and medical. This focus results in customized outcome
oriented programs that the Company believes produce overall cost savings to the
patients and/or client organizations. The Company intends to leverage experience
gained from providing services to customers in certain industries that it
believes will enhance its selling efforts within these certain industries.
Marketing and Customers
The Company markets its substance abuse, inpatient and outpatient
psychiatric health services both locally and nationally, primarily to safety
sensitive industries, including transportation, manufacturing and healthcare
services. Additionally, the Company markets its services in the gaming industry
both in Nevada and nationally and its help line services nationally.
The Company employs nine individuals dedicated to marketing the Company's
facilities, five of whom are in the research division. Each facility performs
marketing activities in its local region. The Senior Vice President of the
Company coordinates the Company's national marketing efforts. In addition,
employees at certain facilities perform local marketing activities independent
of the Senior Vice President. The Company, with the support of its owned
integrated outpatient systems and management services, continues to pursue more
at-risk contracts and outpatient, managed health care fee-for-service contracts.
"At risk" contracts require that the Company provide all the clinically
necessary behavioral health services for a group of people for a set fee per
person per month. The Company currently has one at risk contract with a large
insurance carrier, which requires the Company to provide behavioral health
services to all of its insured in the state of Nevada for a fixed fee. This at
risk contract represents less than 5% of the Company's total gross revenues. In
addition to providing excellent services and treatment outcomes, the Company
will continue to negotiate pricing policies to attract patients for long-term
intensive treatment which meet length of stay and clinical requirements
established by insurers, managed health care organizations and the Company's
internal professional standards.
The Company's integrated systems of comprehensive outpatient mental health
programs complement the Company's inpatient facilities. These outpatient
programs are strategically located in Nevada, Virginia, Michigan, and Utah. They
make it possible for the Company to offer wholly integrated, comprehensive,
mental health services for corporations and managed care organizations on an
at-risk or exclusive fee-for-service basis. Additionally, the Company operates
Wellplace located in the Highland Ridge facility in Salt Lake City, Utah and in
Detroit, Michigan. Wellplace provides clinical support, referrals, management
and professional services for a number of the Company's national contracts. It
gives the Company the capacity to provide a complete range of fully integrated
mental health services.
The Company provides services to employees of a variety of corporations
including: Boyd Gaming, Conrail, CSX, the IUE, MCC, MGM, Union Pacific Railroad,
Union Pacific Railroad Hospital Association, VBH, and others.
In addition to its direct patient care services, the Company maintains its
web site, Wellplace.com, which provides articles and information of interest to
the general public as well as the behavioral health professional. The Company's
internet company also provides the added benefit of web availability of
information for various EAP contracts held and serviced by those subsidiaries
providing direct treatment services.
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Competition
The Company's substance abuse programs compete nationally with other health
care providers, including general and chronic care hospitals, both non-profit
and for-profit, other substance abuse facilities and short-term detoxification
centers. Some competitors have substantially greater financial resources than
the Company. The Company believes, however, that it can compete successfully
with such institutions because of its success in treating poor-prognosis
patients. The Company will compete through its focus on such patients, its
willingness to negotiate appropriate rates and its capacity to build and service
corporate relationships.
The Company's psychiatric facilities and programs compete primarily within
the respective geographic area serviced by them. The Company competes with
private doctors, hospital-based clinics, hospital-based outpatient services and
other comparable facilities. The main reasons that the Company competes well are
its integrated delivery and dual diagnosis programming. Integrated delivery
provides for more efficient follow-up procedures and reductions in length of
stay. Dual diagnosis programming provides a niche service for clients with a
primary mental health and a secondary substance abuse diagnosis. The Company
developed its dual diagnosis service in response to demand from insurers,
employers and treatment facilities. The Company's internet company provides the
competitive edge for service information and delivery for our direct patient
care programs.
The Company's pharmaceutical research operations compete for studies with
other research companies located in the same areas as our research offices in
Arizona, Michigan and Utah.
Revenue Sources and Contracts
The Company has entered into relationships with numerous employers, labor
unions and third-party payors to provide services to their employees and members
for the treatment of substance abuse and psychiatric disorders. In addition, the
Company admits patients who seek treatment directly without the intervention of
third parties and whose insurance does not cover these conditions in
circumstances where the patient either has adequate financial resources to pay
for treatment directly or is eligible to receive free care at one of the
Company's facilities. The Company's psychiatric patients either have insurance
or pay at least a portion of treatment costs based on their ability to pay. Most
of our patients are covered by insurance. Free treatment provided each year
amounts to less than 5% of the Company's total patient days.
Each contract is negotiated separately, taking into account the insurance
coverage provided to employees and members, and, depending on such coverage, may
provide for differing amounts of compensation to the Company for different
subsets of employees and members. The charges may be capitated, or fixed with a
maximum charge per patient day, and, in the case of larger clients, frequently
result in a negotiated discount from the Company's published charges. The
Company believes that such discounts are appropriate as they are effective in
producing a larger volume of patient admissions. The Company treats non-contract
patients and bills them on the basis of the Company's standard per diem rates
and for any additional ancillary services provided to them by the Company.
Insurance companies and managed care organizations are entering into sole
source contracts with healthcare providers, which could limit our ability to
obtain patients. Private insurers, managed care organizations and, to a lesser
extent, Medicaid and Medicare, are beginning to carve-out specific services,
including mental health and substance abuse services, and establish small,
specialized networks of providers for such services at fixed reimbursement
rates. We are not aware of any lost business as a result of sole source
contracts to date, as we have not been advised by any payor that we have been
eliminated as a provider from their system based on an exclusivity contract with
another provider. Continued growth in the use of carve-out systems could
materially adversely affect our business to the extent we are not selected to
participate in such smaller specialized networks or if the reimbursement rate is
not adequate to cover the cost of providing the service.
-- 10 --
Quality Assurance and Utilization Review
The Company has established comprehensive quality assurance programs at all
of its facilities. These programs are designed to ensure that each facility
maintains standards that meet or exceed requirements imposed upon the Company
with the objective of providing high-quality specialized treatment services to
its patients. To this end, the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") surveys and accredits the Company's inpatient
facilities, except Detroit Behavioral Institute, and the Company's outpatient
facilities comply with the standards of National Commission on Quality Assurance
("NCQA") although the facilities are not NCQA certified. The Company's
outpatient facilities in Michigan are certified by the American Osteopathic
Association ("AOA"), which is nationally recognized by all payors as the measure
of quality in outpatient treatment. The Company's professional staff, including
physicians, social workers, psychologists, nurses, dietitians, therapists and
counselors, must meet the minimum requirements of licensure related to their
specific discipline, in addition to each facility's own internal quality
assurance criteria. The Company is currently in the process of providing data
for accreditation through the Council on Accreditation ("COA") for the Detroit
Behavioral Institute residential facility. This accreditation is expected to be
awarded in the next quarter. The Company participates in the federally mandated
National Practitioners Data Bank, which monitors professional accreditation
nationally.
In response to the increasing reliance of insurers and managed care
organizations upon utilization review methodologies, the Company has adopted a
comprehensive documentation policy to satisfy relevant reimbursement criteria.
Additionally, the Company has developed an internal case management system,
which provides assurance that services rendered to individual patients are
medically appropriate and reimbursable. Implementation of these internal
policies has been integral to the success of the Company's strategy of providing
services to relapse-prone, higher acuity patients.
Government Regulation
The Company's business and the development and operation of the Company's
facilities are subject to extensive federal, state and local government
regulation. In recent years, an increasing number of legislative proposals have
been introduced at both the national and state levels that would affect major
reforms of the health care system if adopted. Among the proposals under
consideration are reforms to increase the availability of group health
insurance, to increase reliance upon managed care, to bolster competition and to
require that all businesses offer health insurance coverage to their employees.
The Company cannot predict whether any such legislative proposals will be
adopted and, if adopted, what effect, if any, such proposals would have on the
Company's business.
In addition, both the Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions, all
of which may materially increase or decrease the rate of program payments to
health care facilities. Since 1983, Congress has consistently attempted to limit
the growth of federal spending under the Medicare and Medicaid programs and will
likely continue to do so. Additionally, congressional spending reductions for
the Medicaid program involving the issuance of block grants to states is likely
to hasten the reliance upon managed care as a potential savings mechanism of the
Medicaid program. As a result of this reform activity, the Company can give no
assurance that payments under such programs will in the future remain at a level
comparable to the present level or be sufficient to cover the costs allocable to
such patients.
Control of the healthcare industry exercised by federal, state and local
regulatory agencies can increase costs, establish maximum reimbursement levels
and limit expansion. Our Company and the health care industry are subject to
rapid regulatory change with respect to licensure and conduct of operations at
existing facilities, construction of new facilities, acquisition of existing
facilities, the addition of new services, compliance with physical plant safety
and land use requirements, implementation of certain capital expenditures,
reimbursement for services rendered and periodic government inspections.
Governmental budgetary restrictions have resulted in limited reimbursement rates
in the healthcare industry including our Company. As a result of these
restrictions, we cannot be certain that payments under government programs will
remain at a level comparable to the present level or be sufficient to cover the
costs allocable to such patients. In addition, many states, including the State
of Michigan, where the majority of our Medicaid Revenue is generated, are
considering reductions in state Medicaid budgets.
-- 11 --
Health Planning Requirements
Most of the states in which the Company operates have health planning
statutes which require that prior to the addition or construction of new beds,
the addition of new services, the acquisition of certain medical equipment or
certain capital expenditures in excess of defined levels, a state health
planning agency must determine that a need exists for such new or additional
beds, new services, equipment or capital expenditures. These state
determinations of need or certificate of need ("DoN") programs are designed to
enable states to participate in certain federal and state health related
programs and to avoid duplication of health services. DoN's typically are issued
for a specified maximum expenditure, must be implemented within a specified time
frame and often include elaborate compliance procedures for amendment or
modification, if needed.
Licensure and Certification
All of the Company's facilities must be licensed by state regulatory
authorities. The Company's Harbor Oaks facility is certified for participation
as a provider in the Medicare and Medicaid programs.
The Company's initial and continued licensure of its facilities, and
certification to participate in the Medicare and Medicaid programs, depends upon
many factors, including accommodations, equipment, services, patient care,
safety, personnel, physical environment, the existence of adequate policies,
procedures and controls and the regulatory process regarding the facility's
initial licensure. Federal, state and local agencies survey facilities on a
regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participating in
government programs. Such surveys include review of patient utilization and
inspection of standards of patient care. The Company has procedures in place to
ensure that its facilities are operated in compliance with all such standards
and conditions. To the extent these standards are not met, however, the license
of a facility could be restricted, suspended or revoked, or a facility could be
decertified from the Medicare or Medicaid programs.
Medicare Reimbursement
Currently, the only facility of the Company that receives Medicare
reimbursement is Harbor Oaks. For the fiscal year ended June 30, 2005, 10.27% of
revenues for Harbor Oaks were derived from Medicare programs. Harbor Oaks
revenue was 37.3% of total net patient care revenues.
Effective for fiscal years beginning after January 1, 2005, the prospective
payment system ("PPS") was brought into effect for all Psychiatric services paid
through the Medicare program. The new system will change the present TEFRA-based
(Tax Equity and Fiscal Responsibility Act of 1982) system to a new variable per
diem-based system. The new rates are based on a statistical model that relates
per diem resource use for beneficiaries to patient and facility characteristics
available from CMS's administrative data base (cost reports and claims data).
Patient-specific characteristics include principal diagnoses, comorbid
conditions, and age. Facility specific variables include an area wage index,
rural setting, and the extent of teaching activity. This change is being phased
in over the next three fiscal years with a percentage of payments being made at
the old rates and a percentage at the new rates, 75/25, 50/50, and 25/75,
respectively. We expect this new system will result in a higher reimbursement
rate than the current rate at Harbor Oaks.
In order to receive Medicare reimbursement, each participating facility
must meet the applicable conditions of participation set forth by the federal
government relating to the type of facility, its equipment, its personnel and
its standards of medical care, as well as compliance with all state and local
laws and regulations. In addition, Medicare regulations generally require that
entry into such facilities be through physician referral. The Company must offer
services to Medicare recipients on a non-discriminatory basis and may not
preferentially accept private pay or commercially insured patients. The Company
currently meets all of these conditions and requirements and has systems in
place to assure compliance in the future.
Medicaid Reimbursement
Currently, the only facilities of the Company that receive reimbursement
under any state Medicaid program are Harbor Oaks and Detroit Behavioral
Institute. A portion of Medicaid costs is paid by states under the Medicaid
program and the federal matching payments are not made unless the state's
portion is made. Accordingly, the timely receipt of Medicaid payments by a
facility may be affected by the financial condition of the relevant state. For
the period ended June 30, 2005, 24.03% of total net patient revenues of the
Company were derived from Medicaid programs.
-- 12 --
Harbor Oaks and Detroit Behavioral Institute are both participants in the
Medicaid programs administered by the State of Michigan. The Company receives
reimbursement on a per diem basis, inclusive of ancillary costs. The state
determines the rate and adjusts it annually based on cost reports filed by the
Company.
Fraud and Abuse Laws
Various federal and state laws regulate the business relationships and
payment arrangements between providers and suppliers of health care services,
including employment or service contracts, and investment relationships. These
laws include the fraud and abuse provisions of the Medicare and Medicaid
statutes as well as similar state statutes (collectively, the "Fraud and Abuse
Laws"), which prohibit the payment, receipt, solicitation or offering of any
direct or indirect remuneration intended to induce the referral of patients, the
ordering, arranging, or providing of covered services, items or equipment.
Violations of these provisions may result in civil and criminal penalties and/or
exclusion from participation in the Medicare, Medicaid and other
government-sponsored programs. The federal government has issued regulations
that set forth certain "safe harbors," representing business relationships and
payment arrangements that can safely be undertaken without violation of the
federal Fraud and Abuse Laws. Failure to fall within a safe harbor does not
constitute a per se violation of the federal fraud and abuse laws. The Company
believes that its business relationships and payment arrangements either fall
within the safe harbors or otherwise comply with the Fraud and Abuse Laws.
The Company has an active compliance program in place with a corporate
compliance officer and compliance liaisons at each facility and a toll free
compliance hotline. Compliance in-services and trainings are conducted on a
regular basis.
Employees
As of July 31, 2005, the Company had 460 employees of whom nine were
dedicated to marketing, 139 (27 part time) to finance and administration and 312
(55 part time and 54 contingent) to patient care. Until January of 2003, all of
the Company's employees were leased through Team America, a national
employee-leasing firm. The Company elected to discontinue the use of the leasing
company and begin processing payroll in-house or using a more traditional
payroll service while providing more employee services when the benefit of using
a leasing company began to diminish.
The Company believes that it has been successful in attracting skilled and
experienced personnel. Competition for such employees is intense, however, and
there can be no assurance that the Company will be able to attract and retain
necessary qualified employees in the future. On July 31, 2003, the Company's
largest facility, Harbor Oaks Hospital, with approximately 125 union eligible
nursing and administrative employees, voted for union (UAW) representation. In
December 2004, the Company and the Union reached a collective bargaining
agreement, which was ratified by the employees on December 8, 2004 and signed by
the Union and the Company in January 2005.
The limited number of healthcare professionals in the areas in which the
Company operate may create staffing shortages. The Company's success depends, in
large part, on its ability to attract and retain highly qualified personnel,
particularly skilled health care personnel, which are in short supply. The
Company faces competition for such personnel from governmental agencies, health
care providers and other companies and is constantly increasing its employee
benefit programs, and related costs, to maintain required levels of skilled
professionals. As a result of staffing shortages, the Company uses professional
placement services to supply it with a pool of professionals from which to
choose. These individuals generally are higher skilled, seasoned individuals who
require higher salaries, richer benefit plans, and in some instances, require
relocation. The Company has also entered into contracts with agencies to provide
short-term interim staffing in addition to placement services. These additional
costs impact the Company's profitability.
-- 13 --
Insurance
Each of the Company's facilities maintains separate professional liability
insurance policies. Harbor Oaks, Highland Ridge Hospital, Mount Regis Center,
North Point, Detroit Behavioral Institute, Harmony Healthcare and Pivotal, Inc.
each have coverage of $1,000,000 per claim and $3,000,000 in the aggregate. In
addition, the Company has maintained the insurance coverage which was in place
for Pivotal Research Centers, LLC by its former owners of $3,000,000 per claim
and $3,000,000 in the aggregate. In addition to this coverage, Highland Ridge
maintains a $1,000,000 umbrella policy, Harbor Oaks and Detroit Behavioral
Health each maintain a $5,000,000 umbrella policy and Mount Regis Center
maintains a $3,000,000 umbrella policy. In addition, each of these entities
maintains general liability insurance coverage in similar amounts.
The Company maintains $1,000,000 of directors' and officers' liability
insurance coverage, general liability coverage of $1,000,000 per claim and
$2,000,000 in aggregate and an umbrella policy of $1,000,000. The Company
believes, based on its experience, that its insurance coverage is adequate for
its business and, although cost has escalated in recent years, that it will
continue to be able to obtain adequate coverage.
Acquisition and Expansion
If we acquire new businesses or expand our businesses, the operating costs
may be far greater than revenues for a significant period of time. The operating
losses and negative cash flow associated with start-up operations or
acquisitions could have a material adverse effect on our profitability and
liquidity unless and until such facilities are fully integrated with our other
operations and become self sufficient. Until such time, we may be required to
borrow at higher rates and less favorable terms to supplement short term
operating cash flow shortages.
Item 2. DESCRIPTION OF PROPERTY
Executive Offices
The Company's executive offices are located in Peabody, Massachusetts. The
Company's lease agreement in Peabody covers approximately 4,800 square feet for
a 60-month term, which expires September 16, 2009. The current annual payment
under the lease is $80,000. The Company believes that this facility will be
adequate to satisfy its needs for the foreseeable future.
Highland Ridge Hospital
The Highland Ridge premises consist of approximately 24,000 square feet of
space occupying the majority of the first floor of a two-story hospital owned by
Valley Mental Health. The lease is for a six-year term expiring December 31,
2009, which provides for monthly rental payments of approximately $20,000.
Changes in rental payments each year are based on increases or decreases in the
CPI. The Company believes that these premises are adequate for its current and
anticipated needs and does not anticipate any difficulty in renewing or securing
alternate space on expiration of the lease.
Mount Regis Center
The Company owns the Mount Regis facility, which consists of a three-story
wooden building located on an approximately two-acre site in a residential
neighborhood. The building consists of over 14,000 square feet and is subject to
a mortgage in the approximate amount of $331,800 as of June 30, 2005. The
facility is used for both inpatient and outpatient services. The Company
believes that these premises are adequate for its current and anticipated needs.
Psychiatric Facilities
The Company owns or leases premises for each of its psychiatric facilities.
Detroit Behavioral Institute, Harmony, North Point Pioneer and Pivotal Research
lease their premises. The Company believes that each of these premises is leased
at fair market value and could be replaced without significant time or expense
if necessary. The Company believes that all of these premises are adequate for
its current and anticipated needs.
-- 14 --
Harbor Oaks Hospital
The Company owns the building in which Harbor Oaks operates, which is a
single story brick and wood frame structure comprising approximately 32,000
square feet situated on an approximately three acre site. The Company has a
$1,145,000 mortgage on this property as of June 30, 2005. The Company believes
that these premises are adequate for its current and anticipated needs.
Item 3. LEGAL PROCEEDINGS.
In April 2004, the Company successfully resolved a medical malpractice
lawsuit. As a result of the settlement, the Company made a payment of
approximately $463,000, which compares to the previous judgment of approximately
$3 million. The Company has not released other parties, including an insurance
company. Payments made by insurance and other related parties, if collected,
could significantly reduce the Company's financial burden below the $463,000
payment.
The financial impact of this settlement and related legal fees of
approximately $1,030,000 is reflected in the operating results during the year
ended June 30, 2004 as a component of administrative expenses. The Company
continues to seek reimbursement from all sources for amounts expended on this
case.
The Company is subject to various claims and legal action that arise in the
ordinary course of business. In the opinion of management, Pioneer is not
currently a party to any proceeding that would have a material adverse effect on
its financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 2005.
-- 15 --
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since the Company's public offering, which was declared effective on March
3, 1994, until December 2000, the Company's Units, Class A Common Stock and
Class A Warrants were traded on the NASDAQ National Market under the symbols
"PIHCU," "PIHC" and "PIHCW," respectively. In December 2000, the Company's stock
was delisted due to failure to meet listing criteria. Currently, the Company's
Class A Common Stock is traded on the NASDAQ Bulletin Board under the symbol
"PIHC-BB." There is no public trading market for the Company's Class B Common
Stock. The following table sets forth, for the periods indicated, the high and
low sale price of the Company's Class A Common Stock, as reported by NASDAQ
Bulletin Board.
HIGH LOW
2004
First Quarter $ .98 $ .72
Second Quarter $ 1.39 $ .83
Third Quarter $ 1.71 $ 1.17
Fourth Quarter $ 1.37 $ .87
2005
First Quarter $ 1.21 $ .93
Second Quarter $ 1.73 $ 1.11
Third Quarter $ 2.10 $ 1.33
Fourth Quarter $ 2.62 $ 1.75
2006
First Quarter (through August 31, 2005) $ 2.95 $ 2.26
On August 31, 2005, the last reported sale price of the Class A Common
Stock was $2.42. On August 5, 2005, there were 707 holders of record of the
Company's Class A Common Stock and 312 holders of record of the Company's Class
B Common Stock. Information required with respect to "Securities Authorized for
Issuance Under Equity Compensation Plans" is included in Part III, Item 11 in
this Annual Report on Form 10-K. The Company did not repurchase any of its
equity securities that were registered under Section 12 of the Securities Act
during the fourth quarter of fiscal 2005.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. The
Company anticipates that, in the future, earnings will be retained for use in
the business or for other corporate purposes, and it is not anticipated that
cash dividends in respect to Common Stock will be paid in the foreseeable
future. Any decision as to the future payment of dividends will depend on the
results of operations, the financial position of the Company and such other
factors, as the Company's Board of directors, in its discretion, deems relevant.
MARKET RISKS
The Company's failure to meet listing requirements resulted in the
delisting of the Company's stock from the Nasdaq Stock Market in December 2000.
Since then, the Company's stock has been a bulletin board traded stock. Since
there may be an absence of market makers on the bulletin board, the price may be
more volatile and it may be harder to sell the securities. The shares have sold
at prices varying between a low of $.72 and a high of $2.95 from July 2003
through August 2005. If our common stock is not actively traded, the small
number of transactions can result in significant swings in the market price, and
it may be difficult for stockholders to dispose of stock in a timely way at a
desirable market price or may result in purchasing of shares for a higher price.
Our right to issue convertible preferred stock may adversely affect the
rights of the common stock. Our Board of Directors has the right to establish
-- 16 --
the preferences for and issue up to 1,000,000 shares of preferred stock without
further stockholder action. The terms of any series of preferred stock, which
may include priority claims to assets and dividends and special voting rights,
could adversely affect the market price of and the ability to sell common stock.
During the twelve month period ended June 30, 2005, the Company did not
make any sales of unregistered securities.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
included elsewhere in this report.
The selected consolidated financial data as of June 30, 2005 and 2004 and
for each of the three years in the period ended June 30, 2005 have been derived
from our consolidated financial statements which are included elsewhere in this
annual report on Form 10-K and were audited by BDO Seidman, LLP, an independent
registered public accounting firm. The selected consolidated financial data as
of June 30, 2003, 2002 and 200l and for each of the two year period ended June
30, 2002 have been derived from our consolidated financial statements not
included herein, which were audited by BDO Seidman, LLP, independent registered
public accounting firm.
The historical results are not necessarily indicative of the results to be
expected for any future period.
PHC, Inc.
Selected Financial Data
As of and for the years ended, June 30
2005 2004 2003 2002 2001
___________ ____________ __________ __________ _________
(in thousands, except share and per share)
Statements of Operations Data:
Revenues $ 34,063 $ 26,649 $ 23,833 $ 22,698 $ 22,750
Cost and Expenses:
Patient care expenses 14,582 12,422 11,676 10,692 9,663
Contract expenses 2,198 2,392 1,399 704 855
Administrative expenses 12,424 10,333 8,204 8,821 8,804
Practice management closing
expenses * -- -- -- -- 5,186
Provision for doubtful accounts 1,272 1,356 1,108 717 2,490
Interest Expense 655 532 542 791 1,043
Other (income) expenses,
including interest income, net (150) (140) (129) (126) (86)
___________ ____________ __________ __________ __________
Total expenses 30,981 26,895 22,801 21,599 27,956
___________ ____________ __________ __________ __________
Income (loss) before income taxes 3,082 (246) 1,032 1,099 (5,206)
Provision for (benefit from)
income taxes (74) 11 54 15 44
___________ ____________ __________ __________ __________
Net income (loss) 3,156 (257) 978 1,084 (5,251)
Dividends -- -- -- (99) (383)
___________ ____________ __________ __________ __________
Net income (loss) applicable to
common shareholders $ 3,156 $ (257) $ 978 $ 985 $ (5,634)
=========== ============ ========== ========== ==========
Basic income (loss) per common
share $ 0.18 $ (0.02) $ 0.07 $ 0.10 $ (0.66)
=========== ============ ========== ========== ==========
Basic weighted average number
of shares outstanding 17,574,678 14,731,395 13,944,047 10,232,286 8,518,408
=========== ============ ========== ========== ==========
Diluted income (loss) per common
share $ 0.17 $ (0.02) $ 0.07 $ 0.09 $ (0.66)
=========== ============ ============ =========== =========
Diluted weighted average number
of shares outstanding 18,364,076 14,731,395 14,564,078 11,012,861 8,518,408
=========== ============ ============ =========== =========
-- 17 --
2005 2004 2003 2002 2001
___________________________________________
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $ 918 $ 595 $ 495 $ 205 $ 44
Working capital (deficit) 4,106 241 736 (154) (2,908)
Long-term debt and obligations under
capital leases 2,712 2,285 3,002 3,427 3,897
Total stockholders' equity 9,102 5,367 1,935 616 (1,281)
Total assets 17,896 13,312 9,412 9,474 9,723
Item 7. 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.
The following is a discussion and analysis of the financial condition and
results of operations of the Company for the years ended June 30, 2005, 2004 and
2003. It should be read in conjunction with the operating statistics (Part I,
Item 1) and selected financial data (Part II, Item 6) and the accompanying
consolidated financial statements and related notes thereto included in this
Annual Report on Form 10-K.
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 payer 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 illness through its clinics in Utah, Michigan and Arizona.
The healthcare industry is subject to extensive federal, state and local
regulation governing, among other things, licensure and certification, conduct
-- 18 --
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
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,
third party". The provision for contractual allowances is deducted directly from
revenue and the net revenue amount is recorded as accounts receivable. The
allowance for doubtful accounts does not include the contractual allowances.
The Company currently has one "at-risk" contract. The contract calls for
the Company to provide for all of the inpatient and outpatient behavioral health
needs of the insurance carrier's enrollees in Nevada for a fixed monthly fee per
member per month. Revenues are recorded monthly based on this formula and the
expenses related to providing the services under this contract are recorded as
incurred. The Company provides most of the outpatient care directly and, through
utilization review, monitors closely, and pre-approves all inpatient and
outpatient services not provided directly. The contract is considered "at-risk"
because the payments to third-party providers for services rendered could equal
or exceed the total amount of the revenue recorded.
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and accepted
based on study criteria and billable units of service are provided. Where a
contract requires completion of the study by the patient, no revenue is
recognized until the patient completes the study program.
Contract support service revenue is a result of fixed fee contracts to
provide telephone support. Revenue for these services is recognized ratably over
the service period.
All revenues reported by the Company are shown net of estimated allowances
and charity care provided. When payment is made, if the contractual adjustment
is found to have been understated or overstated, appropriate adjustments are
made in the period the payment is received in accordance with the AICPA "Audit
and Accounting Guide for Health Care Organizations."
Allowance for doubtful accounts:
The provision for bad debts is calculated based on a percentage of each
aged accounts receivable category beginning at 0-5% on current accounts and
-- 19 --
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 bases of the
assets and liabilities. The Company's policy is to record a valuation allowance
against deferred tax assets unless it is more likely than not that such assets
will be realized in future periods. The Company considers estimated future
taxable income or loss and other available evidence when assessing the need for
its deferred tax valuation allowance. During the fiscal year ended June 30,
2005, the Company recognized a tax benefit of approximately $209,000, related to
a decrease in its valuation allowance, based on budgeted taxable income for the
next fiscal year. The Company's policy is to recognize tax benefit for only the
next fiscal year based on the uncertainties surrounding the healthcare industry.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are initially created as a result of
business combinations or acquisitions. The values the Company records for
goodwill and other intangible assets represent fair values calculated by
independent third-party appraisers. Such valuations require the Company to
provide significant estimates and assumptions, which are derived from
information obtained from the management of the acquired businesses and the
Company's business plans for the acquired businesses. Critical estimates and
assumptions used in the initial valuation of goodwill and other intangible
assets include, but are not limited to: (i) future expected cash flows from
services to be provided, customer contracts and relationships, and (ii) the
acquired market position. These estimates and assumptions may be incomplete or
inaccurate because unanticipated events and circumstances may occur. If
estimates and assumptions used to initially value goodwill and intangible assets
prove to be inaccurate, ongoing reviews of the carrying values of such goodwill
and intangible assets may indicate impairment which will require the Company to
record an impairment charge in the period in which the Company identifies the
impairment. The Company uses an outside valuation expert to assess the value of
intangibles each year and will continue to do so unless circumstances require an
earlier evaluation.
Results of Operations
The following table illustrates our consolidated results of operations for
the years ended June 30, 2005, 2004 and 2003 (in thousands):
2005 2004 2003
______________ ____________________________________
(in thousands)
Statements of Operations Data:
Amount % Amount % Amount %
Revenue $34,063 100.0% $26,649 100.0% $23,833 100.0%
________ ______ _______ _____ _______ ______
Cost and Expenses:
Patient care expenses 14,582 42.8% 12,422 46.6% 11,676 49.6%
Contract expenses 2,198 6.5% 2,392 9.0% 1,399 5.9%
Administrative expenses 12,424 36.5% 10,333 38.8% 8,204 33.8%
Provision for bad debts 1,272 3.7% 1,356 5.1% 1,108 4.6%
Interest Expense 655 1.9% 532 2.0% 542 2.3%
Other (income) expenses, net (150) -0.4% (140) -0.5% (129) -0.5%
________ ______ _______ _____ _______ ______
Total expenses 30,981 91.0% 26,895 100.9% 22,801 95.7%
________ ______ _______ _____ _______ ______
-- 20 --
2005 2004 2003
______________ ____________________________________
(in thousands)
Income (loss) before income taxes 3,082 9.0% (246) -0.9% 1,032 4.3%
Provision for (benefit from) income
taxes (74) -0.2% 11 0.0% 54 0.2%
________ ______ _______ _____ _______ ______
Net income (loss) $ 3,156 9.3% $ (257) -1.0% $ 978 4.1%
======== ====== ======== ===== ======= ======
Years ended June 30, 2005 as compared to June 30, 2004
The Company's profitability from its operations, without the impact of the
litigation and settlement costs of approximately $1,030,000 recorded in fiscal
2004, excluding research operations, increased 100.55% for the fiscal year ended
June 30, 2005 over the fiscal year ended June 30, 2004. Net income, with the
same adjustments, increased 253.39%. This increase is primarily the result of
increased census in our treatment facilities and the addition of 30 beds in the
second quarter of fiscal 2005. Total revenues increased 27.8% to $34,063,258 for
the year ended June 30, 2005 from $26,648,845 for the year ended June 30, 2004.
Income from operations increased to $3,587,412 for the year ended June 30, 2005
from $145,536 for the year ended June 30, 2004.
Total net patient care revenue from all facilities increased 16.4% to
$26,087,088 for the year ended June 30, 2005 as compared to $22,418,355 for the
year ended June 30, 2004. Patient days increased over 6,500 days for the fiscal
year ending June 30, 2005 over the fiscal year ended June 30, 2004. In addition,
the Company experienced a better payor mix. In December 2004, the Company opened
30 residential beds increasing our available beds from 130 to 160. The
contracted rate for these residential beds is lower than that of our other
facilities, which negatively impacts our revenue per patient day. Net inpatient
care revenue from inpatient psychiatric services increased 24.4% to $18,469,578
for the year ended June 30, 2005 from $14,845,163 for the fiscal year ended June
30, 2004. Net partial hospitalization and outpatient care revenue increased 0.5%
to $7,617,510 for the year ended June 30, 2005 from $7,573,192 for the year
ended June 30, 2004. This minimal increase is partially a result of the high
increase last year triggered by the utilization of these step-down programs by
managed care as a treatment alternative to inpatient care. Pharmaceutical study
revenue increased 261.9% to $4,509,338 for the year ended June 30, 2005 from
$1,246,013 for the year ended June 30, 2004. This increase is due to the
acquisition of Pivotal Research Centers, LLC, in April 2004. Revenues also
increased in our contract support services division, Wellplace, formerly known
as Pioneer Development and Support Services ("PDS2"). Wellplace revenues
increased 16.2% to $3,466,832 for the year ended June 30, 2005 from $2,984,477
for the year ended June 30, 2004. This increase in revenue is primarily due to
the increase in the Wayne County call center contract in October 2004. All
revenues reported in the accompanying consolidated statements of operations are
shown net of estimated contractual adjustments 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.
Patient care expenses, excluding research, increased by $1,327,950, or
11.47%, to $12,905,286 for the year ended June 30, 2005 from $11,577,336 for the
year ended June 30, 2004 due to the increase in available beds and resulting
increase in patient census at our inpatient facilities. Inpatient census
-- 21 --
increased by 6,537 patient days, 18%, for the year ended June 30, 2005 compared
to the year ended June 30, 2004. Direct patient care payroll and payroll related
expenses increased 8.5% to $10,727,317 for the year ended June 30, 2005 from
$9,890,125 for the year ended June 30, 2004, food and dietary expense increased
21.0% to $633,869 for the year ended June 30, 2005 from $524,023 for the year
ended June 30, 2004, hospital supplies expense increased 6.6% to $51,863 for the
year ended June 30, 2005 from $48,667 for the year ended June 30, 2004,
laboratory fees increased 5.9% to $160,603 for the year ended June 30, 2005 from
$151,697 for the year ended June 30, 2004, laundry expense increased 7.5% to
$47,416 for the year ended June 30, 2005 from $44,124 for the year ended June
30, 2004 and agency nursing expense increased 233.7% to $119,672 for the year
ended June 30, 2005 from $35,867 for the year ended June 30, 2004. All of these
increases were a result of increased patient census and increased needs of the
patients based on the severity of their illness and the start up of the
additional 30 bed residential unit in December 2004. We continue to closely
monitor the ordering of all hospital supplies, food and pharmaceutical supplies
but these expenses all relate directly to the number of days of inpatient
services we provide and are expected to increase with higher patient census.
(see "Operating Statistics" Part I, Item 1).
Patient care expenses for the research division increased 98.4% to
$1,676,749 for the year ended June 30, 2005 from $845,291 for the year ended
June 30, 2004. This increase is due to the expansion of our research division
through the acquisition of Pivotal Research Centers, LLC in April 2004. Payroll
and related direct care expenses increased 113.4% to $1,287,038 for the year
ended June 30, 2005 from $603,179 for the year ended June 30, 2004. Patient
supplies expense increased 4.9% to $23,040 for the year ended June 30, 2005 from
$21,962 for the year ended June 30, 2004. Patient stipends and other patient
related expenses increased 66.7% to $366,671 for the year ended June 30, 2005
from $219,914 for the year ended June 30, 2004. These expenses are expected to
increase in a direct relationship with the increases in related revenue.
Cost of contract support services related to Wellplace decreased 8.1% to
$2,197,518 for the year ended June 30, 2005 from $2,391,660 for the year ended
June 30, 2004. This decrease is due to the expiration of the smoking cessation
contracts for Nebraska and Kansas over the last year. Expenses are expected to
increase as new contracts are added. With the exception of payroll and employee
related expenses, all expenses for Wellplace decreased. Payroll and payroll
related expenses increased 6.5% to $1,003,988 for the year ended June 30, 2005
from $942,866 for the year ended June 30, 2004.
Provision for doubtful accounts decreased 6.2% to $1,272,037 for the fiscal
year ended June 30, 2005 from $1,355,770 for the fiscal year ended June 30,
2004. This decrease is the result of a decrease in the age of outstanding
accounts receivable which affects the required balance in allowance for doubtful
accounts.
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, which has resulted in an overall decrease in the age of its
accounts receivable. Although through increased revenue the Company's gross
receivables from direct patient care has increased 13.7% to $8,287,365 for the
year ended June 30, 2005 from $7,287,090 for the year ended June 30, 2004, the
Company believes its reserve of approximately 24% is sufficient based on the age
of the receivables. We continue to reserve for bad debt based on managed care
denials and past difficulty in collections. The growth of managed care has
negatively impacted reimbursement for behavioral health services with a higher
rate of denials requiring higher contractual adjustments and higher reserves.
Total administrative expenses, excluding research, decreased .3% to
$9,667,138 for the year ended June 30, 2005 from $9,695,274 for the year ended
June 30, 2004. Legal expense decreased 78.7% to $255,794 for the year ended June
30, 2005 from $1,198,568 for the year ended June 30, 2004. Unusually high legal
fees were experienced last year due to the litigation and settlement involving
one of the Company's subsidiaries. Administrative salaries increased 16.9% to
$3,054,294 for the year ended June 30, 2005 from $2,612,603 for the year ended
June 30, 2004. Greater competition for experienced health care administrative
staff resulted in these increased salaries. Insurance expense increased 37.9% to
$587,751 for the year ended June 30, 2005 from $426,148 for the year ended June
30, 2004 due to general increases in property and liability insurance.
Accounting fees, which includes non-audit accounting services, including but not
limited to taxes, cost reports and individual contract audits, provided by firms
other than our principal audit firm, increased 30.6% to $230,791 for the year
ended June 30, 2005 from $176,746 for the year ended June 30, 2004. Fees and
licenses expense increased 415.1% to $247,076 for the year ended June 30, 2005
from $47,967 for the year ended June 30, 2004. This increase is due to the newly
established Michigan quality assurance assessment fee, which accounted for the
majority of the increase. Rent expense increased 8.2% to $953,667 for the year
ended June 30, 2005 from $881,173 for the year ended June 30, 2004. This
increase is due to the opening of the 30 residential beds at Detroit Behavioral
Institute.
-- 22 --
Total administrative expenses for the research division increased 332.2% to
$2,757,118 for the year ended June 30, 2005 from $637,978 for the year ended
June 30, 2004. This increase is due to the expansion of our research division
through the acquisition of Pivotal Research Centers, LLC in April 2004.
Administrative payroll and taxes increased 524.4% to $1,158,394 for the year
ended June 30, 2005 from $185,520 for the year ended June 30, 2004. Comparison
in the operating expenses of the offices are not meaningful because of the
addition of the operations of Pivotal.
Interest expense increased 23.2% to $654,871 for the year ended June 30,
2005 from $531,564 for the year ended June 30, 2004. This increase is due to the
increase in the prime rate, which dictates the interest rate on the majority of
the Company's long-term debt. It also reflects the amortization of capitalized
costs associated with the refinancing of the Company's debt, which was completed
in October 2004 and a penalty associated with the extinguishment of the old
debt.
The Company's income taxes of $135,969 and $11,294 for the years ended June
30, 2005 and June 30, 2004, respectively, are significantly below the Federal
statutory rate of 34% primarily due to the utilization of net operating loss
carry-forwards. Total provision for income tax expense for fiscal 2005 and 2004
represents state income taxes for certain subsidiaries with no available net
operating loss carry-forwards. The Company has provided a significant valuation
allowance against its deferred tax asset and recognized a tax benefit of
$303,994 based on the estimated taxable income for the fiscal year ended June
30, 2006.
Years ended June 30, 2004 as compared to June 30, 2003
The Company's profitability from its ongoing operations, without the impact
of the litigation and settlement costs of approximately $1,030,000, decreased
for the fiscal year ended June 30, 2004. Higher expenses and less favorable
overall economic conditions resulted in the decrease. Total revenues increased
11.8% to $26,648,845 for the year ended June 30, 2004 from $23,833,323 for the
year ended June 30, 2003. Higher unemployment, reduced insurance coverage and
increases in some operating expenses, resulted in a decrease in income from
operations, before the expenses of the litigation noted above, of 18.7% to
$1,175,536 for the year ended June 30, 2004 from $1,445,689 for the year ended
June 30, 2003 and a decrease in income before taxes of 24.0% to $784,291 for the
fiscal year ended June 30, 2004 from $1,031,976 for the fiscal year ended June
30, 2003.
Total net patient care revenue from all facilities, increased 5.5% to
$22,418,355 for the year ended June 30, 2004 as compared to $21,243,177 for the
year ended June 30, 2003. Although occupancy and net revenue per patient day
shown in "Operating Statistics" on page 8 of this report decreased, actual
patient days increased by over 1,250 days. The decrease in percentage of
occupancy is the result of the increase in available beds starting in November
2003 from 122 to 130. Net inpatient care revenue from inpatient psychiatric
services increased 2.9% to $14,845,163 for the year ended June 30, 2004 from
$14,430,069 for the fiscal year ended June 30, 2003. Net partial hospitalization
and outpatient care revenue increased 11.2% to $7,573,192 for the year ended
June 30, 2004 from $6,813,108 for the year ended June 30, 2003. This increase is
the result of utilization of these step-down programs by managed care as a
treatment alternative to inpatient care. Pharmaceutical study revenue increased
32.4% to $1,246,013 for the year ended June 30, 2004 from $940,772 for the year
ended June 30, 2003. This increase is due to the recent acquisition of Pivotal
Research Centers, LLC, which contributed $699,341 of revenue in the last two
months of the period. The largest increase in revenues for the year was from
Wellplace, formerly known as Pioneer Development and Support Services ("PDS2").
Wellplace revenues increased 80.9% to $2,984,477 for the year ended June 30,
2004 from $1,649,374 for the year ended June 30, 2003. This increase in revenue
is due to the inclusion of the Wayne County call center contract, which began in
March 2003 and the Kansas smoking cessation contract, which began in May 2003.
All revenues reported in the accompanying consolidated statements of operations
are shown net of estimated contractual adjustments 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.
Patient care expenses, excluding Pivotal, increased by $638,099 to
$11,577,336 for the year ended June 30, 2004 from $10,939,237 for the year ended
June 30, 2003 due to the increase in patient census at our inpatient facilities.
-- 23 --
Inpatient census increased by approximately 1,250 patient days, 4%, for the year
ended June 30, 2004 compared to the year ended June 30, 2003. Direct patient
care payroll and payroll related expenses increased 5.8% to $9,890,125 for the
year ended June 30, 2004 from $9,343,880 for the year ended June 30, 2003; food
and dietary expense increased 9.4% to $524,023 for the year ended June 30, 2004
from $479,102 for the year ended June 30, 2003, hospital supplies expense
increased 27.5% to $48,595 for the year ended June 30, 2004 from $38,125 for the
year ended June 30, 2003, laundry expense increased 11.0% to $44,124 for the
year ended June 30, 2004 from $39,761 for the year ended June 30, 2003 and
Medical records expense increased 12.2% to $69,415 for the year ended June 30,
2004 from $61,865 for the year ended June 30, 2003. All of these increases were
a result of increased patient census and increased needs of the patients based
on the severity of their illness. Other patient related expenses decreased 17.2%
to $46,472 for the year ended June 30, 2004 from $56,153 for the year ended June
30, 2003. Laboratory fees decreased 17.9% to $151,697 for the year ended June
30, 2004 from $184,810 for the year ended June 30, 2003 due to a change in
service provider and closer monitoring of tests ordered. We continue to closely
monitor the ordering of all hospital supplies, food and pharmaceutical supplies
but these expenses all relate directly to the number of days of inpatient
services we provide and are expected to increase with higher patient census.
(see "Operating Statistics" Part I, Item 1).
Cost of contract support services related to Wellplace increased 79.2% to
$2,391,660 for the year ended June 30, 2004 from $1,398,602 for the year ended
June 30, 2003. This increase is due to the inclusion of the Wayne County call
center contract, which began March 2003 and the Kansas smoking cessation
contract, which began in May 2003. Expenses are expected to increase as new
contracts are added. Legal fees for Wellplace increased to $133,975 for the year
ended June 30, 2004 from $12,352 for the year ended June 30, 2003. This
disproportionate increase is a result of an inquiry by the State of Nebraska.
Provision for doubtful accounts increased 22.3% to $1,355,770 for the
fiscal year ended June 30, 2004 from $1,108,498 for the fiscal year ended June
30, 2003. This increase is the result of an increase in the age of outstanding
accounts receivable with many insurance carriers delaying payment as much as 180
days as well as increased overall revenue.
Total administrative expenses, excluding Pivotal, increased 21.5% to
$9,695,274 for the year ended June 30, 2004 from $7,982,851 for the year ended
June 30, 2003. Legal expense increased approximately $1,068,000, which accounts
for more than 62% of the increase. This is a result of the litigation and
settlement described in "Legal Proceedings" on page 15 of this report.
Administrative salaries increased 7.2% to $2,612,603 for the year ended June 30,
2004 from $2,436,753 for the year ended June 30, 2003. Greater competition for
experienced health care administrative staff resulted in these increased
salaries. Insurance expense increased 62.3% to $426,148 for the year ended June
30, 2004 from $262,563 for the year ended June 30, 2003 due to general increases
in property and liability insurance. Accounting fees, which includes non-audit
accounting services, including but not limited to taxes, cost reports and
individual contract audits, provided by firms other than our principal audit
firm, increased 3.9% to $176,746 for the year ended June 30, 2004 from $170,135
for the year ended June 30, 2003.
Patient care and administrative expenses for the research division
increased for the year ended June 30, 2004 over the year ended June 30, 2003.
These increases are due to the acquisition of Pivotal Research Centers LLC. in
April 2004. Comparisons in the expenses of the research division are not
meaningful because of the addition of the operations of Pivotal.
Interest expense decreased 2.0% to $531,564 for the year ended June 30,
2004 from $542,269 for the year ended June 30, 2003. This decrease is due to the
decrease in the prime rate, which dictates the interest rate on the majority of
the Company's long-term debt and the decrease in outstanding debt. The Company
also expensed $114,500 of costs related to the Company's initial efforts to
finance the Pivotal acquisition through debt. This amount would have been
amortized over the term of the loan had the loan been consummated. It was
determined that equity financing would be in the best interest of the Company
and its shareholders when more favorable loan terms could not be secured.
Without this one time expense, interest expense for the year would have
decreased 23.1% to $417,064.
The Company's income taxes of $11,294 and $54,234 for the years ended June
30, 2004 and June 30, 2003, respectively, are significantly below the Federal
statutory rate of 34% primarily due to the availability of net operating loss
carry-forwards. Total income tax expense for fiscal 2004 and 2003 represents
state income taxes for certain subsidiaries with no available net operating loss
carry-forwards. The Company has provided a significant valuation allowance
against its deferred tax asset due to the uncertainty of its availability in
future periods.
-- 24 --
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, which has resulted in an overall decrease in its accounts
receivable. Although the Company's gross receivables from direct patient care
have decreased, the Company continues to reserve for bad debts based on managed
care denials and past difficulty in collections. The growth of managed care has
negatively impacted reimbursement for behavioral health services with a higher
rate of denials requiring higher reserves.
Liquidity and Capital Resources
As of June 30, 2005, the Company had working capital of $4,106,316,
including cash and cash equivalents of $917,630, compared to working capital of
$240,855, including cash and cash equivalents of $594,823 at June 30, 2004. At
June 30, 2004, the Company's current liabilities included $1,500,000 in long-
term debt that was refinanced in October 2004.
Cash provided by operating activities was $983,466 for the year ended June
30, 2005 compared to cash used in operating activities of $149,744 for the year
ended June 30, 2004. Cash provided by operations in fiscal 2005 consists of the
net income of $3,155,900, offset by an increase in total net accounts receivable
of $2,251,931 due to increased revenue, an increase in other assets of $92,044,
a decrease in accounts payable of $754,011 and a non-cash increase in deferred
tax asset of $303,994. These uses of cash from operations were offset by
depreciation and amortization of $511,211, non-cash interest expense of $51,080
and non-cash equity compensation of $105,681, which are non-cash expenditures
and a decrease in prepaid expenses of $21,554 and an increase in accrued
expenses and other liabilities of $540,020.
Cash used in investing activities in fiscal 2005 consisted of $483,462 in
capital expenditures for the acquisition of property and equipment and $62,258
related to the acquisition of Pivotal Research Centers, LLC compared to $193,185
in capital expenditures for the acquisition of property and equipment in fiscal
2004 and $2,191,697 related to the acquisition of Pivotal Research Centers, LLC.
(See Note L to the consolidated financial statements included herewith for
additional detail regarding the acquisition of Pivotal Research Centers, LLC).
The Company expects investment amounts to increase with the build-out for the
additional beds in Michigan and the upgrade of systems and technology Company
wide.
Cash used in financing activities in fiscal 2005 consisted of $206,306 in
net debt repayments, $208,445 in deferred financing cost due to the Company's
new debt arrangement, $343,692 received from the issuance of common stock,
$13,880 paid in the purchase of treasury stock and $30,000 in cost related to
the issuance of stock.
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. As of June 30, 2005 accounts
receivable from patient care, net of allowance for doubtful accounts, increased
approximately 20% to $6,330,381 on June 30, 2005 from $5,261,202 on June 30,
2004. This increase is a result of increased net revenue. The Company's goal is
to maintain receivables at their current levels or to have any increases result
from higher revenues and timing of receivables collection. Better accounts
receivable management due to increased staff, standardization of some procedures
for collecting receivables and a more aggressive collection policy has made this
possible in behavioral health, which is typically a difficult collection
environment. Increased staff has allowed the Company to concentrate on current
accounts receivable and resolve any problem issues before they become
uncollectable. The Company's collection policy calls for early 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. The Company's collectors will also seek
assistance through every legal means, including the State Insurance
Commissioner's office, when appropriate, to collect claims. At the same time,
the Company continues to closely monitor reserves for bad debt based on
potential insurance denials and past difficulty in collections.
In order to facilitate the acquisition of the membership interest in
Pivotal Research Centers, LLC, the Company determined that it would be in the
best interest of the shareholders to finance the cash portion of the purchase
-- 25 --
price through equity as well as raise additional working capital, since debt
with favorable terms was not available. Therefore, the Company offered 2,800,000
shares of Class A Common Stock at $1.10 per share in a private placement. The
private placement also included 25% warrant coverage at an exercise price of
$1.10 per share with a three-year term and standard anti-dilution features. This
offering was completed in two stages. As a result of the first stage of the
offering, in March 2004, the Company issued 684,999 shares of Class A Common
Stock for $753,500 and warrants to purchase 171,248 additional shares of Class A
Common Stock. As a result of the second stage of this offering, in April 2004,
the Company issued 1,918,196 shares of Class A Common Stock for $2,110,016 and
warrants to purchase 479,549 additional shares of Class A Common Stock. The
private placement facilitated the closing of the acquisition without incurring
any additional bank debt, and also provided the necessary working capital for
Pivotal to execute its business plan.
Contractual Obligations
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes as of June 30, 2005 are as
follows:
Year Ending Term Capital Operating
June 30, Notes Leases Leases Total
_________ _________ _________ __________
2006 $ 774,683 $29,777 $1,299,529 $2,103,989
2007 808,817 10,087 1,033,996 1,852,900
2008 517,797 2,123 919,895 1,439,815
2009 207,099 -- 861,110 1,068,209
2010 212,609 -- 388,467 601,076
Thereafter 153,699 -- 94,730 248,429
_________ _________ _________ __________
Total minimum payments $2,674,704 $41,987 $4,597,727 $7,314,418
========== ======== ========== ==========
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, 2005. This
treatment is in accordance with SFAS No. 141, "Business Combinations", which
states that contingent consideration should be recognized only when determinable
beyond a reasonable doubt. Payments on the $1,000,000 note began on January 1,
2005. The above table includes the outstanding balance on this note of
$1,068,510 which represents the earn out for the Pivotal acquisition through
December 31, 2004 net of payments made through June 30, 2005. No payment is due
on the $500,000 note as earn-out requirements have not been attained. The final
note for $1,000,000 does not bear interest, is also subject to adjustment based
on earnings but has a minimum value of $200,000 to be paid in PHC, Inc. Class A
common stock on March 31, 2009. This minimum liability has been recorded with
imputed interest of 6% and $159,793 is included in the schedule above. (See Note
L to the consolidated financial statements included in this report for
additional details on the Pivotal acquisition).
In October 2004, the Company entered into a revolving credit, term loan and
security agreement with CapitalSource Finance, LLC to replace the Company's
primary lender and provide additional liquidity. Each of the Company's material
subsidiaries, other than Pivotal Research Centers, Inc, is a co-borrower under
the agreement. The agreement includes a term loan in the amount of $1,400,000
and an accounts receivable funding revolving credit agreement with a maximum
loan amount of $3,500,000, including $900,000 available as an overline for
growth.
The term loan note carries interest at prime plus 3.5%, but not less than
9%, with twelve monthly principal payments of $25,000, 12 monthly principal
payments of $37,500, and eleven monthly principal payments of $50,000 beginning
November 1, 2004 with balance due at maturity, on October 1, 2007 and is
included in the above table.
-- 26 --
The revolving credit note carries interest at prime plus 2.25%, but not
less than 6.75% paid through lock box payments of third party accounts
receivable. The revolving credit term is three years, renewable for two
additional one-year terms. The balance on the revolving credit agreement as of
June 30, 2005 was $2,385,629. For additional information regarding this
transaction, see the Company's current report on form 8-K filed with the
Securities and Exchange Commission on October 22, 2004. The balance outstanding
as of June 30, 2005 is included in the above table.
The Company has operated ongoing operations profitably for eighteen
consecutive quarters with the exception of the litigation settlement and related
legal costs incurred in the third quarter of fiscal year 2004. While it is
difficult to project 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 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.
Operating Risks
Negative cash flow could arise as a result of slow government payments. The
concentration of accounts receivable due from government payors could create a
severe cash flow problem should these agencies fail to make timely payment. We
had substantial receivables from Medicaid and Medicare of approximately
$1,256,511 at June 30, 2005 and $1,135,000 at June 30, 2004, which would create
a cash flow problem should these agencies defer or fail to make reimbursement
payments as due, which would require us to borrow at unfavorable rates or pay
additional interest as overline fees on current debt instruments. This would
result in lower net income for the same services provided and lower earnings per
share.
Negative cash flow could impact our ability to meet obligations when due.
If managed care organizations delay approving treatment, or reduce the patient
length of stay or number of visits or reimbursement, our Company's ability to
meet operating expenses is affected. As managed care organizations and insurance
companies adopt policies that limit the length of stay for substance abuse
treatment, our business is materially adversely affected since our revenues and
cash flow go down and our fixed operating expenses continue or increase based on
the additional resources required to collect accounts receivable.
Reimbursement for substance abuse and psychiatric treatment from private
insurers is largely dependent on our ability to substantiate the medical
necessity of treatment. The process of substantiating some claims may take up to
four months and sometimes longer; as a result, we experience significant delays
in the collection of amounts reimbursable by third-party payors, which requires
us to increase staff to pursue payment and adversely affects our working capital
condition. This causes amounts borrowed on our accounts receivable revolver to
remain outstanding for longer periods of time resulting in higher interest
expense in addition to the reduced income resulting from the shorter lengths of
stay, which combined reduce net income and earnings per share.
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 $6,330,381 at June 30, 2005 compared with
$5,261,201 at June 30, 2004. 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
more aggressive 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 June 30, 2005 and 2004, respectively, and Bad Debt
Expense for the years ended June 30, 2005 and 2004:
-- 27 --
Allowance for Bad Debt
Accounts Receivable Doubtful Accounts Expense
___________________ _________________ ___________
June 30, 2005 $ 8,287,365 $ 1,956,984 $ 1,272,037
June 30, 2004 7,287,090 2,025,888 1,355,770
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.
Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment", which is a revision of SFAS
No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 (R) supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS
No. 95, "Statement of Cash Flows". Generally, the approach in SFAS No. 123 (R)
is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values. Pro-forma disclosure is no longer an alternative. The Company is
required to adopt SFAS No. 123 (R) on July 1, 2005. The effect of this change on
the results of operations of the Company is not expected to have a material
affect on the Company's consolidated financial statements.
In December 2004, the FASB issued FASB Staff Position, or FSP, No. 109-1,
"Application of FASB Statement No. 109, "Accounting for Income Taxes", to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004". FSP No. 109-1 states that the impact of the tax deduction
on qualified production activities provided by the AJCA should be accounted for
as a special deduction rather than a rate reduction. FSP No. 1091 was effective
immediately and had no impact on our 2005 consolidated financial statements.
In December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004". FSP No. 109-2 grants a waiver to the SFAS No. 109
requirement to account for the impacts of new legislation in the period of
enactment. FSP No. 109-2 was effective immediately and had no impact on our 2005
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets", an amendment of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions". SFAS No. 153 is based on the principle that exchange of
nonmonetary assets should be measured based on the fair market value of the
assets exchanged. SFAS No. 153 eliminates the exception of nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. SFAS 153
is effective for nonmonetary asset exchanges in fiscal periods beginning after
June 15, 2005. We are currently evaluating the provisions of SFAS No. 153 and do
not believe that the adoption of SFAS No. 153 will have a material impact on our
financial condition, results of operations and liquidity.
Item 7A. Quantitative and Qualitative Disclosures 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;
-- 28 --
o Quarter-to-quarter variations in operating results;
o Changes in market conditions in the behavioral health care industry;
o Changes in market conditions in the research industry;
o Changes in general economic conditions; and
o Fluctuations in securities markets in general.
Our interest expense is sensitive to changes in the general level of
interest rates. With respect to our interest-bearing liabilities, all of our
long-term debt outstanding is subject to rates at prime plus 2.25% and prime
plus 3.5%, which makes interest expense increase with changes in the prime rate.
Failure to meet targeted revenue projections could cause us to be out of
compliance with covenants in our debt agreements. (For additional information
see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations").
-- 29 --
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data required pursuant to this Item 8
begin on page F-1 of this Annual Report on Form 10-K.
PAGE
Index F-1
Report of Independent Registered Public Accounting Firm F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of changes in stockholders' equity F-5
Consolidated statements of cash flows F-6 - F-7
Notes to consolidated financial statements F-8 - F-29
F-1
-- 30 --
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
PHC, Inc.:
We have audited the accompanying consolidated balance sheets of PHC, Inc. and
subsidiaries as of June 30, 2005 and 2004, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances but not for
the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PHC,
Inc. and subsidiaries at June 30, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2005 in conformity with accounting principles generally accepted in the
United States of America.
/s/ BDO Seidman, LLP
Boston, Massachusetts
August 23, 2005
F-2
-- 31 --
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2005 2004
___________ __________
ASSETS (Note C)
Current assets: (Note A)
Cash and cash equivalents (Note A) $ 917,630 $ 594,823
Accounts receivable, net of allowance for
doubtful accounts of $1,956,984
and $2,025,888 at June 30, 2005 and 2004,
respectively (Note A) 6,265,381 5,165,150
Pharmaceutical research receivables (Note A) 1,414,340 549,974
Prepaid expenses 146,988 168,542
Other receivables and advances (Note A) 638,654 310,221
Deferred tax assets (Note F) 1,375,800 842,806
___________ __________
Total current assets 10,758,793 7,631,516
___________ __________
Accounts receivable, non-current (Note A) 65,000 96,052
Other receivables (Note A) 84,422 94,469
Property and equipment, net (Notes A, B, C,
D and L) 1,516,114 1,353,975
Deferred financing costs, net of amortization
of $62,507 at June 30, 2005 145,938 --
Customer relationships, net of amortization of
$140,000 and $20,000 at June 30, 2005 and
2004, respectively (Notes A and L) 2,260,000 2,380,000
Goodwill (Notes A and L) 2,648,209 1,416,119
Other assets (Note A) 417,172 339,438
___________ __________
Total assets $ 17,895,648 $13,311,569
============ ===========
-- 32 --
LIABILITIES
Current liabilities:
Accounts payable $ 907,569 $ 1,668,509
Current maturities of long-term
debt (Notes C and L) 769,599 1,713,395
Revolving credit note (Note C) 2,385,629 1,714,380
Deferred revenue 85,061 38,151
Current portion of obligations under capital
leases (Note D) 29,777 18,169
Accrued payroll, payroll taxes and benefits 1,411,653 1,305,490
Accrued expenses and other liabilities
(Note K) 1,063,189 682,567
Convertible debentures (Note C) -- 250,000
___________ __________
Total current liabilities 6,652,477 7,390,661
Long-term debt, less current maturities
(Notes C and L) 1,900,022 529,378
Obligations under capital leases (Note D) 12,210 24,493
Deferred tax liabilities (Note F) 229,000 --
___________ __________
Total liabilities 8,793,709 7,944,532
___________ __________
Commitments and contingent liabilities
(Notes D, G, H, I and L)
STOCKHOLDERS' EQUITY (Notes A, E, G, H, I and L)
Preferred stock, 1,000,000 shares
authorized, none issued or outstanding -- --
Class A common stock, $.01 par value;
30,000,000 shares authorized, 17,490,818
and 16,744,848 shares issued at June 30,
2005 and 2004, respectively 174,908 167,448
Class B common stock, $.01 par value; 2,000,000
shares authorized, 776,991 issued and
outstanding at June 30, 2005 and 2004, each
convertible into one share of class A
common stock 7,770 7,770
Additional paid-in capital 23,377,059 22,791,637
Treasury stock, 181,738 and 168,136 class A
common shares at cost at June 30, 2005
and 2004, respectively. (155,087) (141,207)
Accumulated deficit (14,302,711) (17,458,611)
___________ __________
Total stockholders' equity 9,101,939 5,367,037
Total liabilities and stockholders' equity $17,895,648 $13,311,569
=========== ===========
F-3
See accompanying notes to consolidated financial statements.
-- 33 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<c>
For the Years Ended June 30,
2005 2004 2003
____________ ___________ ____________
Revenues: (Note A)
Patient care, net $26,087,088 $22,418,355 $21,243,177
Pharmaceutical study 4,509,338 1,246,013 940,772
Contract support services 3,466,832 2,984,477 1,649,374
____________ ___________ ____________
Total revenues 34,063,258 26,648,845 23,833,323
____________ ___________ ____________
Operating expenses:
Patient care expenses 12,905,286 11,577,336 10,939,237
Patient care expenses, pharmaceutical 1,676,749 845,291 736,962
Cost of contract support services 2,197,518 2,391,660 1,398,602
Provision for doubtful accounts 1,272,037 1,355,770 1,108,498
Administrative expenses 9,667,138 9,695,274 7,982,851
Administrative expenses,
pharmaceutical 2,757,118 637,978 221,484
____________ ___________ ____________
Total operating expenses 30,475,846 26,503,309 22,387,634
____________ ___________ ____________
Income from operations 3,587,412 145,536 1,445,689
____________ ___________ ____________
Other income (expense):
Interest income 73,176 44,731 13,133
Interest expense (654,871) (531,564) (542,269)
Other income, net 76,760 95,588 115,423
____________ ___________ ____________
Total other expense, net (504,935) (391,245) (413,713)
____________ ___________ ____________
Income (loss) before income taxes 3,082,477 (245,709) 1,031,976
Provision for (benefit from) income taxes
(Notes A and F) (73,423) 11,294 54,234
____________ ___________ ____________
Net income (loss) $ 3,155,900 $ (257,003) $ 977,742
============ =========== ============
Basic net income (loss) per common share
(Note A) $ 0.18 $ (0.02) $ 0.07
============ =========== ============
Basic weighted average number of shares
outstanding (Note A) 17,574,678 14,731,395 13,944,047
============ =========== ============
Fully diluted net income (loss) per
common share (Note A) $ 0.17 $ (0.02) $ 0.07
============ =========== ============
Fully diluted weighted average number of
shares outstanding (Note A) 18,364,076 14,731,395 14,564,078
============ =========== ============
See accompanying notes to consolidated financial statements. F-4
-- 34 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity (Notes A, C, E, G, H,
I and L)
Class A Class B Additional
Common Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
___________ _________ _______ ______ ____________
Balance - June 30, 2002 12,919,042 $129,190 726,991 $7,270 $18,769,863
Costs related to private
placements (7,212)
Issuance of shares for options
exercised 408,025 4,081 346,060
Issuance of warrants for services 3,185
Shares issued for employee
bonuses 28,623 286 18,726
Issuance of shares for warrants
exercised 62,363 624 9,376
Issuance of employee stock
purchase plan shares 19,014 190
Purchase of shares from former
employee 7,606
Net income-year ended June 30,
2003 ___________ _________ _______ ______ ____________
Balance - June 30, 2003 13,437,067 134,371 726,991 7,270 19,147,604
Costs related to private
placements (46,578)
Issuance of shares for options
exercised 46,165 461 50,169
Issuance of warrants for services 76,664
Shares issued for employee
bonuses 11,016 110 10,279
Issuance of shares for warrants
exercised 155,000 1,550 95,050
Issuance of employee stock
purchase plan shares 8,238 83 6,383
Purchase of shares from former
employee
Net value of repriced options 5,425
Forgiveness of stock purchase
debt
Private placement 2,660,012 26,600 2,899,414
Shares issued in acquisition 427,350 4,273 495,727
Conversion of debt into Class B
common stock 50,000 500 51,500
Net loss year ended June 30, 2004
___________ _________ _______ ______ ____________
Balance - June 30, 2004 16,744,848 167,448 776,991 7,770 22,791,637
=========== ======== ======= ======== ==========
Costs related to private
placements (30,000)
Issuance of shares for options
exercised 104,750 1,048 102,365
Non-cash value of warrant issued
in connection with long term debt 167,185
Non-cash value of shares issued
for employee bonuses 9,472 95 9,140
Issuance of shares for warrants
exercised 626,768 6,267 302,337
Issuance of employee stock
purchase plan shares 4,980 50 7,370
Purchase of shares from former
employee
Value of acceleration of certain
stock options 27,025
Net income year ended June 30,
2005 ___________ _________ _______ ______ ____________
Balance - June 30, 2005 17,490,818 $174,908 776,991 $ 7,770 $23,377,059
=========== ========= ======= ======== ============
See accompanying notes to consolidated financial statements.
-- 35 --
PHC, INC. AND SUBSIDIARIES (continued)
Consolidated Statements of Changes In Stockholders' Equity (Notes A, C, E, G, H,
I and L)
Notes
Receivable
Treasury Stock Common Stock Accumulated
Shares Amount Purchase Deficit Total
___________________ __________ ___________ ________
Balance - June 30, 2002 38,126 $(30,988) $(80,000) $(18,179,350) $615,985
Costs related to private
placements (7,212)
Issuance of shares for options
exercised 350,141
Issuance of warrants for services 3,185
Shares issued for employee
bonuses 19,012
Issuance of shares for
warrants exercised 10,000
Issuance of employee stock
purchase plan shares 7,796
Purchase of shares from former
employee 59,678 (41,392) (41,392)
Net income-year ended June 30,
2003 977,742 977,742
________ _________ __________ ___________ ___________
Balance - June 30, 2003 97,804 (72,380) (80,000) (17,201,608) 1,935,257
Costs related to private
placements (46,578)
Issuance of shares for options
exercised 50,630
Issuance of warrants for services 76,664
Shares issued for employee
bonuses 10,389
Issuance of shares for warrants
exercised 96,600
Issuance of employee stock
purchase plan shares 6,466
Purchase of shares from former
employee 70,332 (68,827) (68,827)
Net value of repriced options 5,425
Forgiveness of stock purchase debt 80,000 80,000
Private placement 2,926,014
Shares issued in acquisition 500,000
Conversion of debt into class B
common stock 52,000
Net loss-year ended June 30, 2004 (257,003) (257,003)
________ _________ __________ ___________ ________
Balance - June 30, 2004 168,136 (141,207) -- (17,458,611) 5,367,037
======== ========== ========== =========== ==========
Costs related to private
placements (30,000)
Issuance of shares for options
exercised 103,413
Non-cash value of warrant issued in
connection with long term debt 167,185
Non-cash value shares issued for
employee bonuses 9,235
Issuance of shares for warrants
exercised 308,604
Issuance of employee stock
purchase plan shares 7,420
Purchase of shares from former
employee 13,602 (13,880) (13,880)
Value of acceleration of certain
stock options 27,025
Net income-year ended June 30,
2005 3,155,900 3,155,900
________ _________ _________ ___________ ________
Balance - June 30, 2005 181,738 $(155,087) $ -- $(14,302,711)$9,101,939
======== ========== ========= ========== ===========
See accompanying notes to consolidated financial statements. F-5
-- 36 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<c> <c>
For the Years Ended June 30,
2005 2004 2003
__________ __________ __________
Cash flows from operating activities:
Net income (loss) $3,155,900 $(257,003) $ 977,742
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 511,211 321,835 198,695
Non-cash interest expense 51,080 -- --
Deferred income taxes (303,994) (34,199) (41,814)
Non-cash compensation 105,681 74,142 22,686
Fair value of warrants issued
in exchange for services -- 25,356 3,185
Changes in operating assets and liabilities:
Accounts and other receivables (2,251,931) (731,540) 513,193
Prepaid expenses and other current
assets 21,554 (99,001) (2,889)
Other assets (92,044) (135,904) (96,766)
Accounts payable (754,011) 813,077 (422,437)
Accrued expenses and other liabilities 540,020 126,507 255,099
__________ __________ __________
Net cash provided by (used in) operatin
activities 983,466 (149,744) 1,406,694
__________ __________ __________
Cash flows from investing activities:
Acquisition of property and equipment (483,462) (193,185) (226,100)
Costs related to business acquisition
(Note L) (62,258) (2,191,697) --
__________ __________ __________
Net cash used in investing
activities (545,720) (2,384,882) (226,100)
__________ __________ __________
Cash flows from financing activities:
Proceeds from repayment on revolving
debt, net 671,249 610,819 (365,083)
Proceeds from borrowings on long term debt 1,430,154 49,633 810,081
Principal payments on long-term debt (2,307,709) (987,832) (1,359,983)
Deferred financing costs (208,445) 4,000 8,000
Purchase of treasury stock (13,880) (68,827) (41,392)
Proceeds from issuance of common stock, net 313,692 3,026,665 58,210
__________ __________ __________
Net cash provided by (used in)financing
activities (114,939) 2,634,458 (890,167)
__________ __________ __________
Net increase in cash and cash equivalents 322,807 99,832 290,427
Cash and cash equivalents, beginning of year 594,823 494,991 204,564
__________ __________ __________
Cash and cash equivalents, end of year $ 917,630 $ 594,823 $ 494,991
========== ========== =========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 652,582 $ 452,454 $ 506,909
========== ========== ==========
Income taxes $ 123,150 $ 35,986 $ 121,323
========== ========== =========
See accompanying notes to consolidated financial statements. F-6
-- 37 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30,
2005 2004 2003
__________ _________ _________
Supplemental disclosures of non-cash investing
and financing activities:
Conversion of debt into common stock $ 14,250 $ 52,000 $ --
Issuance of common stock in cashless
exercise of options -- 15,000 134,866
Issuance of common stock in cashless exercise
of warrants 3,229 -- 424
Pivotal Acquisition Note A earn out
consideration recorded (Notes C and L) 1,169,832 -- --
Value of warrants issued with debt recorded
as debt discount 167,185 -- --
Acquisition disclosure
On April 30, 2004, the Company acquired Pivotal Research Centers, LLC (Note L):
2005 2004
__________ ____________
Property and equipment $ -- $ 85,000
Intangible assets 1,209,832 2,847,020
Accrued -- (40,000)
expenses
Accrued acquisition costs -- (149,016)
Warrants issued in lieu of cash
payment for acquisition costs -- (51,307)
Cash paid for purchase 2,191,697
Note recorded for earn-out (1,209,832) --
___________ ___________
Fair value of common stock issued $ -- $ 500,000
=========== ===========
See accompanying notes to consolidated financial statements. F-7
-- 38 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and business segments:
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 30-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 study services, including four clinic study sites. Two in
Arizona, in Peoria and Mesa, one Michigan location in Royal Oak, Michigan
and one in Midvale, Utah. These research sites conduct studies of the
effects of specified pharmaceuticals on a controlled population through
contracts with major manufacturers of the pharmaceuticals. All of the
Company's research sites operate as Pivotal Research Centers;
(3) Call center and help line services (contract services), including two call
centers, one operating in Midvale, Utah and one in Detroit, Michigan. The
Company provides help line services through contracts with major railroads
and a call center contract with Wayne County Michigan. The call centers
both operate as Wellplace; and
(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.
-- 39 --
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
Revenues 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
F-8
-- 40 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues and accounts receivable (continued):
period the related services are rendered. Differences between the amounts
provided and subsequent settlements are recorded in operations in the year of
settlement. 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.
Medicaid reimbursements are currently based on established rates depending
on the level of care provided and are adjusted prospectively. Medicare
reimbursements are currently based on provisional rates that are adjusted
retroactively based on annual cost reports filed by the Company with Medicare.
The Company's cost reports to Medicare are routinely audited on an annual basis.
Activity and cost report expense differences are reviewed on an interim basis
and adjustments are made to the net expected collectable revenue accordingly.
The Company believes that adequate provision has been made in the financial
statements for any adjustments that might result from the outcome of Medicare
audits. Approximately 21%, 22% and 16% of the Company's total revenue is derived
from Medicare and Medicaid payors for the years ended June 30, 2005, 2004 and
2003, respectively. Differences between the amounts provided and subsequent
settlements are recorded in operations in the year of the settlement. To date,
settlement adjustments have not been material.
Effective for fiscal years beginning after January 1, 2005, the prospective
payment system ("PPS") was brought into effect for all Psychiatric services paid
through the Medicare program. The new system will change the present TEFRA-based
(Tax Equity and Fiscal Responsibility Act of 1982) system to a new variable per
diem-based system. The new rates are based on a statistical model that relates
per diem resource use for beneficiaries to patient and facility characteristics
available from CMS's administrative data base (cost reports and claims data).
Patient-specific characteristics include principal diagnoses, comorbid
conditions, and age. Facility specific variables include an area wage index,
rural setting, and the extent of teaching activity. This change is being phased
in over the next three fiscal years with a percentage of payments being made at
the old rates and a percentage at the new rates, 75/25, 50/50, and 25/75,
respectively. The Company expects this new system will result in higher
reimbursement than the current rate at Harbor Oaks.
Patient care revenue is recognized as services are rendered, provided there
exists persuasive evidence of an arrangement, the fee is fixed or determinable
and collectability of the related receivable is reasonably assured. Pre
- -admission screening of financial responsibility of the patient, insurance
carrier or other contractually obligated payor, provides the Company the net
expected collectable patient revenue to be recorded based on contractual
arrangements with the payor or pre-admission agreements with the patient.
Revenue is not recognized for emergency provision of services for indigent
patients. As of June 30, 2005, the Company has no outstanding balance in other
receivables, third party, due as a result of cost report settlements.
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
contracts require 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,
Long-term assets include accounts receivable non-current, other receivables
and other assets. Accounts receivable, non-current consists of amounts due from
former patients for service. This amount represents estimated amounts
F-9
-- 41 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
collectable under supplemental payment agreements, arranged by the Company or
its collection agencies, entered into because of the patients' inability to pay
under normal payment terms. All of these receivables have been extended beyond
their original due date. Accounts of former patients that do not comply with
these supplemental payment agreements are written off when deemed unrecoverable.
Other receivables included as long-term assets include the non-current portion
of loans provided to employees and amounts due on a contractual agreement.
Charity care amounted to approximately $242,385, $147,096 and $54,263 for
the years ended June 30, 2005, 2004 and 2003, respectively. Patient care revenue
is stated net of charity care in the accompanying consolidated statements of
operations.
The Company had accounts receivable from Medicaid and Medicare of
approximately $1,257,000 at June 30, 2005 and $1,136,000 at June 30, 2004.
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 reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Reliance on key clients:
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 the Company's ability to meet its fixed costs. The Company has
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 the Company for
treatment, the cost of which is reimbursed on a per diem or per capita basis.
Approximately 30% of the Company's total revenue is derived from these clients
for all periods presented. No one of these large employers, health care
institutions or labor unions individually accounts for 10% or more of the
Company's consolidated revenues, but the loss of any of these clients would
require the Company to expend considerable effort to replace patient referrals
and would result in revenue losses and attendant loss in income.
Cash equivalents:
Cash equivalents include short-term highly liquid investments with
maturities of less than three months when purchased.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:
F-10
-- 42 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment (Continued)
Estimated
Assets Useful Life
_______________________ ______________________________________
Buildings 39 years
Furniture and equipment 3 through 10 years
Motor vehicles 5 years
Leasehold improvements Lesser of useful life or term of lease
Other assets:
Other assets consists of deposits, deferred expenses and advances.
Long-lived assets:
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company reviews the carrying values of its long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable. Any long-lived assets
held for disposal are reported at the lower of their carrying amounts or fair
value less costs to sell. The Company believes that the carrying value of its
long-lived assets is fully realizable at June 30, 2005.
Goodwill and other intangible assets:
Goodwill and other intangible assets are initially created as a result of
business combinations or acquisitions. The values the Company records for
goodwill and other intangible assets represent fair values calculated by
independent third-party appraisers. Such valuations require the Company to
provide significant estimates and assumptions which are derived from information
obtained from the management of the acquired businesses and the Company's
business plans for the acquired businesses. Critical estimates and assumptions
used in the initial valuation of goodwill and other intangible assets include,
but are not limited to: (i) future expected cash flows from services to be
provided, customer contracts and relationships, and (ii) the acquired market
position. These estimates and assumptions may be incomplete or inaccurate
because unanticipated events and circumstances may occur. If estimates and
assumptions used to initially value goodwill and intangible assets prove to be
inaccurate, ongoing reviews of the carrying values of such goodwill and
intangible assets may indicate impairment which will require the Company to
record an impairment charge in the period in which the Company identifies the
impairment.
Customer relationships, acquired as a part of the assets acquired in the
membership interest purchase of Pivotal Research Centers, LLC, (Note L) are
being amortized, using the straight-line method, over an estimated useful life
of twenty years. Amortization expense of intangible assets, which amounted to
$120,000 for the fiscal year ended June 30, 2005, is included in administrative
expenses in the accompanying consolidated statement of operations. The following
is a summary of amortization expense of intangible assets for the succeeding
fiscal years and thereafter as of June 30, 2005:
F-11
-- 43 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
Goodwill and other intangible assets (continued)
Year Ending
June 30, Amount
2006 $ 120,000
2007 120,000
2008 120,000
2009 120,000
2010 120,000
thereafter 1,660,000
__________
$2,260,000
Goodwill:
SFAS No. 142, "Goodwill and Other Intangible Assets", requires, among other
things, that companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS 142 requires that the
Company identify reporting units for the purpose of assessing potential future
impairments of goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with an
indefinite useful life.
The Company's goodwill of $969,099 relating to the treatment services
reporting unit of the Company and $1,679,110 related to the research study
services reporting unit of the Company were evaluated under SFAS No. 142 as of
June 30, 2005. As a result of the evaluation, the Company determined that no
impairment exists. The Company will continue to test goodwill for impairment at
least annually in accordance with the guidelines of SFAS No. 142.
Fair value of financial instruments:
The carrying amounts of cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value
based on their short-term maturity and prevailing market variable interest
rates.
Basic and diluted income (loss) per share:
Income (loss) per share is computed by dividing the income applicable to
common shareholders, net of dividends charged directly to retained earnings, by
the weighted average number of shares of common stock outstanding for each
fiscal year. All dilutive common stock equivalents have been included in the
calculation of diluted earnings per share for the fiscal years ended June 30,
2005 and 2003. Any increase in number of shares of common stock equivalents for
the year ended June 30, 2004 would be anti-dilutive based on the year to date
loss and therefore not included. The number of shares outstanding increased by
789,398 and 620,031 dilutive common stock equivalents for the fiscal years ended
June 30, 2005 and 2003, respectively.
The weighted average number of common shares outstanding used in the
computation of earnings per share is summarized as follows:
F-12
-- 44 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
Basic and diluted income (loss) per share: (continued)
Years Ended June 30,
2005 2004 2003
__________ __________ ___________
Weighted average shares outstanding
- basic 17,574,678 14,731,395 13,944,047
Employee stock options 530,896 -- 377,741
Warrants 258,502 -- 242,290
___________ __________ ___________
Weighted average shares
outstanding - fully diluted 18,364,076 14,731,395 14,564,078
=========== ========== ===========
The following table summarizes securities outstanding as of June 30, 2005,
2004 and 2003, but not included in the calculation of diluted net earnings per
share because such shares are antidilutive:
Years Ended June 30,
2005 2004 2003
________ _________ _________
Employee stock options 32,500 945,000 29,500
Warrants 471,360 1,415,357 327,500
Convertible debentures -- 125,000 125,000
________ _________ _________
Total 503,860 2,485,357 482,000
======== ========= =========
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 bases of the
assets and liabilities. The Company's policy is to record a valuation allowance
against deferred tax assets unless it is more likely than not that such assets
will be realized in future periods. The Company considers estimated future
taxable income or loss and other available evidence when assessing the need for
its deferred tax valuation allowance.
Comprehensive income (loss):
SFAS No. 130, "Reporting Comprehensive Income", requires companies to
classify items of other comprehensive income (loss) in a financial statement.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The Company's comprehensive net income (loss) is equal
to its net income (loss) for all periods presented.
F-13
-- 45 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
Stock-based compensation:
Until January 1, 2003, all of the Company's employees were employed under
leasing arrangements. The Company believes that its employee leasing arrangement
met the employee definition requirements under FASB Interpretation ("FIN") No.44
"Accounting for Certain Transactions Involving Stock Compensation". The Company
elected to discontinue the use of the leasing company and begin processing
payroll in-house or using a more traditional payroll service while providing
more employee services internally when it believed the benefit of using a
leasing company began to diminish.
For all periods presented in the accompanying financial statements, the
Company accounted for its employee stock-based compensation arrangements using
the intrinsic value method under the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and FIN No. 44. The Company has
elected to use the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation"; and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." Had compensation expense for stock
option grants to employees been determined based on the fair value method at the
grant dates for awards under the stock option plans consistent with the method
prescribed by SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have decreased (increased) to the pro forma amounts
indicated as follows:
Year Ended June 30,
2005 2004 2003
__________ __________ _________
Net income (loss), as reported $3,155,900 $(257,003) $977,742
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 105,681 74,142 22,686
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related taxes (298,084) (134,630) (78,575)
__________ __________ _________
Pro forma net income (loss) $2,963,497 $(317,491) 921,853
========== ========== =========
Earnings (loss) per share:
Basic - as reported $ 0.18 $ (0.02) $ 0.07
========== ========== =========
Basic - pro forma $ 0.17 $ (0.02) $ 0.07
========== ========== ========
Diluted - as reported $ 0.17 $ (0.02) $ 0.07
========== ========== =========
Diluted - pro forma $ 0.16 $ (0.02) $ 0.06
========== ========== =========
The Company has computed the pro forma disclosures for stock options
granted to employees using the Black-Scholes option pricing model prescribed by
SFAS No. 123. The assumptions used and certain results during each of the three
years ended June 30, 2005 were as follows:
June 30,
2005 2004 2003
___________ __________ __________
Risk free interest rate 4.00% 4.00% 6.00%
Expected dividend yield -- -- --
Expected lives 5-10 years 5-10 years 5-10 years
Expected volatility 45% 30% 30%
Weighted average value of grants
per share $ .63 $ .46 $ .29
Weighted average remaining contractual
life of options outstanding (years) 3.70 4.05 3.76
F-14
-- 46 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (CONTINUED)
Reclassifications:
Certain June 30, 2004 and 2003 amounts have been reclassified to be
consistent with the June 30, 2005 presentation.
Recent accounting pronouncements:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment", which is a revision of SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 (R) supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS
No. 95, "Statement of Cash Flows". Generally, the approach in SFAS No. 123 (R)
is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values. Pro-forma disclosure is no longer an alternative. The Company is
required to adopt SFAS No. 123 (R) on July 1, 2005. The effect of this change on
the results of operations of the Company is not expected to have a material
affect on the Company's consolidated financial statements.
In December 2004, the FASB issued FASB Staff Position, or FSP, No. 109-1,
"Application of FASB Statement No. 109, "Accounting for Income Taxes", to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004". FSP No. 109-1 states that the impact of the tax deduction
on qualified production activities provided by the AJCA should be accounted for
as a special deduction rather than a rate reduction. FSP No. 109-1 was effective
immediately and had no impact on our 2005 consolidated financial statements.
In December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004". FSP No. 109-2 grants a waiver to the SFAS No. 109
requirement to account for the impacts of new legislation in the period of
enactment. FSP No. 109-2 was effective immediately and had no impact on our 2005
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Asset", an Amendment of APB Opinion No. 29," Accounting for Nonmonetary
Transactions. "SFAS No. 153 is based on the principle that exchange of
nonmonetary assets should be measured based on the fair market value of the
assets exchanged. SFAS No. 153 eliminates the exception of nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. SFAS 153
is effective for nonmonetary asset exchanges in fiscal periods beginning after
June 15, 2005. We are currently evaluating the provisions of SFAS No. 153 and do
not believe that the adoption of SFAS No. 153 will have a material impact on our
financial condition, results of operations and liquidity.
F-15
-- 47 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is composed of the following:
As of June 30,
2005 2004
__________ __________
Land $ 69,259 $ 69,259
Buildings 1,136,963 1,136,963
Furniture and euipment 1,610,327 1,446,005
Motor vehicles 174,302 134,995
Leasehold impovements 816,197 570,291
__________ __________
3,807,048 3,357,513
Less accumulated depreciation and amortization 2,290,934 2,003,538
__________ __________
Property and equipment, net $1,516,114 $1,353,975
========== ===========
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is summarized as follows:
As of June 30,
2005 2004
___________ _________
9% mortgage note due in monthly installments of
$4,850 including interest through July 1, 2012,
when the remaining principal balance is payable,
collateralized by a first mortgage on the PHC
of Virginia, Inc, Mount Regis Center facility. $ 331,808 $358,811
Note payable issued in conjunction with the final
earn-out on the BSC-NY, Inc. acquisition. All
amounts were repaid at June 30, 2005. -- 141,148
Note payable issued in conjunction with the final
earn-out on the BSC-NY, Inc. acquisition. All
amounts were repaid at June 30, 2005. -- 44,573
Note payable due in monthly installments of $665
including interest at 10.8 % through November 2005. 2,981 10,211
Term mortgage note payable with principal installments
of $45,000 beginning December 2001 through November
2002 and increasing annually by $5,000 through
November 2004 at which time the remaining balance
becomes due. The note bears interest at prime (4.0%
at June 30, 2004) plus 3.5%. In October 2004, the
entire amount was repaid with the proceeds received
from a new term mortgage payable -- 1,500,542
Note payable due in monthly installments of $775
including interest at 3.9% through October 2008. 28,998 36,978
Note payable in conjunction with the earn out of the
Pivotal Research Centers, LLC acquisition. Minimum
payment amount $200,000 in class A common stock due
March 2009 interested imputed at 6%. (Note L) 159,793 150,510
Note payable due in monthly installments of $555
including interest at 3.9% through March 2010. 28,811 --
Note payable due in monthly installments of $578
including interest at 5.9% through May 2010. 29,108 --
F-16
-- 48 --
--
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
As of June 30,
2005 2004
___________ __________
Term mortgage note payable with principal installments
of $25,000 beginning November 2004 through October
2005 and increasing annually by $12,500 through
October 1, 2007 at which time the remaining balance
becomes due. The note bears interest at prime
(6.01% at June 30, 2005) plus 3.5% and is
collateralized by all of the assets of the
Company and its material subsidiaries except
Pivotal Research Centers, Inc. 1,019,612 --
Pivotal acquisition note (Note A) due in 16 quarterly
principal installments, plus interest at 6% per
annum, beginning January 2005. The principal on
this $1,000,000 note was increased by $40,000 on
January 1, 2005 for accrued interest through
December 31, 2004 and is subject to two annual
adjustments based on earnings. The first earn
out adjustment of $169,832 was added to the
note on February 1, 2005. Current quarterly
payments are $76,322 plus accumulated interest
at 6% per annum. 1,068,510 --
____________ _________
Total 2,669,621 2,242,773
Less current maturities 769,599 1,713,395
____________ _________
Long-term portion $ 1,900,022 $ 529,378
============ =========
Maturities of long-term debt are as follows as of June 30, 2005:
Year Ending
June 30, Amount
______________ _________
2006 $ 769,599
2007 808,817
2008 517,797
2009 207,099
2010 212,609
Thereafter 153,700
__________
$2,669,621
In October 2004, the Company refinanced its revolving credit note under
which a maximum of $3,500,000 may be outstanding at any time. At June 30, 2005,
the outstanding balance was $2,358,068. At June 30, 2004, the outstanding
balance with the previous lender was $1,714,380. Advances are available based on
a percentage of accounts receivable and the payment of principal is payable upon
receipt of proceeds of the accounts receivable. Interest is payable monthly at
prime (6.01% at June 30, 2005) plus 2.25%, but not less than 6.75%. The initial
term of the agreement is for three years, renewable for two additional one year
terms. Upon expiration, all remaining principal and interest are due. The
revolving credit note is collateralized by substantially all of the assets of
the Company's subsidiaries except Pivotal Research Centers, Inc. and guaranteed
by PHC.
As of June 30, 2005, the Company was not in compliance with its financial
covenants under the revolving line of credit note. Subsequent to year-end, the
Company received a waiver of non-compliance.
F-17
-- 49 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
On December 7, 1998, the Company issued the principal sum of $500,000 of
convertible debentures with interest at 12% per annum that were due on December
2, 2004. At June 30, 2004, the outstanding balance on the debentures was
$250,000. At June 30, 2005, the balance of these debentures is paid in full.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 2005, the Company was obligated under various capital leases
for equipment providing for monthly payments of approximately $4,700 and terms
expiring from November 2005 through July 2007.
The carrying value of assets under capital leases included in property and
equipment is as follows:
June 30,
2005 2004
__________ _________
Equipment and improvements $ 131,989 $116,185
Less accumulated amortization (95,446) (65,007)
__________ _________
$ 36,543 $ 51,178
========= =========
Future minimum lease payments under the terms of the capital lease
agreements are as follows at June 30, 2005:
Year Ending June 30,
2006 $31,440
2007 10,647
2008 2,168
_______
Total future minimum lease payments 44,255
Less amount representing interest 2,268
_______
Present value of future minimum lease payments 41,987
Less current portion 29,777
_______
Long-term obligations under capital leases $12,210
=======
NOTE E - NOTES PAYABLE - RELATED PARTIES
In prior years, Bruce A. Shear, a director and the President and Chief
Executive Officer of the Company, and persons affiliated and associated with him
have made a series of unsecured loans to the Company and its subsidiaries to
enable them to meet ongoing financial commitments. During the period ended June
30, 2004, the Company paid Mr. Shear and affiliates approximately $62,515 in
principal and accrued interest under the related party notes. The remaining
balance of this debt, $52,000, was converted into 50,000 shares of class B
common stock at the then current market price for class A common stock. As of
June 30, 2004 all outstanding related party debt has been eliminated. During the
fiscal year ended June 30, 2005 no amounts were borrowed from related parties
and related party debt remains at zero.
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the
accompanying balance sheets:
F-18
-- 50 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE F - INCOME TAXES (Continued)
Year Ended June 30,
2005 2004
___________ __________
Deferred tax asset:
Allowance for doubtful accounts $ 782,000 $ 811,000
Depreciation 37,000 109,000
Reserves not currently deductible and other -- 759,000
Difference between book and tax bases
of intangible assets 9,000 --
Operating loss carryforward 3,107,000 3,800,000
___________ __________
Gross deferred tax asset 3,935,000 5,479,000
___________ _________
Less:
Valuation allowance (2,559,200) (4,636,194)
___________ _________
Deferred Tax Asset 1,375,800 842,806
___________ _________
Current portion (1,375,800) (842,806)
___________ _________
Long-term portion $ -- $ --
=========== ==========
Deferred tax liability:
Difference between book and tax bases
of intangible assets $ (229,000) $ --
___________ _________
Net deferred tax liability (229,000) --
___________ _________
The components of the income tax provisions (benefit) for the years ended
June 30, 2005, 2004 and 2003 are as follows:
2005 2004 2003
___________ _________ __________
Current
Federal $ -- $ -- $ --
State 230,571 45,493 96,048
___________ _________ __________
230,571 45,493 96,048
___________ _________ __________
Deferred
Federal (235,595) -- (35,542)
State (68,399) (34,199) (6,272)
___________ _________ __________
(303,994) (34,199) (41,814)
___________ _________ __________
Income tax provision (benefit) $ (73,423) $ 11,294 $ 54,234
========== ========= ==========
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended June 30, 2005, 2004 and 2003 is as follows:
2005 2004 2003
________ _______ _______
Income tax provision at federal statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Utilization of net operating loss
carryforwards (34.0%) -- --
State tax provision, net of federal benefit 4.5% 4.5% 4.5%
Non-deductible expenses 1.0% 1.0% 1.3%
Other, net 1.5% (5.0%) (0.5%)
Valuation allowance (9.0%) (34.0%) (34.0%)
________ _______ _______
Effective income tax rate (2.0%) 1.0% 5.3%
======== ======= =======
F-19
-- 51 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE F - INCOME TAXES (CONTINUED)
At June 30, 2005 the Company had a federal net operating loss carryforward
amounting to approximately $8,500,000. The Company's Federal net operating loss
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service and are subject to certain limitations in the event of
cumulative changes in the ownership interest of significant stockholders over a
three-year period in excess of 50%. The Federal carryforward expires beginning
in 2011 through 2024.
The Company has provided a significant valuation allowance against its
deferred tax asset at June 30, 2005 and 2004. The Company has recognized only
current expected tax benefit based on net income projections for the next fiscal
year. The Company's policy is to recognize tax benefit for only the next fiscal
year based on the uncertainties surrounding the healthcare industry.
Operating leases:
The Company leases office and treatment facilities, furniture and equipment
under operating leases expiring on various dates through September 2011. Rent
expense for the years ended June 30, 2005, 2004 and 2003 was approximately
$1,484,000, $1,035,000 and $899,000, respectively. Rent expense includes certain
short-term rentals. Minimum future rental payments under non-cancelable
operating leases, having remaining terms in excess of one year as of June 30,
2005 are as follows:
Year Ending
June 30, Amount
___________ __________
2006 $ 1,299,529
2007 1,033,996
2008 919,895
2009 861,110
2010 388,467
Thereafter 94,730
___________
$ 4,597,727
Notes Receivable:
In August 2000, the Company entered into agreements with nine officers and
directors to provide each officer and director with $10,000 with which to
purchase stock. One individual left the Company on February 28, 2001 and
forfeited all rights. The agreement called for the parties to sign notes, which
would provide the purchased shares as security, with the Company releasing the
-- 52 --
shares, and canceling the officers' and directors' obligations under the notes
based on specific PHC stock price targets. In the event that the stock price
targets were not met, the agreement called for the cancellation of the
obligation and release of the shares on the third anniversary of the agreement.
The notes were cancelled pursuant to these provisions in August 2003, which
resulted in a compensation charge of $80,000 during the quarter ended September
30, 2003. Under FIN 44, the shares underlying the notes were subject to variable
accounting but did not result in any material change in value during any period
presented.
Contingent Notes Payable:
In conjunction with the acquisition of Pivotal Research Centers, LLC (Note
L), the Company signed three notes, with face amounts of $1,000,000, $500,000
and $1,000,000. The ultimate amount payable under these notes is based on the
future earnings of the acquired entity. Since all but $200,000 is contingent on
future earnings, only $200,000 less imputed interest was recorded as a liability
as of June 30, 2004 as stipulated in SFAS No. 141. In December 2004 the first
F-20
-- 53 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
earn-out period ended and resulted in the recording of $1,209,832 as a
liability. This note is subject to one additional earn-out adjustment in
December 2005. The earn-outs are recorded as additional purchase price. (See
Note L for discussion of the terms of these notes.)
Litigation:
Various legal proceedings, claims and investigations of a nature considered
normal to its business operations are pending against the Company. The most
significant of these matters is described below.
In April 2004, the Company successfully resolved a medical malpractice
lawsuit. As a result of the settlement, the Company made a payment of
approximately $463,000, which compares to the previous judgment of approximately
$3 million. The Company has not released other parties, including an insurance
company. Payments made by insurance and other related parties, if collected,
could significantly reduce the Company's financial burden below the $463,000
payment.
The financial impact of this settlement and related legal fees of
approximately $1,030,000 is reflected in the operating results during the year
ended June 30, 2004 as a component of administrative expenses. The Company
continues to seek reimbursement from all sources for amounts expended on this
case.
The Company is subject to various claims and legal action that arise in the
ordinary course of business. In the opinion of management, Pioneer is not
currently a party to any proceeding that would have a material adverse effect on
its financial condition or results of operations.
NOTE H - STOCK AND STOCK PLANS
Common Stock
The Company has authorized two classes of common stock, the Class A common
stock and the Class B common stock. Subject to preferential rights in favor of
the holders of the Preferred Stock, the holders of the common stock are entitled
to dividends when, as and if declared by the Company's Board of Directors.
Holders of the Class A common stock and the Class B common stock are entitled to
share equally in such dividends, except that stock dividends (which shall be at
the same rate) shall be payable only in Class A common stock to holders of Class
A common stock and only in Class B common stock to holders of Class B common
stock.
Class A Common Stock
The Class A common stock is entitled to one vote per share with respect to
all matters on which shareholders are entitled to vote, except as otherwise
required by law and except that the holders of the Class A common stock are
entitled to elect two members to the Company's Board of Directors.
The Class A common stock is non-redeemable and non-convertible and has no
pre-emptive rights. The shares of Class A common stock offered hereby and the
shares issued on the exercise of the warrants will be fully paid and
non-assessable.
Class B Common Stock
The Class B common stock is entitled to five votes per share with respect
F-21
-- 54 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE H - STOCK AND STOCK PLANS (CONTINUED)
to all matters on which shareholders are entitled to vote, except as otherwise
required by law and except that the holders of the Class A common stock are
entitled to elect two members to the Company's Board of Directors. The holders
of the Class B common stock are entitled to elect all of the remaining members
of the Board of Directors.
The Class B common stock is non-redeemable and has no pre-emptive rights.
Each share of Class B common stock is convertible, at the option of its
holder, into a share of Class A common stock. In addition, each share of Class B
common stock is automatically convertible into one fully-paid and non-assessable
share of Class A common stock (i) upon its sale, gift or transfer to a person
who is not an affiliate of the initial holder thereof or (ii) if transferred to
such an affiliate, upon its subsequent sale, gift or other transfer to a person
who is not an affiliate of the initial holder. Shares of Class B common stock
that are converted into Class A common Stock will be retired and cancelled and
shall not be reissued.
All of the outstanding shares of Class B common stock are fully paid and
nonassessable.
Preferred Stock
The Board of Directors is authorized, without further action of the
shareholders, to issue up to 1,000,000 shares in one or more classes or series
and to determine, with respect to any series so established, the preferences,
voting powers, qualifications and special or relative rights of the established
class or series, which rights may be in preference to the rights of common
stock. No shares of the Company's preferred stock are currently issued or
outstanding.
Stock Plans
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)
-- 55 --
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. Through June 30, 2005, options for 185,500 shares were granted under
the 1995 plan. This plan expired in August 2005 and, in January 2005, the
shareholders voted to approve a new non-employee directors' stock plan. The new
plan is identical to the plan it replaced. Under the new plan a maximum of
F-22
-- 56 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE H - STOCK AND STOCK PLANS (CONTINUED)
350,000 shares may be issued. Each outside director is granted an option to
purchase 10,000 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 new
plan will expire in January 2015, ten years from the date of shareholder
approval.
Under the above plans, at June 30, 2005, 1,650,583 shares were available
for future grant or purchase.
The Company had the following activity in its stock option plans for fiscal
2005, 2004 and 2003:
Number Weighted-Average
of Exercise Price
Shares Per Share
_________ ________________
Balance - June 30, 2002 1,275,000 $0.37
Granted 297,500 $0.73
Exercised (555,000) $0.25
Expired (15,500) $0.52
___________ ______
Balance - June 30, 2003 1,002,000 $0.54
Granted 130,000 $1.17
Exercised (68,500) $0.41
Expired (118,500) $0.49
__________ ______
Balance - June 30, 2004 945,000 $0.64
========== ======
Granted 320,000 $1.30
Exercised (104,750) $0.33
Expired (22,000) $0.76
___________ ______
Balance - June 30, 2005 1,138,250 $0.85
========== ======
The following tables summarize information about stock options outstanding
and exercisable at June 30, 2005:
Weighted-Average
Number Remaining Contractual
Exercise Outstanding Life of Options Number Exercisable
Price At June 30,2005 Outstanding (years) At June 30, 2005
_______ _______________ ____________________ __________________
$ .19 5,000 0.56 5,000
.22 8,000 4.29 8,000
.30 240,500 0.77 240,500
.35 40,000 5.22 40,000
.45 33,000 1.47 33,000
.55 138,000 1.80 138,000
.69 40,000 2.47 40,000
.74 50,000 6.53 50,000
.75 148,000 2.24 148,000
.81 6,000 4.48 6,000
.87 10,000 3.53 10,000
.97 7,500 3.94 7,500
F-23
-- 57 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE H - STOCK AND STOCK PLANS (CONTINUED)
Weighted-Average
Number Remaining Contractual
Exercise Outstanding Life of Options Number Exercisable
Price At June 30,2005 Outstanding (years) At June 30, 2005
_______ _______________ ____________________ __________________
1.03 6,000 3.48 6,000
1.07 10,000 3.94 10,000
1.11 50,000 3.94 50,000
1.17 20,000 3.64 20,000
1.20 45,000 4.26 45,000
1.21 53,750 4.28 53,750
1.33 50,000 7.53 50,000
1.37 15,000 4.35 15,000
1.38 5,000 4.56 5,000
1.41 50,000 4.48 50,000
1.45 25,000 3.64 25,000
1.48 50,000 8.53 50,000
2.06 6,000 2.49 6,000
2.38 15,000 4.96 15,000
3.50 6,000 1.64 6,000
6.63 5,500 0.57 5,500
_____ _________ ____ _________
$ .85 1,138,250 3.2 1,138,250
===== ========= ==== =========
The Company re-priced options to purchase 791,500 shares of class A common
stock in January 2001. During the fiscal year ended June 30, 2005, the remaining
50,000 repriced options were exercised. The compensation expense related to the
vested re-priced options was approximately $69,175, $16,435 and $2,505 for the
years ended June 30, 2005, 2004 and 2003, respectively.
On June 30, 2005, the company accelerated the vesting on the remaining
326,250 outstanding unvested options. This resulted in a non-cash charge to
compensation of $27,025. The decision to accelerate these options was made
primarily to avoid recognizing compensation cost in the consolidated statement
of operations in the Company's future financial statements upon the
effectiveness of SFAS 123R.
On October 18, 1995, the Board of Directors voted to provide employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to participate in an employee Stock Purchase Plan (the "Plan"), which
became effective February 1, 1996. The price per share shall be the lesser of
the 85% of the average of the bid and ask price on the first day of the plan
period or the last day of the plan period. The plan was amended on December 19,
2001 and December 19, 2002 to allow for a total of 500,000 shares of class A
common stock to be issued under the plan.
As of June 30, 2005, a total of 144,417 shares of class A common stock have
been issued under the plan. Ten employees are participating in the current
offerng period under the plan, which began on February 1, 2005 and will end on
January 31, 2006.
F-24
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE I - CERTAIN CAPITAL TRANSACTIONS
In addition to the outstanding options under the Company's stock plans
(Note H), the Company has the following warrants outstanding at June 30, 2005:
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
______________________________________________________________________________________
04/15/2001 Warrants issued for investor
relations consulting services
$1,136 value charged to
professional fees 6,000 shares $.25 per share Apr 2006
07/20/2001 Warrants issued for investor
relations consulting services
$1,786 value charged to
professional fees 12,000 shares $.35 per share Jul 2006
04/01/2003 Warrants issued for consulting
services $3,185 charged
to professional fees. 10,000 shares $1.00 per share Apr 2008
07/03/2003 Warrants issued for consulting
services $4,430 charged
to professional fees 20,000 shares $ .84 per share Jul 2008
09/22/2003 Warrants issued for consulting
services $6,261 charged
to professional fees 20,000 shares $ .90 per share Sep 2008
10/20/2003 Warrants issued for investor
relations consulting services
$6,842 charged to professional
fees 30,000 shares $ .86 per share Oct 2006
10/20/2003 Warrants issued for investor
relations consulting services
$6,578 charged to professional
fees 30,000 shares $ .84 per share Oct 2006
03/02/2004 Warrants issued in a private
placement of class A
common stock 57,613 shares $1.10 per share Mar 2007
04/29/2004 Warrants issued in a private
placement of class A 287,499 shares $1.10 per share Apr 2007
common stock
04/30/2004 Warrants issued as a finder's
fee in connection with
the acquisition of Pivotal,
$51,307 recorded as
acquisition costs. 6,750 shares $1.24 per share Apr 2007
10/19/2004 Warrants issued in conjunction
with long-term debt transaction,
$167,185 recorded as debt
discount. 250,000 shares $1.15 per share Oct 2014
Warrants issued for services or in connection with debt are valued at fair
value at grant date using the Black-Scholes pricing model and accounted for in a
manner consistent with the underlying reason the warrants were issued. Charges
to operations in connection with warrants were $25,358 and $3,185 in fiscal 2004
and 2003, respectively. These warrants were all fully vested at grant date.
In addition, in fiscal 2005, the Company issued warrants to a finance
company in connection with a long-term debt transaction (see the last item in
the above table). The value of the warrant, $167,185 was recorded as a debt
discount and is being recorded as additional interest expense over the life of
the debt. During the fiscal year ended June 30, 2005, $41,796 was amortized as
additional interest expense.
Under existing dilution agreements with other stockholders, the issuance of
common stock under agreements other than the employee stock purchase and option
plans will increase the number of shares issuable and decrease the exercise
price of certain of the above warrant agreements based on the difference between
the then current market price and the price at which the new common stock is
being issued. The dilutive effects of transactions through June 30, 2005 are
reflected in the table above. The value of the additional shares issuable as a
result of these dilution provisions was not material.
NOTE J - 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:
F-25
-- 59 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE J - BUSINESS SEGMENT INFORMATION (CONTINUED)
Behavioral
Health Pharmaceutical
Treatment Study Contract Administrative
Services Services Services Services Eliminations Total
__________ ___________ ________ ____________ ___________ _________
For the Year ended
June 30, 2005
Revenues-external
customers $26,087,088 $4,509,338 $3,466,832 $ -- $ -- $34,063,258
Revenues - intersegment 5,940 -- 62,707 2,724,000 (2,792,647) --
Segment net income
(loss) 4,543,372 180,820 1,243,514 (2,811,806) -- 3,155,900
Total assets 9,333,260 5,596,917 669,229 2,296,242 -- 17,895,648
Capital expenditures 365,644 18,336 38,057 61,425 -- 483,462
Depreciation &
amortization 233,734 144,010 7,899 139,295 -- 524,938
Goodwill 969,099 1,679,110 -- -- -- 2,648,209
Interest expense 469,384 65,651 -- 119,836 -- 654,871
Income tax expense
(benefit) 105,400 -- 25,800 (204,623) -- (73,423)
For the Year ended
June 30, 2004
Revenues-external
customers $22,418,355 $1,246,013 $2,984,477 $ -- $ -- $26,648,845
Revenues - intersegment 197,780 -- 4,140 3,234,840 (3,436,760) --
Segment net income
(loss) 1,822,642 (68,870) 706,817 (2,717,592) -- (257,003)
Total assets 7,799,709 3,620,676 283,666 1,607,518 -- 13,311,569
Capital expenditures 126,848 2,208 5,973 58,156 -- 193,185
Depreciation &
amortization 175,810 28,325 4,371 113,329 -- 321,835
Goodwill 969,099 447,020 -- -- -- 1,416,119
Interest expense 378,163 2,307 -- 151,094 -- 531,564
Income tax expense 10,000 1,294 -- -- -- 11,294
For the Year ended
June 30, 2003
Revenues-external
customers $21,243,177 $ 940,772 $1,649,374 $ -- $ -- $23,833,323
Revenues - intersegment 286,200 -- -- 2,962,224 (3,248,424) --
Segment net income
(loss) 2,962,177 90,153 334,772 (2,409,360) -- 977,742
Total assets 7,534,816 180,373 -- 1,696,534 -- 9,411,723
Capital expenditures 210,497 3,517 -- 12,086 -- 226,100
Depreciation &
amortization 146,553 4,802 2,464 44,876 -- 198,695
Goodwill 969,099 -- -- -- -- 969,099
Interest expense 402,260 818 -- 139,191 -- 542,269
Income tax expense 54,234 -- -- -- -- 54,234
NOTE K - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
June 30
2005 2004
__________ ________
Accrued professional fees $ 767,592 $468,035
Accrued operating expenses 284,181 203,068
Income tax payable 11,416 11,464
__________ ________
Total $1,063,189 $682,567
========== =========
F-26
-- 60 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE L - ACQUISITIONS
On April 30, 2004, the Company acquired Phoenix-based Pivotal Research
Centers, LLC, ("Pivotal") significantly expanding the Company's clinical
research capabilities and geographic presence. As part of the acquisition, one
of the former owners and CEO signed three-year employment and non-compete
agreements.
Pivotal performs all phases of clinical research for Phase I-IV drugs under
development through two dedicated research sites. When acquired, Pivotal had
approximately 22 enrolling studies and an additional 31 ongoing studies with
approximately 75-80 percent of Pivotal's research activity in central nervous
system (CNS) research.
The Company paid $1.5 million in cash and $500,000 in PHC, Inc. Class A
common stock based on the closing market price of $1.17. The value of the class
A common stock was determined in accordance with EITF 99- 12, "Determination of
the Measurement Date for the Market Price of Acquirer Securities Issued in a
Purchase Business Combination." Additionally, the Company agreed to three
performance-based notes (Notes A, B and C) which are staged during the next five
years based on future profitability and secured by all the assets of Pivotal as
well as by PHC, Inc.'s ownership interest in Pivotal.
Note A is a secured promissory note with a face value of $1,000,000, with
an annual interest rate of 6%, a maturity date of December 31, 2008 and payments
due in quarterly installments beginning January 2005. The outstanding principal
will be adjusted in the first and second years of the note based on adjusted
EBITDA as defined in the agreement of $780,000. Where adjusted EBITDA of greater
then $780,000 for each period increases the note value by the difference and
adjusted EBITDA of less than $780,000 will decrease the note value by the
difference. Quarterly payments are then made based on the adjusted value of the
notes. The first adjustment of $169,832 was made on February 1, 2005. The
Company recorded the value of Note A of $1,169,832 as additional purchase price
during fiscal 2005. As of June 30, 2005, $1,068,510 is due under Note A.
Note B is a secured promissory note with a face value of $500,000, with an
annual interest rate of 6%, a maturity date of December 31, 2008 and payments
due in quarterly installments beginning January 2007. The outstanding principal
will be adjusted on February 1, 2006 based on annual adjusted EBITDA as defined
in the agreement of $780,000 for the adjustment period of January 1, 2005
through December 31, 2006. Where adjusted EBITDA greater then $780,000 for the
adjustment period increases the note value by the difference and adjusted EBITDA
of less than $780,000 for the adjustment period will decrease the note value by
the difference. Quarterly payments are then made based on the adjusted value of
the notes. As of June 30, 2005, no amounts have been recorded under Note B.
Note C is a secured promissory note with a face value of $1,000,000, with
an annual interest rate of 6%, a maturity date of March 31, 2009 and annual
payments commencing on March 31, 2005. Note payment amounts will be determined
based on the adjusted EBITDA as defined in the agreement of the non-Pivotal
Research business for each payment period beginning at the effective date of the
agreement and ending on December 31, of 2004 and each year thereafter multiplied
by .35. In addition this note provides for the issuance of up to $200,000 in
PHC, Inc. Class A common stock, should the total of the five note payments be
less then the $1,000,000 face value of the note. The value of the $200,000 stock
minimum value less imputed interest at 6% was recorded at the time of
acquisition.
The purchase price was allocated as follows:
F-27
-- 61 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE L - ACQUISITIONS (CONTINUED)
2005 2004
___________ ___________
Property and equipment $ -- $ 85,000
Intangible assets 1,209,832 2,847,020
Accrued expenses -- (40,000)
Accrued acquisition costs -- (149,016)
Warrants issued in lieu of cash
payment for acquisition costs -- (51,307)
Cash paid for purchase 2,191,697
Note recorded for earn-out (1,209,832) --
___________ ___________
Fair value of stock issued $ -- $ 500,000
___________ ___________
The fair value assigned to customer relationships was based upon the
results of an independent appraisal.
The acquisition of Pivotal is accounted for as a purchase under SFAS No.
141, "Business Combinations". Accordingly, the operating results of Pivotal have
been included in the Company's consolidated statements of operations since the
acquisition date. Goodwill generated from this acquisition is deductible for tax
purposes over a period of 15 years. The Company estimates the useful lives of
customer relationships to be twenty years.
Since all but $200,000 of these notes is contingent on future earnings,
only $200,000, less imputed interest, has been recorded as of June 30, 2004 as
stipulated in SFAS No. 141. During fiscal 2005, $9,283 was recorded on the Note.
Based on unaudited data, the pro forma results of operations as though the
acquisition was completed at the beginning of the periods indicated below are as
follows. Management does not believe such results are necessarily indicative of
future operations. The pro forma shares outstanding include the shares issued in
the acquisition and the private placement shares issued to fund the acquisition,
as though they were issued at the beginning of the periods shown.
Year Ended June 30,
(In thousands, except
per share data)
(unaudited)
2004
________
Revenues $30,231
Net income 191
Basic income per common share .01
Diluted income per common share .01
NOTE M - QUARTERLY INFORMATION (Unaudited)
The following presents selected quarterly financial data for each of the
quarters in the years ended June 30, 2005 and 2004.
F-28
-- 62 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
NOTE M - QUARTERLY INFORMATION (Unaudited) (Continued)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
__________________________________________________
2005
Revenue $7,957,515 $8,069,201 $8,763,682 $9,272,860
Income from operations 884,835 679,895 982,872 1,039,810
Net income available to common
shareholders 775,628 408,804 880,456 1,091,012
Earnings per share:
Basic $ 0.04 $ 0.02 $ 0.05 $ 0.06
Diluted $ 0.04 $ 0.02 $ 0.05 $ 0.06
2004
Revenue $6,103,167 $6,488,828 $6,472,188 $7,584,662
Income (loss) from operations 179,546 77,821 (673,096) 561,264
Net income (loss) available to
common shareholders 53,149 2,659 (845,265) 532,454
Earnings per share:
Basic $ 0.00 $ 0.00 $ (0.06) $ 0.03
Diluted $ 0.00 $ 0.00 $ (0.06) $ 0.03
o During fiscal 2004 the Company incurred approximately $1,030,000 in legal
expenses and settlement costs. Of this amount, the settlement of $463,000
was recorded in the third quarter of fiscal 2004 (see Part I, Item 3, Legal
Proceedings of this report for further information).
o Also during fiscal 2004, on April 30, 2004, the Company acquired Pivotal
Research Centers, LLC (see Note L for details of the acquisition).
NOTE N -SUBSEQUENT EVENTS
Subsequent to year-end, the Company announced its plans to open a 60 bed
behavioral health facility in Henderson, Nevada for the treatment of children,
adolescence and adults. The Company anticipates the opening in the fall of 2006,
pending final approval of all regulatory licenses and permits.
F-29
-- 63 --
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified within the
SEC's Rules and Forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management was necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures to meet the
criteria referred to above. Based on the foregoing, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective.
Change in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluations.
-- 65 --
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company as of June 30, 2005 are as
follows:
Name Age Position
________________________ ___ _____________________________________________
Bruce A. Shear 50 Director, President and Chief Executive Officer
Robert H. Boswell 57 Senior Vice President
Paula C. Wurts 56 Controller, Treasurer and Assistant Clerk
Gerald M. Perlow, M.D. 67 Director and Clerk
Donald E. Robar (1)(2) 68 Director
Howard W. Phillips 75 Director
William F. Grieco (1)(2) 51 Director
David E. Dangerfield (1) 64 Director
(1) Member of Audit Committee. (2) Member of Compensation Committee.
The Company does not currently have a Nominating Committee. Directors may
be nominated by the Board of Directors or by stockholders in accordance with the
Company's Amended and Restated Articles of Incorporation and Bylaws. All of the
directors hold office until the annual meeting of stockholders next following
their election, or until their successors are elected and qualified. The primary
duties of the Compensation Committee and the Audit Committee are shown below.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. There are no family relationships among any of the
directors or officers of the Company.
Information with respect to the business experience and affiliations of the
directors and officers of the Company is set forth below.
BRUCE A. SHEAR has been President, Chief Executive Officer and a Director
of the Company since 1980 and Treasurer of the Company from September 1993 until
February 1996. From 1976 to 1980, he served as Vice President, Financial
Affairs, of the Company. Mr. Shear has served on the Board of Governors of the
Federation of American Health Systems for over fifteen years. Mr. Shear received
an M.B.A. from Suffolk University in 1980 and a B.S. in Accounting and Finance
from Marquette University in 1976. Since November 2003, Mr. Shear has been a
member of the board of directors of Vaso Active Pharmaceuticals, Inc., a public
company marketing and selling over-the-counter pharmaceutical products that
incorporate Vaso's transdermal drug delivery technology.
ROBERT H. BOSWELL has served as the Senior Vice President of the Company
since February 1999 and as executive vice president of the Company from 1992 to
1999. From 1989 until the spring of 1994, Mr. Boswell served as the
Administrator of the Company's Highland Ridge Hospital facility where he is
based. Mr. Boswell is principally involved with the Company's substance abuse
facilities. From 1981 until 1989, he served as the Associate Administrator at
the Prevention Education Outpatient Treatment Program--the Cottage Program,
International. Mr. Boswell graduated from Fresno State University in 1975 and
from 1976 until 1978 attended Rice University's doctoral program in philosophy.
Mr. Boswell is a Board Member of the National Foundation for Responsible Gaming
and the Chair for the National Center for Responsible Gaming.
PAULA C. WURTS has served as the Controller of the Company since 1989, as
Assistant Clerk since January 1996, as Assistant Treasurer from 1993 until April
2000 when she became Treasurer. Ms. Wurts served as the Company's Accounting
Manager from 1985 until 1989. Ms. Wurts received an Associate's degree in
Accounting from the University of South Carolina in 1980, a B.S. in Accounting
from Northeastern University in 1989 and passed the examination for Certified
Public Accountants. She received a Master's Degree in Accounting from Western
New England College in 1996.
-- 64 --
GERALD M. PERLOW, M.D. has served as a Director of the Company since May
1993 and as Clerk since February 1996. Dr. Perlow is a retired cardiologist who
practiced medicine in Lynn, Massachusetts, and has been Associate Clinical
Professor of Cardiology at the Tufts University School of Medicine, now
emeritus, since 1972. Dr. Perlow is a Diplomat of the National Board of Medical
Examiners and a Fellow of the American Heart Association, the American College
of Cardiology and the American College of Physicians. From 1987 to 1990, Dr.
Perlow served as the Director, Division of Cardiology, at AtlantiCare Medical
Center in Lynn, Massachusetts. Dr. Perlow served as a consultant to
Wellplace.com, formerly Behavioralhealthonline.com, in fiscal year 2000 and has
been a contributing journalist to Wellplace.com since 1999. Dr. Perlow received
a B.A. from Harvard College in 1959 and an M.D. from Tufts University School of
Medicine in 1963.
DONALD E. ROBAR has served as a Director of the Company since 1985 and as
the Treasurer from February 1996 until April 2000. He served as the Clerk of the
Company from 1992 to 1996. Dr. Robar has been a professor of Psychology at
Colby-Sawyer College in New London, New Hampshire from 1967 to 1997 and is now
Professor Emeritus. Dr. Robar received an Ed.D. from the University of
Massachusetts in 1978, an M.A. from Boston College in 1968 and a B.A. from the
University of Massachusetts in 1960.
HOWARD W. PHILLIPS has served as a Director of the Company since August 27,
1996 and has been employed by the Company as a public relations specialist since
August 1, 1995. From 1982 until October 31, 1995, Mr. Phillips was the Director
of Corporate Finance for D.H. Blair Investment Corp. From 1969 until 1981, Mr.
Phillips was associated with Oppenheimer & Co. where he was a partner and
Director of Corporate Finance.
WILLIAM F. GRIECO has served as a Director of the Company since February
18, 1997. Mr. Grieco has been a Managing Director of Arcadia Strategies, LLC, a
legal and business consulting organization servicing science and technology
companies, since 1999. From 2001 to 2002, he also served as Senior Vice
President and General Counsel of IDX Systems Corporation, a healthcare
information technology Company. From 1995 to 1999 he was Senior Vice President
and General Counsel for Fresenius Medical Care North America. Prior to that, Mr.
Grieco was a partner at Choate, Hall & Stewart, a general service law firm. Mr.
Grieco received a BS from Boston College in 1975, an MS in Health Policy and
Management from Harvard University in 1978 and a JD from Boston College Law
School in 1981.
DAVID E. DANGERFIELD has served as a Director of the Company since December
2001. Since 1977, he has served as the Chief Executive Officer for Valley Mental
Health in Salt Lake City, Utah. Since 1974, Mr. Dangerfield has been a partner
for Professional Training Associates (PTA). In 1989, he became a consultant
across the nation for managed mental health care and the enhancement of mental
health delivery services. David Dangerfield serves as a Board member of the
Mental Health Risk Retention Group and Utah Alliance for the Mentally Ill, an
advocacy organization of family and friends of the mentally ill, which are
privately held corporations, and the Utah Hospital Association, which is a state
organization. Mr. Dangerfield graduated from the University of Utah in 1972 with
a Doctorate of Social Work after receiving his Masters of Social Work from the
University in 1967.
Item 11. Executive Compensation
Employment agreements
The Company has not entered into any employment agreements with its
executive officers. The Company owns and is the beneficiary on a $1,000,000 key
man life insurance policy on the life of Bruce A. Shear.
Executive Compensation
Three executive officers of the Company received compensation in the 2005
fiscal year, which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 2005, 2004 and 2003:
-- 65 --
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
___________________ ____________
(a) (b) (c) (d) (e) (g) (i)
Securities
Name and Other Underlying All
Principal Annual Options Other
Position Year Salary Bonus Compensation /SARs Compensation
($) ($) ($) (#) ($)
__________________________________________________________
Bruce A. Shear 2005 $383,965 $45,000 $62,498 (1) 60,000 $37,050
President and Chief 2004 $345,416 $25,147 $15,395 (2) -- $ --
Executive Officer 2003 $306,771 $25,000 $15,730 (3) 40,000 $11,200
Robert H. Boswell 2005 $164,590 $10,000 $29,016 (4) 25,000 $15,750
Senior Vice President 2004 $155,417 $32,794 $15,582 (5) -- $ --
2003 $152,937 $40,147 $12,820 (6) 25,000 $ 7,000
Paula C. Wurts 2005 $140,586 $10,000 $35,009 (7) 25,000 $15,750
Controller, Treasurer 2004 $129,125 $17,647 $13,901 (8) -- $ --
And Assistant Clerk 2003 $116,981 $22,000 $11,270 (9) 25,000 $ 7,000
(1) This amount represents $7,789 contributed by the Company to the Company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $7,541 in premiums
paid by the Company with respect to life and disability insurance for the
benefit of Mr. Shear, $2,805 in club membership dues paid by the Company
for the benefit of Mr. Shear, $4,027 personal use of a Company car held by
Mr. Shear and $40,336 based on the intrinsic value of the repricing of
options held by Mr. Shear.
(2) This amount represents $5,063 contributed by the Company to the Company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $5,532 in premiums
paid by the Company with respect to life and disability insurance for the
benefit of Mr. Shear, $912 in club membership dues paid by the Company for
the benefit of Mr. Shear, $3,888 personal use of a Company car held by Mr.
Shear.
(3) This amount represents $4,057 contributed by the Company to the Company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $4,768 in premiums
paid by the Company with respect to life insurance for the benefit of Mr.
Shear, $1,387 in premiums paid by the Company with respect to disability
insurance for the benefit of Mr. Shear, $2,009 in club membership dues paid
by the Company for the benefit of Mr. Shear and $3,509 personal use of a
Company car held by Mr. Shear.
(4) This amount represents a $6,000 automobile allowance, $6,656 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $1,020 in benefit derived from the purchase of shares through
the employee stock purchase plan, and $15,340 based on the intrinsic value
of the repricing of options held by Mr. Boswell.
(5) This amount represents a $6,000 automobile allowance, $4,650 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $428 in membership dues paid by the Company for the benefit of
Mr. Boswell, $699 in benefit derived from the purchase of shares through
the employee stock purchase plan, and $3,805 based on the intrinsic value
of the repricing of options held by Mr. Boswell.
(6) This amount represents a $6,000 automobile allowance, $3,212 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $640 in membership dues paid by the Company for the benefit of
Mr. Boswell, $617 in benefit derived from the purchase of shares through
the employee stock purchase plan, $401 in club membership dues paid by the
Company for the benefit of Mr. Boswell and $1,950 based on the intrinsic
value of the repricing of options held by Mr. Boswell.
-- 66 --
(7) This amount represents a $4,800 automobile allowance, $8,392 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $340 in benefit derived from the purchase of shares through the
employee stock purchase plan and $21,477 based on the intrinsic value of
the repricing of options held by Ms. Wurts.
(8) This amount represents a $4,800 automobile allowance, $5,063 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $233 in benefit derived from the purchase of shares through the
employee stock purchase plan and $3,805 based on the intrinsic value of the
repricing of options held by Ms. Wurts.
(9) This amount represents a $4,800 automobile allowance, $4,211 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $309 in benefit derived from the purchase of shares through the
employee stock purchase plan and $1,950 based on the intrinsic value of the
repricing of options held by Ms. Wurts.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
services as members of the Board. Directors who are not employees of the Company
receive $5,000 stipend per year and $1,250 for each Board meeting they attend.
In addition, Directors of the Company are entitled to receive certain stock
option grants under the Company's Non-Employee Director Stock Option Plan (the
"Director Plan").
COMPENSATION COMMITTEE
The Board of Directors has appointed the members of the Compensation
Committee to review and approve officer's compensation, formulate bonuses for
management and administer the Company's equity compensation plans. During fiscal
2005 the Compensation Committee consisted of Mr. Donald Robar and Mr. William
Grieco. The Compensation Committee met once during fiscal 2005. Mr. Shear does
not participate in discussions concerning, or vote to approve, his salary. All
members of the compensation committee are independent.
AUDIT COMMITTEE
The Board of Directors has appointed an audit committee to assist the Board
in its oversight of the financial reports, internal controls, accounting
policies and procedures and practices. The primary responsibilities of the Audit
Committee are as follows:
o Hire, evaluate and, when appropriate, replace the Company's independent
registered public accounting firm, whose duty it is to audit the books and
accounts of the Company and its subsidiaries for the fiscal year in which
it is appointed.
o Approve all audit fees in advance of work performed.
o Approve any accounting firm and fees to be charged for taxes or any other
non-audit accounting fees.
o Review internal controls over financial reporting with the independent
accountant and a designated accounting staff member.
o Review with management and the registered public accounting firm:
o The independent accountant's audit of and report on the financial
statements.
o The auditor's qualitative judgments about the appropriateness, not
just the acceptability, of accounting principles and financial
disclosures and how aggressive (or conservative) the accounting
principles and underlying estimates are.
o Any serious difficulties or disputes with management encountered
during the course of the audit.
o Anything else about the audit procedures or findings that GAAS
requires the auditors to discuss with the committee.
o Consider and review with management and a designated accounting staff
member.
o Any significant findings during the year and management's responses to
them.
-- 67 --
o Any difficulties an accounting staff member encountered while
conducting audits, including any restrictions on the scope of their
work or access to required information.
o Any changes to the planned scope of management's internal audit plan
that the committee thinks advisable.
o Review the annual filings with the SEC and other published documents
containing the company's financial statements and consider whether the
information in the filings is consistent with the information in the
financial statements.
o Review the interim financial reports with management the independent
registered public accounting firm and an accounting staff member.
o Prepare a letter for inclusion in the annual report that describes the
committee's composition and responsibilities and how the responsibilities
were fulfilled.
o Review the audit committee charter at least annually and modify as needed.
During fiscal 2005 the Audit Committee consisted of Dr. David Dangerfield,
Mr. Donald Robar and Mr. William Grieco. As required by the SEC, all members of
the committee are independent as such term is defined pursuant to applicable SEC
rules and regulations and Dr. Dangerfield serves as the chairman and is the
financial expert on the committee. The Audit Committee met five times during
fiscal 2005. All of the committee members attended the meetings.
Meetings of the Board of Directors
During fiscal 2005, the Board of Directors held a total of four meetings
and took action by written consent five times. Each director attended all of the
meetings of the Board and committees of the Board on which such director served.
OPTION PLANS
Stock Plan
The Board of Directors adopted the Company's first stock option plan on
August 26, 1993. This stock option plan has expired however, options to purchase
626,500 shares remain outstanding under the plan. On September 22, 2003 the
Board of Directors adopted the Company's current stock option plan and the
stockholders of the Company approved the plan on December 31, 2003. The Stock
Plan provides for the issuance of a maximum of 1,300,000 shares of the Class A
Common Stock of the Company pursuant to the grant of incentive stock options to
employees and the grant of nonqualified stock options or restricted stock to
employees, directors, consultants and others whose efforts are important to the
success of the Company.
The Board of Directors administers the Stock Plan. Subject to the
provisions of the Stock Plan, the Board of Directors has the authority to select
the optionees or restricted stock recipients and determine the terms of the
options or restricted stock granted, 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 cannot 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 and
upon exercise of options. Generally, an option is not transferable by the option
holder except by will or by the laws of descent and distribution. Also,
generally, no option may be exercised more than 60 days following termination of
employment. However, in the event that termination is due to death or
disability, the option is exercisable for a period of one year following such
termination.
During the fiscal year ended June 30, 2005, the Company issued additional
options to purchase 320,000 shares of Class A Common Stock under the 2003 Stock
Plan at a price per share ranging from $.69 to $2.38. Generally, options are
exercisable upon grant for 25% of the shares covered with an additional 25%
becoming exercisable on each of the first three anniversaries of the date of
grant.
A total of 104,750 options were exercised during the fiscal year ended June
30, 2005, of which 95,000 options were exercised at $.25, 46,000 options were
exercised at $.30, 15,000 options were exercised at $.97 and 5,000 were
exercised at $1.21.
-- 68 --
Employee Stock Purchase Plan
On October 18, 1995, the Board of Directors voted to provide employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to participate in an Employee Stock Purchase Plan (the "Plan"), which
became effective February 1, 1996. The price per share shall be the lesser of
85% of the average of the bid and ask price on the first day of the plan period
or the last day of the plan period. The plan was amended on December 19, 2001
and December 19, 2002 to allow for a total of 500,000 shares of class A common
stock to be issued under the plan.
As of June 30, 2005, a total of 144,417 shares of class A common stock have
been issued under the plan. Ten employees are participating in the current
offering period under the plan, which began on February 1, 2005 and will end on
January 31, 2006.
Non-Employee Director Stock Plan
The Board of Directors adopted the Company's first Non-Employee Director
Stock Plan (the "Director Plan") on October 18, 1995. This stock plan has
expired however, options to purchase 185,500 shares remain outstanding under the
plan. On September 20, 2004 the Board of Directors adopted the Company's current
Non-Employee Director Stock Plan and the stockholders of the Company approved
the plan on January 20, 2005. The new plan provides for the issuance of a
maximum of 350,000 shares of the Class A Common stock of the Company to
non-employee directors pursuant to the plan.
The Board of Directors or a committee of the Board administers the Director
Plan. Under the Director Plan, each non-employee director is granted an option
to purchase 10,000 shares of the Class A Common Stock of the Company. The option
exercise price is the fair market value of the shares of the Company's Class A
Common Stock on the date of grant. The options are non-transferable and become
exercisable as follows: 25% immediately and 25% on each of the first, second and
third anniversaries of the grant date. If an optionee ceases to be a member of
the Board of Directors other than for death or permanent disability, the
unexercised portion of the options, to the extent unvested, immediately
terminate, and the unexercised portion of the options which have vested lapse
180 days after the date the optionee ceases to serve on the Board. In the event
of death or permanent disability, all unexercised options vest and the optionee
or his or her legal representative has the right to exercise the option for a
period of 180 days or until the expiration of the option, if sooner.
During the fiscal year ended June 30, 2005, 40,000 options were issued
under the original plan. As of June 30, 2005 no options have been exercised
under the original plan and no options have been issued under the new plan.
The following table provides information about options granted to the named
executive officers during fiscal 2005 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted or Base
Name Options/SARs to Employees Price Expiration
Granted (#) in Fiscal Year ($/Share) Date
______________________________________________________________________________
Bruce A. Shear 60,000 18.75% $.69-$2.38 01/07/2008-
06/16/2010
Robert H. Boswell 25,000 7.81% $1.41 12/21/2009
Paula C. Wurts 25,000 7.81% $1.41 12/21/2009
All Directors and
Officers as a 01/07/2008-
group (8 Persons) 160,000 50.0% $1.43 01/06/2015
The following table provides information about options exercised by the
named executive officers during fiscal 2005 and the number and value of options
held at the end of fiscal 2005.
-- 69 --
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs at
Shares at FY-End (#) FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
_______________________________________________________________________________
Bruce A. Shear 25,000 $37,208 187,000/0 $327,260/$0
Robert H. Boswell 8,333 13,319 111,000/0 203,030/$0
Paula C. Wurts 11,667 18,648 111,000/0 203,030/$0
All Directors
and Officers as
a group (8
persons) 45,000 $69,175 861,000/0 1,520,525/$0
In January 2001, all 791,500 shares underlying the then outstanding
employee stock options were repriced to $0.25, which was greater than the then
current market price, using the existing exercise durations. The computed effect
of the option repricing of $69,175, $16,435 and $2,505 was charged to salaries
in the fiscal years ended June 30, 2005, 2004 and 2003, respectively. As of June
30, 2005 all of the repriced options have been exercised.
On June 30, 2005, the company accelerated the vesting on the remaining
326,250 outstanding unvested options. This resulted in a non-cash charge to
compensation of $27,025.
-- 69 --
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the ownership
of shares of the Company's Class A Common Stock and Class B Common Stock (the
only classes of common stock of the Company currently outstanding) as of July
30, 2005 by each person known by the Company to beneficially own more than 5% of
any class of the Company's voting securities, each director of the Company, each
of the named executive officers as defined in 17 CFR 228.402(a)(2) and all
directors and officers of the Company as a group. Unless otherwise indicated
below, to the knowledge of the Company, all persons listed below have sole
voting and investment power with respect to their shares of Common Stock, except
to the extent authority is shared by spouses under applicable law. In preparing
the following table, the Company has relied on the information furnished by the
persons listed below:
Amount and
Nature of Percent
Name and Address Beneficial of
Title of Class of Beneficial Owner Owner (12) Class
____________________ _____________________________ ______________ _________
Class A Common Stock Bruce A. Shear 626,995(1) 3.6%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Robert H. Boswell 243,719(2) 1.4%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Paula C. Wurts 192,349(3) 1.1%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 173,750(4) *
P. O. Box 2047
East Hampton, NY 11937
Gerald M. Perlow 143,125(5) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 134,127(6) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
William F. Grieco 137,750(7) *
115 Marlborough Street
Boston, MA 02116
David E. Dangerfield 50,000(8) *
5965 South 900 East
Salt Lake City, UT 84121
All Directors and Officers as 1,701,815(9) 9.4%
a Group (8 persons)
-- 70 --
Amount and
Nature of Percent
Name and Address Beneficial of
Title of Class of Beneficial Owner Owner (12) Class
____________________ _____________________________ ______________ _________
Class A Common Stock Marathon Capital Mgmt, LLC 1,153,800 6.7%
(continued) P. O. Box 771
Hunt Valley, MD 21030
Class B Common
Stock (10) Bruce A. Shear 721,259(11) 92.8%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and Officers as
a Group (8 persons) 721,259 92.8%
* Less than 1%
1. Includes 187,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.30
to $2.38 per share.
2. Includes 111,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options at an exercise price range of $.30 to
$1.41 per share.
3. Includes 111,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.30
to $1.41 per share.
4. Includes 108,500 shares issuable pursuant to currently exercisable stock
options having an exercise price range of $.22 to $1.48 per share.
5. Includes 97,000 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $.22 to $6.63 per share.
6. Includes 100,500 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $.22 to $6.63 per share.
7. Includes 96,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.22
to $3.50 per share.
8. Includes 50,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $
.55 to $1.48 per share.
9. Includes an aggregate of 861,000 shares issuable pursuant to currently
exercisable stock options. Of those options, 5,500 have an exercise price
of $6.63 per share, 6,000 have an exercise price of $3.50 per share, 15,000
have an exercise price of $2.38 per share, 6,000 have an exercise price of
$2.06 per share, 50,000 have an exercise price of $1.48, 50,000 have an
exercise price of $1.41, 15,000 have an exercise price of $1.37, 50,000
have an exercise price of $1.33 per share, 15,000 have an exercise price of
$1.21, 6,000 have an exercise price of $1.03 per share, 6,000 have an
exercise price of $.81 per share, 140,000 have an exercise price of $.75
per share, 50,000 have an exercise price of $.74 per share, 15,000 have an
exercise price of $.69 per share, 138,000 have an exercise price of $.55
per share, 15,000 have an exercise price of $.45 per share, 40,000 have an
exercise price of $.35 per share, 230,500 have an exercise price of $.30
per share and 8,000 have an exercise price of $.22 per share.
10. Each share of class B common stock is convertible into one share of class A
common stock automatically upon any sale or transfer or at any time at the
option of the holder.
11. Includes 56,369 shares of class B common stock pledged to Steven J. Shear
of 2 Addison Avenue, Lynn, Massachusetts 01902, Bruce A. Shear's brother,
to secure the purchase price obligation of Bruce A. Shear in connection
with his purchase of his brother's stock in the Company in December 1988.
In the absence of any default under this obligation, Bruce A. Shear retains
full voting power with respect to these shares.
-- 71 --
12. "Amount and Nature of Beneficial Ownership". Each share of Class A Common
Stock is entitled to one vote per share and each share of Class B Common
Stock is entitled to five votes per share on all matters on which
stockholders may vote (except that the holders of the Class A Common Stock
are entitled to elect two members of the Company's Board of Directors and
holders of the Class B Common Stock are entitled to elect all the remaining
members of the Company's Board of Directors).
By virtue of the fact that Mr. Shear owns 92% of the class B shares and the
class B shareholders have the right to elect all of the directors except the two
directors elected by the class A shareholders, Mr. Shear has the right to elect
the majority of the members of the Board of directors and may be deemed to be in
control of the Company.
Based on the number of shares listed under the column headed "Amount and
Nature of Beneficial Ownership," the following persons or groups held the
following percentages of voting rights for all shares of common stock combined
as of July 31, 2005:
Bruce A. Shear .............................19.78%
All Directors and Officers as a Group
(8 persons)..................................24.04%
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the SEC reports of ownership and reports of
changes in ownership of Common Stock. SEC rules also require the reporting
persons and entities to furnish the Company with a copy of the reports they
file. The Company is required to report any failure to file these reports.
Based on a review of these filings and written representations from the
Company's directors and executive officers, the Company believes that all
reports required to be filed with the SEC by Section 16(a) during the most
recent fiscal year have been filed on a timely basis.
Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Related Party Indebtedness
For approximately the last fifteen years, Bruce A. Shear, a director and
the President and Chief Executive Officer of the Company, and persons affiliated
and associated with him have made a series of unsecured loans to the Company and
its subsidiaries to enable them to meet ongoing financial commitments. The
borrowings generally were entered into when the Company did not have financing
available from outside sources and, in the opinion of the Company, were entered
into at market rates given the financial condition of the Company and the risks
of repayment at the time the loans were made.
During the period ended June 30, 2004, the Company paid Mr. Shear and
affiliates approximately $62,515 in principal and accrued interest under the
related party notes. The remaining balance of this debt, $52,000, was converted
into 50,000 shares of class B common stock at the then current market price for
class A common stock. As of June 30, 2004 all outstanding related party debt has
been eliminated. During the fiscal year ended June 30, 2005 no amounts were
borrowed from related parties and related party debt remains at zero.
Item 14. Principal Accountant Fees and Services
The following table presents fees for professional audit services rendered
by BDO Seidman, LLP for the Company's annual financial statements, quarterly
review services and other related services for the fiscal years ended June 2005
and 2004:
2005 2004
________ ________
Audit Fees 125,500 117,500
All other fees -- 12,000
________ ________
Total fees 125,500 $129,500
======= ========
-- 72 --
In fiscal 2004, BDO Seidman, billed the Company an additional $4,000 in
connection with the company's current report on form 8-k filed regarding the
acquisition of Pivotal Research Centers, LLC and $8,000 in connection with the
Company's registration statement on form S-3. These amounts are listed as "All
other fees" in the above table and relate to services traditionally provided by
auditors, which are compatible with BDO Seidman, LLP's independence. The
Company's Audit Committee considered the non-audit services rendered by BDO
Seidman, LLP during fiscal 2004 and determined that such services were
compatible with BDO Seidman, LLP's independence. Firms other than BDO Seidman,
LLP, provide tax and other accounting services.
BDO Seidman, LLP did not directly or indirectly, operate, or supervise the
operation of, the Company's information systems or manage the Company's local
area network, nor did BDO Seidman, LLP design or implement a hardware or
software system that aggregates source data underlying the financial statements
of the Company or generates information that is significant to the Company's
financial statements taken as a whole.
The charter of the Audit Committee provides that the Audit Committee must
pre-approve all auditing and non-auditing services to be provided by the
auditor. In addition, any services exceeding pre-approved cost levels will
require specific pre-approval by the Audit Committee. All services shown in the
table above were pre-approved by the Audit Committee.
-- 73 --
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form
10-K
1) Consolidated Financial Statements: The consolidated financial statements of
PHC, Inc. are included at Item 8, pages F-1 through F-29, in this Annual
Report
2) Financial Statement Schedules: All schedules are included in the
Consolidated financial statements and footnotes thereto at Item 8 in this
Annual Report
3) The exhibits which are filed with this report or which are incorporated
herein by reference are set forth in the Exhibit Index that follows.
Exhibit No. Description
3.1 Restated Articles of Organization of the Registrant, as amended. (Filed as
exhibit 3.1 to the Company's Registration Statement on March 2, 1994).
3.1.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed as exhibit 3.1.1 to the Company's report
on Form 10-QSB dated November 12, 2004. Commission file number 0-22916).
3.1.2 Certification of the Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed as exhibit 3.1.2 to the Company's
report on Form 10-QSB dated November 12, 2004. Commission file number
0-22916).
3.2 By-laws of the Registrant, as amended. (Filed as exhibit 3.2 to the
Company's Post-Effective Amendment No. 2 on Form S-3 to Registration
Statement on Form SB-2 under the Securities Act of 1933 dated November 13,
1995. Commission file number 333-71418).
3.2.1 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. (Filed as exhibit 3.1.2 to the Company's report
on Form 10-QSB dated November 12, 2004. Commission file number 0-22916).
4.1 Warrant Guaranty Agreement for Common Stock Purchase Warrants issuable
by PHC, Inc. dated August 14, 1998 for Warrants No. 2 and No. 3. (Filed as
exhibit 4.19 to the Company's report on Form 10-KSB, filed with the
Securities and Exchange Commission on October 14, 1997. Commission file
number 0-22916).
4.2 12% Convertible Debenture by and between PHC, Inc., and Dean & Co., dated
December 3, 1998 in the amount of $500,000. (Filed as exhibit 4.20 to the
Company's report on Form 10-QSB dated February 12, 1999. Commission file
number 0-22916).
4.3 Securities Purchase Agreement for 12% Convertible Debenture by and between
PHC, Inc. and Dean & Co., a Wisconsin nominee partnership for Common Stock.
(Filed as exhibit 4.21 to the Company's report on Form 10-QSB dated
February 12, 1999. Commission file number 0-22916).
4.4 Warrant Agreement to purchase up to 25,000 shares of Class A Common Stock
by and between PHC, Inc., and Dean & Co., dated December 3, 1998. (Filed as
exhibit 4.22 to the Company's report on Form 10-QSB dated February 12,
1999. Commission file number 0-22916).
4.5 Warrant Agreement by and between PHC, Inc., and National Securities
Corporation dated January 5, 1999 to purchase 37,500 shares of Class A
Common Stock. (Filed as exhibit 4.23 to the Company's report on Form 10-QSB
dated February 12, 1999. Commission file number 0-22916).
4.6 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares, 15,000 shares, 5,000 shares, 5,000 shares, 50,000 shares and
10,000 shares of Class A Common Stock dated December 31, 1998; 5,000 shares
of Class A Common Stock dated December 1, 1998; 10,000 shares of Class A
Common Stock dated January 1, 1999; and 10,000 shares of Class A Common
Stock dated February 1, 1999. (Filed as exhibit 4.24 to the Company's
report on Form 10-QSB dated February 12, 1999. Commission file number
0-22916).
4.7 Warrant Agreement by and between PHC, Inc., and Barrow Street Research for
3,000 shares of Class A Common Stock dated February 23, 1999. (Filed as
exhibit 4.24 to the Company's Registration Statement on Form S-3 dated
April 13, 1999. Commission file number 333-76137).
4.8 Warrant Agreement by and between PHC, Inc., and George H. Gordon for 10,000
shares of Class A Common Stock dated March 1, 1999. (Filed as exhibit 4.25
to the Company's Registration Statement on Form S-3 dated April 13, 1999.
Commission file number 333-76137).
-- 74 --
Exhibit No. Description
4.9 Warrant Agreement by and between PHC, Inc., and George H. Gordon for 10,000
shares of Class A Common Stock dated April 1, 1999. (Filed as exhibit 4.26
to the Company's Registration Statement on Form S-3 dated June 1, 1999.
Commission file number 333-76137).
4.10 Warrant Agreement by and between PHC, Inc., and George H. Gordon for 10,000
shares of Class A Common Stock dated May 1, 1999. (Filed as exhibit 4.27 to
the Company's Registration Statement on Form S-3 dated May 14, 1999.
Commission file number 333-76137).
4.11 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares of Class A Common Stock dated April 1, 1999. (Filed as
exhibit 4.28 to the Company's report on Form 10-KSB dated October 13, 1999.
Commission file number 0-22916).
4.12 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares of Class A Common Stock dated July 1, 1999. (Filed as exhibit
4.29 to the Company's report on Form 10-KSB dated October 13, 1999.
Commission file number 0-22916).
4.13 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares of Class A Common Stock dated August 1, 1999. (Filed as
exhibit 4.30 to the Company's report on Form 10-KSB dated October 13, 1999.
Commission file number 0-22916).
4.14 Warrant Agreement issued to CapitalSource Finance, LLC to purchase 250,000
Class A Common shares dated October 19, 2004. (Filed as exhibit 4.14 to the
Company's report on Form 8-K filed with the Securities and Exchange
Commission on October 22, 2004. Commission file number 0-22916).
4.15 Warrant to purchase up to 37,500 shares of Class A Common Stock by and
between PHC, Inc., and National Securities Corporation dated July 5, 1999.
(Filed as exhibit 4.32 to the Company's report on Form 10-KSB dated October
13, 1999. Commission file number 0-22916).
4.16 Common Stock Purchase Warrant by and between PHC, Inc. and Heller
Healthcare Finance, Inc. for 60,000 shares of Class A Common Stock. (Filed
as exhibit 4.37 to the Company's report on Form 10-KSB, filed with the
Securities and Exchange Commission on September 29, 2000. Commission file
number 0-22916).
4.17 Equity Purchase Warrant to purchase 1% equity in Behavioral Health Online
by and between PHC, Inc., and Heller Healthcare Finance dated March 16,
1998. (Filed as exhibit 4.38 to the Company's quarterly report on Form
10-QSB, filed with the Securities and Exchange Commission on November 14,
2000. Commission file number 0-22916).
4.18 Warrant Agreement issued to Marshall Sternan to purchase 10,000 Class A
Common shares dated April 15, 2001. (Filed as exhibit 4.41 to the Company's
report on Form 10-QSB dated May 14, 2001. Commission file number 0-22916).
4.19 Equity Purchase Warrant to purchase 1% equity in Behavioral Health Online
by and between PHC, Inc., and Heller Healthcare Finance dated December 18,
2000. (Filed as exhibit 4.36 to the Company's report on Form 10-KSB dated
September 25, 2001. Commission file number 0-22916).
4.20 Form of Subscription Agreement and Warrant. (Filed as exhibit 4.22 to the
Company's report on Form 8-K filed with the Securities and Exchange
commission on May 13, 2004. Commission file number 0-22916).
5.1 Opinion of Arent Fox Kintner Plotkin & Kahn, PPLC dated January 8, 2003.
(Filed as an exhibit to the Company's Registration Statement on Form S-8
dated January 8, 2003. Commission file number 333-102402).
5.2 Opinion of Arent Fox Kintner Plotkin & Kahn, PPLC. (Filed as exhibit 5.2 to
the Company's report on Form SB-2 dated June 19, 2002. Commission file
number 333-76137).
10.1 Deed of Trust Note of Mount Regis Center Limited Partnership in favor of
Douglas M. Roberts, dated July 28, 1987, in the amount of $560,000,
guaranteed by PHC, Inc., with Deed of Trust executed by Mount Regis Center,
Limited Partnership of even date. (Filed as exhibit 10.33 to Form SB-2
dated March 2, 1994). Assignment and Assumption of Limited Partnership
Interest, by and between PHC of Virginia Inc. and each assignor dated as of
June 30, 1994. (Filed as exhibit 10.57 to Form 10-KSB on September 28,
1994).
-- 75 --
Exhibit No. Description
10.2 Copy of Note of Bruce A. Shear in favor of Steven J. Shear, dated December
1988, in the amount of $195,695; Pledge Agreement by and between Bruce A.
Shear and Steven J. Shear, dated December 15, 1988; Stock Purchase
Agreement by and between Steven J. Shear and Bruce A. Shear, dated December
1, 1988. (Filed as exhibit 10.52 to the Company's Registration Statement on
Form SB-2 dated March 2, 1994. Commission file number 333-71418).
10.3 Unconditional Guaranty of Payment and performance by and between PHC, Inc.
in favor of HCFP. (Filed as exhibit 10.112 to the Company's quarterly
report on Form 10-QSB, filed with the Securities and Exchange Commission on
February 25, 1997. Commission file number 0-22916).
10.4 Agreement between Family Independence Agency and Harbor Oaks Hospital
effective January 1, 1997. (Filed as exhibit 10.122 to the Company's report
on Form 10-KSB, with the Securities and Exchange Commission on October 14,
1997. Commission file number 0-22916).
10.5 Master Contract by and between Family Independence Agency and Harbor Oaks
Hospital effective January 1, 1997. (Filed as exhibit 10.123 to the
Company's report on Form 10-KSB, filed with the Securities and Exchange
Commission on October 14, 1997. Commission file number 0-22916).
10.6 Financial Advisory Agreement, Indemnification Agreement and Warrant by and
between Brean Murray & Company and PHC, Inc. dated 06/01/97. (Filed as
exhibit 10.125 to the Company's report on Form 10-KSB, filed with the
Securities and Exchange Commission on October 14, 1997. Commission file
number 0-22916).
10.7 Loan and Security Agreement by and among HCFP Funding, Inc., and PHC of
Michigan, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Rhode
Island, Inc., and Pioneer Counseling of Virginia, Inc. dated as of February
18, 1998. (Filed as exhibit 10.139 to the Company's Registration Statement
on Form SB-2 dated July 24, 1998. Commission file number 333-59927).
10.8 Credit Line Deed of Trust by and between PHC of Virginia, Inc., and HCFP
Funding II, Inc. dated July 1998. (Filed as exhibit 10.140 to the Company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission file
number 333-59927).
10.9 Promissory Note for $50,000 dated May 18, 1998 by and between PHC, Inc. and
Tot Care, Inc. (Filed as exhibit 10.142 to the Company's Registration
Statement on Form SB-2 dated July 24, 1998. Commission file number
333-59927).
10.10 Promissory Note for $50,000 dated June 9, 1998 by and between PHC, Inc.
and Tot Care, Inc. (Filed as exhibit 10.143 to the Company's Registration
Statement on Form SB-2 dated July 24, 1998. Commission file number
333-59927).
10.11 Amendment No. 1 to Loan and Security Agreement in the amount of $4,000,000
by and among HCFP Funding, Inc., and PHC of Michigan, Inc., PHC of Utah,
Inc., PHC of Virginia, Inc., PHC of Rhode Island, Inc., and Pioneer
Counseling of Virginia, Inc. dated as of February 18, 1998. (Filed as
exhibit 10.57 to the Company's report on Form 10-KSB dated October 13,
1998. Commission file number 0-22916).
10.12 Financial Advisory and Consultant Agreement by and between National
Securities Corporation and PHC, Inc. dated 01/05/99 (Filed as exhibit 10.61
to the Company's report on Form 10-QSB dated February 12, 1999. Commission
file number 0-22916).
10.13 Amendment number 1 to Loan and Security Agreement dated February 17, 2000
by and between PHC of Michigan, Inc., PHC, of Utah, Inc., PHC of Virginia,
Inc., PHC of Rhode Island, Inc. and Pioneer Counseling of Virginia, Inc.
and Heller Healthcare Finance, Inc., f/k/a HCFP Funding in the amount of
$2,500,000. (Filed as exhibit 10.70 to the Company's report on Form 10-QSB
filed with the Securities and Exchange Commission on May 11, 2000.
Commission file 0-22916).
-- 76 --
Exhibit No. Description
10.14 Promissory Note for $532,000 dated May 30, 2000 by and between PHC, Inc.
and Irwin J. Mansdorf, Ph.D. (Filed as exhibit 10.76 to the Company's
report on Form 10-KSB, filed with the Securities and Exchange Commission on
September 29, 2000. Commission file number 0-22916).
10.15 Promissory Note for $168,000 dated May 30, 2000 by and between PHC, Inc.
and Yakov Burstein, Ph.D. (Filed as exhibit 10.77 to the Company's report
on Form 10-KSB, filed with the Securities and Exchange Commission on
September 29, 2000. Commission file number 0-22916).
10.16 Settlement Agreement and Mutual Releases by and between PHC, Inc. and
Yakov Burstein, Ph.D. and Irwin J. Mansdorf, Ph.D. dated May 30, 2000.
(Filed as exhibit 10.78 to the Company's report on Form 10-KSB, filed with
the Securities and Exchange Commission on September 29, 2000. Commission
file number 0-22916).
10.17 Amendment number 2 to Loan and Security Agreement originally dated
February 18, 1998 by and among PHC, of Utah, Inc., PHC of Virginia, Inc.
and PHC of Michigan, Inc. and Heller Healthcare Finance, Inc. in the amount
of $3,000,000 amended as of May 24, 2001. (Filed as exhibit 10.46 to the
Company's report on Form 10-KSB dated September 25, 2001. Commission file
number 0-22916).
10.18 Amendment Number 3 dated December 6, 2001 to Loan and Security Agreement
dated February 18, 1998 by and between PHC of Michigan, Inc., PHC of Utah,
Inc., and PHC of Virginia, Inc. and Heller Healthcare Finance, Inc.
providing collateral for the Loan and Security Agreement in the amount of
$3,000,000. (Filed as exhibit 10.50 to the Company's quarterly report on
Form 10-QSB, filed with the Securities and Exchange Commission on February
12, 2002. Commission file number 0-22916).
10.19 Consolidating Amended and Restated Secured Term Note in the amount of
$2,575,542 dated December 6, 2001 by and between PHC of Michigan, Inc. and.
Heller Healthcare Finance, Inc. (Filed as exhibit 10.51 to the Company's
Quarterly Report on Form 10-QSB, filed with the Securities and Exchange
Commission on February 12, 2002. Commission file number 0-22916).
10.20 Amended and Restated Revolving Credit Note in the amount of $3,000,000
dated December 6, 2001 by and between PHC of Michigan, Inc., PHC of Utah,
Inc. and PHC of Virginia, Inc. and. Heller Healthcare Finance, Inc. (Filed
as exhibit 10.52 to the Company's Quarterly Report on Form 10-QSB, filed
with the Securities and Exchange Commission on February 12, 2002.
Commission file number 0-22916).
10.21 Amended and Restated Consolidated Mortgage Note in the amount of
$5,688,598 dated December 6, 2001 by and between PHC of Michigan, Inc and
Heller Healthcare Finance, Inc. (Filed as exhibit 10.53 to the Company's
Quarterly Report on Form 10-QSB, filed with the Securities and Exchange
Commission on February 12, 2002. Commission file number 0-22916).
10.22 Third Amended and Restated Cross-Collateralization and Cross-Default
Agreement dated December 6, 2001 by and between PHC, Inc., PHC of Michigan,
Inc., PHC of Utah, Inc. and PHC of Virginia, Inc. and. Heller Healthcare
Finance, Inc. (Filed as exhibit 10.54 to the Company's quarterly report on
Form 10-QSB, filed with the Securities and Exchange Commission on February
12, 2002. Commission file number 0-22916).
10.23 The Company's 1993 Stock Purchase and Option Plan, as amended December
2002. (Filed as exhibit 10.34 to the Company's report on Form S-8 dated
January 8, 2003. Commission file number 333-102402).
10.24 The Company's 1995 Non-Employee Director Stock Option Plan, as amended
December 2002. (Filed as exhibit 10.35 to the Company's report on Form S-8
dated January 8, 2003. Commission file number 333-102402).
-- 77 --
Exhibit No. Description
10.25 The Company's 1995 Employee Stock Purchase Plan, as amended December 2002.
(Filed as exhibit 10.36 to the Company's report on Form S-8 dated January
8, 2003. Commission file number 333-102402).
10.26 First Amended Consolidating Amended and Restated Secured Term Note by and
Between PHC Of Michigan, Inc. and Heller Healthcare Finance, Inc. (Form
10-KSB, filed with the Securities and Exchange Commission on September 19,
2003. Commission file number 0-22916).
10.27 Membership Purchase Agreement between PHC, Inc. and Pivotal Research
Centers, LLC and its Sellers Louis C. Kirby, Carol A. Colombo and Anthony A
Bonacci dated April 30, 2004. (Filed as exhibit 10.27 to the Company's
report on Form 8-K filed with the Securities and Exchange commission on May
13, 2004. Commission file number 0-22916).
10.28 Pledge Agreement entered into April 30, 2004 by and between PHC, Inc. and
Louis C. Kirby, Carol A. Colombo and Anthony A Bonacci. (Filed as exhibit
10.28 to the Company's report on Form 8-K filed with the Securities and
Exchange commission on May 13, 2004. Commission file number 0-22916).
10.29 Security Agreement entered into April 30, 2004 by and between PHC, Inc.
and Louis C. Kirby, Carol A. Colombo and Anthony A Bonacci. (Filed as
exhibit 10.29 to the Company's report on Form 8-K filed with the Securities
and Exchange commission on May 13, 2004. Commission file number 0-22916).
10.30 Secured Promissory Note dated April 30, 2004 in the amount of $1,000,000
by PHC, Inc. in favor of Louis C. Kirby, Carol A. Colombo and Anthony A
Bonacci (Note A). (Filed as exhibit 10.30 to the Company's report on Form
8-K filed with the Securities and Exchange commission on May 13, 2004.
Commission file number 0-22916).
10.31 Secured Promissory Note dated April 30, 2004 in the amount of $500,000 by
PHC, Inc. in favor of Louis C. Kirby, Carol A. Colombo and Anthony A
Bonacci (Note B). (Filed as exhibit 10.31 to the Company's report on Form
8-K filed with the Securities and Exchange commission on May 13, 2004.
Commission file number 0-22916).
10.32 Secured Promissory Note dated April 30, 2004 in the amount of $1,000,000
by PHC, Inc. in favor of Louis C. Kirby, Carol A. Colombo and Anthony A
Bonacci (Note C). (Filed as exhibit 10.32 to the Company's report on Form
8-K filed with the Securities and Exchange commission on May 13, 2004.
Commission file number 0-22916).
10.33 Kirby Employment and Non-Compete Agreement. (Filed as exhibit 10.33 to the
Company's report on Form 8-K filed with the Securities and Exchange
commission on May 13, 2004. Commission file number 0-22916).
10.34 Colombo Employment and Non-Compete Agreement. (Filed as exhibit 10.34 to
the Company's report on Form 8-K filed with the Securities and Exchange
commission on May 13, 2004. Commission file number 0-22916).
10.35 First Amendment to Membership Purchase Agreement and Colombo Employment
Agreement and Note C. (Filed as exhibit 10.35 to the Company's report on
Form 8-K filed with the Securities and Exchange commission on May 13, 2004.
Commission file number 0-22916).
10.36 First Amendment to Membership Purchase Agreement and Colombo Employment
Agreement and Note C. (Filed as exhibit 10.36 to the Company's report on
Form 8-K filed with the Securities and Exchange Commission on May 13, 2004.
Commission file number 0-22916).
10.37 Subscription Agreement entered into September 20, 2004 by and between PHC,
Inc. and Sandor Capital Master Fund, LP, together with the Registration
rights agreement and the form of certificate of Designation. (Filed as
exhibit 10.37 to the Company's report on Form 8-K filed with the Securities
and Exchange Commission on September 23, 2004. Commission file number
0-22916).
10.38 Revolving Credit, Term Loan and Security Agreement, dated October 19,
2004, by and between PHC, Inc, PHC of Utah, Inc., PHC of Virginia, Inc.,
PHC of Michigan, Inc., PHC of Nevada, Inc., North Point Pioneer, Inc,
Wellplace, Inc., Detroit Behavioral Institute, Inc. and CapitalSource
Finance, LLC. (Filed as exhibit 10.38 to the Company's report on Form 8-K
filed with the Securities and Exchange Commission on October 22, 2004.
Commission file number 0-22916).
-- 78 --
Exhibit No. Description
10.39 Term Loan Note, dated October 19, 2004, by and between PHC, Inc, PHC of
Utah, Inc., PHC of Virginia, Inc., PHC of Michigan, Inc., PHC of Nevada,
Inc., North Point Pioneer, Inc, Wellplace, Inc., Detroit Behavioral
Institute, Inc. and CapitalSource Finance, LLC in the amount of $1,400,000.
(Filed as exhibit 10.39 to the Company's report on Form 8-K filed with the
Securities and Exchange Commission on October 22, 2004. Commission file
number 0-22916).
10.40 Revolving Note dated October 19, 2004, by and between PHC, Inc, PHC of
Utah, Inc., PHC of Virginia, Inc., PHC of Michigan, Inc., PHC of Nevada,
Inc., North Point Pioneer, Inc, Wellplace, Inc., Detroit Behavioral
Institute, Inc. and CapitalSource Finance, LLC in the amount of $3,500,000.
(Filed as exhibit 10.40 to the Company's report on Form 8-K filed with the
Securities and Exchange Commission on October 22, 2004. Commission file
number 0-22916).
10.41 One of two notes issued to replace the $3,500,000 note signed in favor of
CapitalSource on October 19, 2004 by and between PHC, Inc., PHC of
Michigan, Inc., PHC of Nevada, Inc., PHC of Utah, Inc., PHC of Virginia,
Inc., Wellplace, Inc. and Detroit Behavioral Institute, Inc. (Filed as
exhibit 10.47 to the Company's quarterly report on Form 10-QSB, filed with
the Securities and Exchange Commission on May 13, 2005. Commission file
number 0-22916).
10.42 Second of two notes issued in the amount of $1,500,000.00 to replace the
$3,500,000 note signed in favor of CapitalSource on October 19, 2004 by and
between PHC, Inc., PHC of Michigan, Inc., PHC of Nevada, Inc., PHC of Utah,
Inc., PHC of Virginia, Inc., Wellplace, Inc. and Detroit Behavioral
Institute, Inc. (Filed as exhibit 10.48 to the Company's quarterly report
on Form 10-QSB, filed with the Securities and Exchange Commission on May
13, 2005. Commission file number 0-22916).
* 21.1 List of Subsidiaries.
* 23.1 Consent of BDO Seidman, LLP, an independent registered public
accounting firm.
23.2 Consent of Wood & Dwyer, P.L.C. accountants for the acquired company.
(Filed as exhibit 23.1 to the Company's report on Form 8-K/A filed with the
Securities and Exchange commission on June 29, 2004. Commission file number
0-22916).
* 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.
* Filed herewith
(b) REPORTS ON FORM 8-K.
The Company filed one report on form 8-K during the quarter ended June 30,
2005. This report provided the same earnings information to the public as shown
in the Company's quarterly press release as required by Item 12 of the
instructions for form 8-K.
-- 79 --
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHC, INC.
Date: September 28, 2005 By: /S/ BRUCE A. SHEAR
_________________________
Bruce A. Shear, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/s/ BRUCE A. SHEAR President, Chief September 28, 2005
_________________________ Executive Officer and
Bruce A. Shear Director (principal
executive officer)
/s/ PAULA C. WURTS Controller and Treasurer September 28, 2005
_________________________ (principal financial
Paula C. Wurts and accounting officer)
/s/ GERALD M. PERLOW Director September 28, 2005
_________________________
Gerald M. Perlow
/s/ DONALD E. ROBAR Director September 28, 2005
_________________________
Donald E. Robar
/s/ HOWARD PHILLIPS Director September 28, 2005
_________________________
Howard Phillips
/s/ WILLIAM F. GRIECO Director September 28, 2005
_________________________
William F. Grieco
/S/ DAVID E. DANGERFIELD Director September 28, 2005
_________________________
David E. Dangerfield
-- 80 --