UNITED STATES
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, 2006
[ ] 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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ___ No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes X No ___
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. ________
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one)
Large Accelerated Filer ___ Accelerated Filer ___ Non-Accelerated Filer X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ No X
As of December 31, 2005 the aggregate market value of the shares of common stock
of the registrant held by non-affiliates of the registrant was approximately
$34.5 million
As of August 5, 2006, 17,754,365 shares of the registrant's Class A Common Stock
and 775,760 shares of the issuer's Class B Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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Table of Contents
Index Page
PART I
Item 1. Description of Business 2
Item 1A. Risk Factors 16
Item 2. Description of Property 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 7A. Quantitative and Qualitative Discolosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 37
Index to financial statements F-1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 70
Item 9A. Controls and Procedures 70
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons 71
Item 11. Executive Compensation 74
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 79
Item 13. Certain Relationships and Related Party Transactions 81
Item 14. Principal Accountant Fees and Services 81
PART IV
Item 15. Exhibits and Financial Statement Schedules 83
Signatures 87
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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, a
call center contract with Wayne County, Michigan and a smoking cessation
contract with a major government contractor. 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. These four sites include two sites in Arizona acquired in
fiscal 2004 through the membership purchase 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 prognosis 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.
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PSYCHIATRIC SERVICES INDUSTRY
Substance Abuse Facilities
Industry Background
The demand for substance abuse treatment services has increased rapidly
over 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 prognosis
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 and dual diagnosis patients
(those suffering from both substance abuse and psychiatric disorders). The
programs are sensitive to the special behavioral health problems of children,
women and Native Americans. 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
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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
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 and expanded
medical staff to include psychiatric care in its treatment plans. Its focus
remains substance abuse and 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 at Highland Ridge 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. Current and future 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
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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.
Similar to Highland Ridge, the programs at Mount Regis Center 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 and residential treatment to adjudicated juveniles 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.
Harbor Oaks Hospital also operates a 20-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
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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 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. 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
50-bed residential facility, located in downtown Detroit, serving adolescents
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 facility includes two Units, a thirty bed male unit that opened in November
2004 and a twenty bed female unit that opened in October 2005. The patients in
the program range 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.
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 outpatient 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, 2006.
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. During fiscal
2006, Wellplace signed an agreement with a major government contractor to
operate a smoking cessation quit line with internet access. Wellplace has been
providing services under this agreement since November 2005 and was recently
notified that the contract would be renewed for an additional year. Wellplace's
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 illnesses. In April 2004, the Company acquired 100%
of the membership interest in Pivotal Research Centers, LLC., thereby expanding
the Company's research operations. 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 46 enrolling studies and an
additional 93 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 Myers 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, 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 studies are
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.
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Operating Statistics
The following table reflects selected financial and statistical information
for all services.
Year Ended June 30,
(unaudited)
2006 2005 2004 2003 2002
________________________________________________________________
Inpatient
Net patient service
revenues $18,775,198 $18,469,578 $14,845,163 $14,430,069 $14,130,471
Net revenues per patient
day (1) $ 382 $ 436 $ 414 $ 417 $ 413
Average occupancy rate (2) 77.7% 78.8% 76.7% 77.7% 76.9%
Total number of licensed
beds at end of period 180 160 130 122 122
Source of Revenues:
Private (3) 54.30% 61.79% 61.62% 62.20% 76.82%
Government (4) 45.70% 38.21% 38.38% 37.80% 23.18%
Partial Hospitalization
and
Outpatient
Net Revenues:
Individual $ 6,734,627 $ 5,557,298 $ 5,647,752 $ 4,865,392 $ 4,678,493
Contract $ 2,351,876 $ 2,060,212 $ 1,925,440 $ 1,947,716 $ 2,300,140
Sources of revenues:
Private 98.0% 97.2% 97.7% 98.0% 98.1%
Government 2.0% 2.8% 2.3% 2.0% 1.9%
Other Services:
Wellplace(5) $ 4,351,576 $ 3,466,832 $ 2,984,477 $ 1,649,374 $ 842,345
Pharmaceutical
Studies (6) $ 5,799,815 $ 4,509,338 $ 1,246,013 $ 940,772 $ 0
(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.
(4) Government pay percentage is the percentage of total patient revenue
derived from the Medicare and Medicaid and other county programs.
(5) Wellplace, 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.
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(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.
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 six individuals dedicated to marketing the Company's
facilities, two 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 Corporation, CSX Corporation, Signa Behavioral Health,
MGM Mirage, Union Pacific Railroad, Union Pacific Railroad Hospital Association
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 Employee Assistance Program contracts held and serviced
by those subsidiaries providing direct treatment services.
Competition
The Company's substance abuse programs compete nationally with other health
care providers, including general and chronic care hospitals, both non-profit
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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.
The Company bills for its behavioral healthcare services at its inpatient
and outpatient facilities using different software platforms for each type of
service; however, in all cases the charges are contractually adjusted at the
time of billing using adjustment factors based on agreements or contracts with
the insurance carriers and the specific plans held by the individuals as
outlined above. This method may still require additional adjustment based on
ancillary services provided and deductibles and copays due from the individuals
which are estimated at the time of admission based on information received from
the individual. Adjustments to these estimates are recognized as adjustments to
revenue during the period identified, usually when payment is received.
The Company's policy is to collect estimated co-payments and deductibles at
the time of admission. Payments are made by way of cash, check or credit card.
If the patient does not have sufficient resources to pay the estimated
co-payment in advance, the Company's policy is to allow payment to be made in
three installments, one third due upon admission, one third due upon discharge
and the balance due 30 days after discharge. At times the patient is not
physically or mentally stable enough to comprehend or agree to any financial
arrangement. In this case the Company will make arrangements with the patient
once his or her condition is stabilized. At times, this situation will require
the Company to extend payment arrangements beyond the three payment method
previously outlined. Whenever extended payment arrangements are made, the
patient, or the individual who is financially responsible for the patient, is
required to sign a promissory note to the Company, which includes interest on
the balance due.
The Company's days sales outstanding ("DSO") are significantly different
for each type of service and each facility based on the payors for each service.
-- 11 --
Overall, the DSO for the combined operations of the Company was 65, 90 and 84
days for the fiscal years ended June 30, 2006, 2005 and 2004 respectively. The
decrease is related to the new study with rapid turn around of revenue in the
Pharmaceutical Services division and increased revenue from contract services
which payment is typically received prior to month end or within thirty days.
Contract Services DSO's fluctuate dramatically by the delay in payment of a few
days for any of our large contracts. There was such a delay in payments for the
Michigan call center at the end of fiscal 2005, artificially inflating the DSO's
for the period.
DSO's for each year for each business segment are as follows:
Fiscal Treatment Pharmaceutical Contract
Year End Services Services Services
06/30/2006 91 93 51
06/30/2005 89 114 62
06/30/2004 85 161 34
Amounts pending approval from Medicare or Medicaid, as with all other third
party payors, are maintained on the receivables aging based on the discharge
date of the patient, while appeals are made for payment. If accounts remain
unpaid, when all levels of appeal have been exhausted, accounts are written off.
Where possible, the Company will turn to the patient or the responsible party to
seek reimbursement and send the account to collections before writing the
account off.
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.
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 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. 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.
-- 12 --
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.
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.
-- 13 --
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, 2006, 12.0% of
revenues for Harbor Oaks were derived from Medicare programs. Revenue from
Harbor Oaks accounted for 33.0% of the Company's 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. For the fiscal year ended June 30, 2006, Medicare
reimbursements rates were based 75% on provisional rates that are adjusted
retroactively based on annual cost reports filed by the Company with Medicare
and 25% on the new prospective payment rates. The Company will continue to file
cost reports to Medicare to determine the new TEFRA portion of the rate for the
following year. These cost reports 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 23%, 21% and 22% of the Company's total revenue is derived
from Medicare and Medicaid payors for the years ended June 30, 2006, 2005 and
2004, 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.
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, 2006, 15.07% of total net patient revenues of the
Company were derived from Medicaid programs.
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.
-- 14 --
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, 2006, the Company had 510 employees of which six were
dedicated to marketing, 189 (47 part time) to finance and administration and 315
(74 part time and 36 contingent) to patient care.
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 collective bargaining agreement
expires in December 2006. The Company will begin negotiations with the Union in
the next quarter but does not anticipate significant legal costs related to the
negotiations.
The limited number of healthcare professionals in the areas in which the
Company operates 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.
Insurance
Each of the Company's subsidiaries 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
-- 15 --
$3,000,000 per claim and $3,000,000 in the aggregate. In addition to this
coverage, Wellplace and Highland Ridge maintain a $1,000,000 umbrella policy,
Harbor Oaks and Detroit Behavioral institute each maintain a $5,000,000 umbrella
policy, Harmony and Mount Regis Center maintains a $2,000,000 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 1A. RISK FACTORS
OPERATING RISKS
AGING OF ACCOUNTS RECEIVABLES COULD RESULT IN OUR INABILITY TO COLLECT
RECEIVABLES REQUIRING US TO INCREASE OUR DOUBTFUL ACCOUNTS RESERVE WHICH WOULD
DECREASE OUR NET INCOME AND WORKING CAPITAL
As our accounts receivable age and become uncollectable our cash flow is
negatively impacted. Our accounts receivable from patient accounts (net of
allowance for bad debts) were $6,995,475 at June 30, 2006 compared with
$6,330,381 at June 30, 2005. As we expand, we will be required to seek payment
from a larger number of payors and the amount of accounts receivable will likely
increase. Because the behavioral health industry is typically a difficult
collection environment, 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, Allowance for
Doubtful Accounts at June 30, 2006, 2005 and 2004, respectively and Bad Debt
Expense for the fiscal years ended June 30, 2006, 2005 and 2004:
Accounts Allowance for Bad Debt
Receivable doubtful accounts Expense
June 30, 2006 $ 10,096,061 $3,100,586 $ 1,912,516
June 30, 2005 8,287,365 1,956,984 1,272,037
June 30, 2004 7,287,090 2,025,888 1,355,770
NEGATIVE CASH FLOW COULD ARISE AS A RESULT OF SLOW GOVERNMENT PAYMENTS WHICH
COULD REQUIRE THE COMPANY TO BORROW ADDITIONAL FUNDS AT UNFAVORABLE RATES AND
AFFECT OUR NET INCOME, WORKING CAPITAL AND LIQUIDITY
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 $1,786,000 at June 30, 2006 and $1,584,000 at June 30, 2005, 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 WHICH
COULD REQUIRE THE COMPANY TO BORROW ADDITIONAL FUNDS AT UNFAVORABLE RATES AND
AFFECT OUR NET INCOME
-- 16 --
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 a claim often takes 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.
POTENTIAL STAFFING SHORTAGES COULD REQUIRE US TO INCREASE OUR EMPLOYEE
COMPENSATION AND REDUCE OUR NET INCOME
The limited number of healthcare professionals in the areas in which we
operate may create staffing shortages. Our success depends, in large part, on
our ability to attract and retain highly qualified personnel, particularly
skilled health care personnel, which are in short supply. We face competition
for such personnel from governmental agencies, health care providers and other
companies and are constantly increasing our employee benefit programs, and
related costs, to maintain required levels of skilled professionals. As a result
of staffing shortages, we use professional placement services to supply us 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. We have also entered into
contracts with agencies to provide short-term interim staffing in addition to
placement services. These additional costs impact our profitability.
In December 2004, the Company's largest facility voted for UAW
representation. Approximately 75% of the staff of the facility are members of
the Union and could vote to strike when the contract comes up for renewal in
December 2006. This action would negatively impact profitability by requiring
the Company to transfer patients to competing facilities or pay high short term
staffing rates. This could also negatively impact the Company's reputation in
the community.
RELIANCE ON KEY CLIENTS THE LOSS OF ANY OF WHICH WOULD REDUCE OUR NET REVENUES
AND OUR NET INCOME
The Company relies on contracts with more than ten clients to maintain
patient census at its inpatient facilities and provide patients for our out-
patient operations and our employee assistance programs. 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.
GOVERNMENT REGULATION COULD RESTRICT OUR ABILITY TO EXPAND, REDUCE THE ALLOWABLE
REIMBURSEMENT TO THE COMPANY AND REDUCE OUR NET INCOME
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
-- 17 --
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, which may be reflected through
more limited access, lower rates, and higher utilization assessments.
SOLE SOURCE CONTRACTING BY MANAGED CARE ORGANIZATIONS MAY REDUCE OUR AVAILABLE
PATIENTS BY ELIMINATING OUR ABILITY TO SERVICE THEM
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.
ACQUISITION AND EXPANSION COULD RESULT IN NEGATIVE CASH FLOW WHICH COULD REQUIRE
THE COMPANY TO BORROW ADDITIONAL FUNDS AT UNFAVORABLE RATES AND AFFECT OUR NET
INCOME
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 affect 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.
RECENT LOSSES RESULTING FROM A LITIGATION SETTLEMENT AND RELATED LEGAL FEES MAY
LIMIT THE COMPANY'S ABILITY TO BORROW AT FAVORABLE RATES WHICH WOULD INCREASE
OUR EXPENSES AND REDUCE NET INCOME
Due to the Company's losses from operations as a result of a medical
malpractice litigation settlement and related legal fees of approximately
$1,030,000 in fiscal 2004, if the Company needs additional financing, it may
require borrowing at unfavorable rates. We have limited availability on our
accounts receivable funding facilities, which bear interest at the prime rate
plus 2.25%, to meet our current cash needs. Should we require additional funds
to meet our cash flow requirements or to fund growth or new investments, we may
be required to meet these needs with more costly financing.
The litigation involved a medical malpractice claim that was filed by a
former patient against the Company's subsidiary, North Point-Pioneer, Inc. and a
former clinician, alleging sexual abuse by a former clinician that first
manifested itself prior to the Company's acquisition of the subsidiary in 1996.
At trial in December 2002, a jury returned a verdict in favor of the plaintiff
in the amount of approximately $9 million plus interest and taxable costs and
attorney's fee for conduct. The clinician declared bankruptcy and was not a
party to the proceeding. After numerous successful motions by the Company to
reduce the amount of the verdict, a judgment in the amount of $3,079,741 was
entered on October 24, 2003.
The Company's subsidiary, North Point-Pioneer, Inc., was covered by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company, which is insolvent and is being administered by the State of New York.
Representatives of Frontier's receiver acknowledged to the Company, Frontier's
obligations under the policy and the Company has recovered a small portion of
the legal fees expended to date on this matter.
-- 18 --
In April 2004, the Company resolved this medical malpractice lawsuit. The
plaintiff received $1,100,000 in full and final settlement of the matter of
which $462,500 was paid by the Company and the balance was paid by the insurance
company. In addition to this settlement amount the Company paid approximately
$567,000 during the fiscal year ended June 30, 2004 in related legal fees. 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 $1,030,000 expended.
As a result of this medical malpractice litigation and related legal fees
the Company's operations for the fiscal year ended June 30, 2004 resulted in a
net loss and negative cash flow from operations. See Consolidated Financial
Statements.
MANAGEMENT RISKS
CONTROL OF THE COMPANY PROVIDES THE PRINCIPAL SHAREHOLDER WITH THE POWER TO
APPROVE ALL TRANSACTIONS AND CONTROL THE BOARD OF DIRECTORS WITHOUT INPUT OF
OTHER SHAREHOLDERS
Bruce A. Shear is in control of the Company since he is entitled to elect
and replace a majority of the board of directors. Bruce Shear and his affiliates
own and control 92.8% of the class B common stock, which elects four of the six
members of the Board of Directors. Bruce Shear can establish, maintain and
control business policy and decisions by virtue of his control of the election
of the majority of the members of the board of directors.
INABILITY TO RETAIN KEY PERSONNEL THE LOSS OF ANY OF WHOM COULD AFFECT OUR
CLIENT RELATIONS AND THUS REDUCE OUR REVENUE AND NET INCOME
Retention of key personnel with knowledge of key contracts and clients is
essential to the success of the Company. PHC is highly dependent on the
principal members of its management and professional staff, who are: Bruce A.
Shear, PHC's President and Chief Executive Officer, Robert H. Boswell, PHC's
Senior Vice President and other members of PHC's management and their continued
relationship with key clients.
In April 2004, the Company acquired Pivotal Research Centers, LLC, which is
engaged in clinical drug testing. Dr. Kirby, the founder and medical director of
Pivotal, has key relationships with the pharmaceutical companies that provide
contracts for the research business. Dr. Kirby signed an employment and
non-compete agreement at the time of the acquisition, which is scheduled to
expire on December 31, 2006.
We do not anticipate any key member of management will leave the Company
but do have key man life insurance policies on Mr. Shear and Dr. Kirby.
MARKET RISKS
BULLETIN BOARD TRADED STOCKS ARE MORE VOLATILE AND CAN COST MORE TO TRADE
THEREFORE AFFECTING THE COST TO SHAREHOLDERS
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. The cost
of trading on the bulletin board can be more than the cost of trading on the
SmallCap market and 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 $.93 and a
high of $2.95 from July 2004 through June 2006. 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.
PREFERRED STOCK ISSUANCE COULD RESULT IN DIVIDEND, VOTING AND LIQUIDATION
PREFERENCES SUPERIOR TO THE COMMON STOCK
-- 19 --
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
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.
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 $84,000. 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 and located in Midvale, Utah. 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 Consumer Price Index. 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
building located on an approximately two-acre site in Salem Virginia. The
building consists of over 14,000 square feet and is subject to a mortgage in the
approximate amount of $302,000 as of June 30, 2006. 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.
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
$662,840 mortgage on this property as of June 30, 2006. The Company believes
that these premises are adequate for its current and anticipated needs.
Item 3. LEGAL PROCEEDINGS.
The company is a party in two separate actions between a former employee
who was terminated and filed a claim for wrongful termination and a breach of
contract on an indemnification claim against the same terminated employee where
the company is the plaintiff. Both matters are being resolved through binding
arbitration and awards in either case will offset. The outcome of the two
actions together cannot be determined at this time, but management does not
expect the outcome to have a material adverse affect on the financial position
or results of operations of the Company.
The Company is subject to various claims and legal actions arising in the
normal course of business, none of which the Company believes will materially
affect its financial position or results of operations.
-- 20 --
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, 2006.
-- 21 --
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock is quoted on the Over-the-Counter Bulletin Board
under the symbol "PIHC-BB." The following table sets forth the high and low
sales price of the Company's Class A Common Stock, as reported by the National
Quotation Bureau.
HIGH LOW
____ ___
2005
First Quarter (July 1, 2004 - September 30, 2004) $1.21 $ .93
Second Quarter (October 1, 2004 - December 31, 2004) $1.73 $1.11
Third Quarter (January 1, 2005 - March 31, 2005) $2.10 $1.33
Fourth Quarter (April 1, 2005 - June 30, 2005) $2.62 $1.75
2006
First Quarter (July 1, 2005 - September 30, 2005) $2.95 $2.26
Second Quarter (October 1, 2005 - December 31, 2005) $2.90 $1.90
Third Quarter (January 1, 2006 - March 31, 2006) $2.40 $1.75
Fourth Quarter (April 1, 2006 - June 30, 2006) $2.39 $1.95
On August 10, 2006, there were 693 holders of record of the Company's Class
A Common Stock and 301 holders of record of the Company's Class B Common Stock.
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 2006.
DIVIDEND POLICY
Although the Company has no current restrictions on the issuance of
dividends, 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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information required with respect to "Securities Authorized for Issuance
Under Equity Compensation Plans" is included in Part III, Item 12 in this Annual
Report on Form 10-K.
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 $.93 and a high of $2.95 from July 2004
through August 2006. 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
the preferences for and issue up to 1,000,000 shares of preferred stock without
-- 22 --
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, 2006, the Company did not make any
sales of unregistered securities.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of our
Company. The selected consolidated financial data as of June 30, 2006 and 2005
and for each of the three years in the period ended June 30, 2006 should be read
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and have been derived from our consolidated financial
statements which are included elsewhere in this annual report on Form 10-K and
were audited by Eisner, LLP, with respect to the period ended June 30, 2006 and
BDO Seidman, LLP, with respect to June 30, 2005 and each of the years ended June
30, 2005 and 2004. Each of these firms is an independent registered public
accounting firm. The selected consolidated financial data for the years ended
June 30, 2004, 2003 and 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,
2006 2005 2004 2003 2002
________ ________ ________ ________ ________
(in thousands, except share and per share data)
Statements of Operations Data:
Revenues $38,013 $34,063 $26,649 $23,833 $22,698
Cost and Expenses:
Patient care expenses 16,512 14,582 12,422 11,676 10,692
Contract expenses 2,676 2,198 2,392 1,399 704
Administrative expenses 13,727 12,424 10,333 8,204 8,821
Provision for doubtful
accounts 1,913 1,272 1,356 1,108 717
Interest expense 607 655 532 542 791
Other (income) expenses
including interest
income, net (158) (150) (140) (129) (126)
________ ________ ________ ________ ________
Total expenses 35,278 30,981 26,895 22,801 21,599
________ ________ ________ ________ ________
Income (loss) before income
taxes 2,735 3,082 (246) 1,032 1,099
Provision for (benefit
from) income taxes 1,310 (74) 11 54 15
________ ________ ________ ________ ________
Net income (loss) 4,045 3,156 (257) 978 1,084
Dividends -- -- -- -- (99)
________ ________ ________ ________ ________
Net income (loss) applicable
to common shareholders $4,045 $3,156 $ (257) $ 978 $ 985
======= ======== ======== ======== ========
-- 23 --
Statements of Operations Data: (continued)
(in thousands, except share and per share data)
2006 2005 2004 2003 2002
=========== =========== ============ =========== ===========
Basic income (loss) per
common share $ 0.22 $ 0.18 $ (0.02) $ 0.07 $ 0.10
=========== =========== ============ =========== ===========
Basic weighted average
number of
shares outstanding 18,213,901 17,574,678 14,731,395 13,944,047 10,232,286
=========== =========== ============ =========== ===========
Diluted income (loss) per
common share $ 0.21 $ 0.17 $ (0.02) $ 0.07 $ 0.09
=========== =========== ============ =========== ===========
Diluted weighted average
number of shares
outstanding 19,105,193 18,364,076 14,731,395 14,564,078 11,012,861
=========== =========== ============ =========== ===========
Balance Sheet Data:
Cash and cash equivalents $ 1,820 $ 918 $ 595 $ 495 $ 205
Working capital (deficit) 7,477 4,106 241 736 (154)
Long-term debt and obligations
under capital leases 2,050 2,712 2,285 3,002 3,427
Total stockholders' equity 13,455 9,102 5,367 1,935 616
Total assets 21,985 17,896 13,312 9,412 9,474
-- 24 --
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, 2006, 2005 and
2004. 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 illnesses 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
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
-- 25 --
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". 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.
All revenues reported by the Company are shown net of estimated contractual
adjustment and charity care provided. When payment is made, if the contractual
adjustment is found to have been understated or overstated, appropriate
adjustments are made in the period the payment is received in accordance with
the AICPA "Audit and Accounting Guide for Health Care Organizations." Net
contractual adjustments recorded in fiscal 2006 for revenue booked in prior
years resulted in an increase in net revenue of approximately $343,700. Net
contractual adjustments recorded in fiscal 2005 for revenue booked in prior
years resulted in an increase in net revenue of approximately $372,000.
During the fiscal year ended June 30, 2006, a Medicare cost report
settlement of $158,100 was received and in the fiscal year ended June 30, 2004,
a Medicare cost report settlement of approximately $172,000 was received. No
cost report settlements were received during the fiscal year ended June 30,
2005. For the fiscal years ended June 30, 2006, 2005 and 2004 no third party
cost report settlements were expected or recorded.
Our accounts receivable systems are capable of providing an aging based on
responsible party or payor. This information is critical in estimating our
required allowance for bad debts. Below is revenue by payor and the accounts
receivable aging information as of June 30, 2006, June 30, 2005 and June 30,
2004 for our treatment services segment.
Net Revenue by Payor (in thousands)
For the Twelve Months Ended
06/30/2006 06/30/2005 06/30/2004
Amount Percent Amount Percent Amount Percent
____________________________________________________________
Private Pay $ 1,207 5% $ 1,212 5% $ 1,132 5%
Commercial 17,572 63% 17,608 67% 15,414 69%
Medicare* 946 3% 999 4% 1,381 6%
Medicaid 8,137 29% 6,268 24% 4,491 20%
_______ ___ _______ ___ _______ ___
Net Revenue $27,862 $26,087 $22,418
======== ======== ========
-- 26 --
* includes Medicare cost report settlement revenue as noted above
Accounts Receivable Aging (Net of allowance for bad debts- in thousands)
Fiscal Year Ended June 30, 2006
_______________________________
Over Over Over Over Over Over Over
Payor Current 30 60 90 120 150 270 360 Total
_____ ________ _____ ____ ____ ____ ______ ____ ____ ______
Private Pay $ 113 $ 119 $106 $113 $ 84 $ 593 $ 33 $ 23 $1,184
Commercial 1,499 595 364 284 229 836 126 92 4,025
Medicare 133 38 6 17 18 73 -- -- 285
Medicaid 971 152 69 32 34 243 -- -- 1,501
________ _____ ____ ____ ____ ______ ____ ____ ______
Total $2,716 $ 904 $545 $446 $365 $1,745 $159 $115 $6,995
Fiscal Year Ended June 30, 2005
_______________________________
Over Over Over Over Over Over Over
Payor Current 30 60 90 120 150 270 360 Total
_____ ________ _____ ____ ____ ____ ______ ____ ____ ______
Private Pay $ 247 $ 139 $ 98 $ 64 $ 75 $ 154 $127 $ 32 $ 936
Commercial 1,708 645 389 239 216 379 208 26 3,810
Medicare 121 16 7 -- -- 1 -- -- 145
Medicaid 556 277 94 74 96 342 -- -- 1,439
________ _____ ____ ____ ____ _____ ____ ____ ______
Total $2,632 $1,077 $588 $377 $387 $ 876 $335 $ 58 $6,330
Fiscal Year Ended June 30, 2004
_______________________________
Over Over Over Over Over Over Over
Payor Current 30 60 90 120 150 270 360 Total
_____ ________ _____ ____ ____ ____ ______ ____ ____ ______
Private Pay $ 135 $ 88 $ 77 $ 69 $ 55 $ 36 $137 $105 $ 702
Commercial 1,333 604 288 164 187 79 308 376 3,339
Medicare 59 11 6 -- 3 -- 4 -- 83
Medicaid 462 327 109 34 45 24 114 20 1,135
________ _____ ____ ____ ____ _____ ____ ____ ______
Total $1,989 $1,030 $480 $266 $291 $ 140 $562 $503 $5,261
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and accepted
based on study criteria and billable units of service are provided. Where a
contract requires completion of the study by the patient, no revenue is
recognized until the patient completes the study program. All revenues and
receivables from our research division are derived from pharmaceutical companies
with no related bad debt allowance.
Contract support service revenue is a result of fixed fee contracts to
provide telephone support. Revenue for these services is recognized ratably over
the service period. All revenues and receivables from our contract services
division are based on a prorated monthly allocation of the total contract amount
and usually paid within 30 days of the end of the month.
Allowance for doubtful accounts:
The provision for bad debts is calculated based on a percentage of each
aged accounts receivable category beginning at 0-5% on current accounts and
increasing incrementally for each additional 30 days the account remains
outstanding until the account is over 360 days outstanding, at which time the
provision is 80-100% of the outstanding balance. These percentages vary by
-- 27 --
facility based on each facility's experience in and expectations for collecting
older receivables. The Company compares this required reserve amount to the
current "Allowance for doubtful accounts" to determine the required bad debt
expense for the period. This method of determining the required "Allowance for
doubtful accounts" has historically resulted in an allowance for doubtful
accounts of 20% or greater of the total outstanding receivables balance.
Income Taxes:
The Company follows the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
prescribes an asset and liability approach, which requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of the
assets and liabilities. The Company's policy is to record a valuation allowance
against deferred tax assets unless it is more likely than not that such assets
will be realized in future periods. During the fourth quarter of fiscal year
ended June 30, 2006, the Company recognized 100% of its deferred tax benefit
based on past profitability and future projections. The total tax benefit
recorded was $1,638,713.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are initially created as a result of
business combinations or acquisitions. The values the Company records for
goodwill and other intangible assets are reviewed by the Company, at least
annually, and represent fair values. Such valuations require the Company to
provide significant estimates and assumptions, which are derived from
information obtained from the management of the acquired businesses and the
Company's business plans for the acquired businesses. Critical estimates and
assumptions used in the initial valuation of goodwill and other intangible
assets include, but are not limited to: (i) future expected cash flows from
services to be provided, customer contracts and relationships, and (ii) the
acquired market position. These estimates and assumptions may be incomplete or
inaccurate because unanticipated events and circumstances may occur. If
estimates and assumptions used to initially value goodwill and intangible assets
prove to be inaccurate, ongoing reviews of the carrying values of such goodwill
and intangible assets may indicate impairment which will require the Company to
record an impairment charge in the period in which the Company identifies the
impairment.
Results of Operations
The following table illustrates our consolidated results of operations for
the years ended June 30, 2006, 2005 and 2004 (in thousands):
2006 2005 2004
____ ____ ____
(in thousands)
Statements of Operations Data:
Amount % Amount % Amount %
Revenue $38,013 100.0% $34,063 100.0% $26,649 100.0%
_______ ______ _______ ______ _______ ______
Cost and Expenses:
Patient care expenses 16,512 43.5% 14,582 42.8% 12,422 46.6%
Contract expenses 2,676 7.0% 2,198 6.5% 2,392 9.0%
Administrative expenses 13,727 36.1% 12,424 36.5% 10,333 38.8%
Provision for bad debts 1,913 5.0% 1,272 3.7% 1,356 5.1%
Interest expense 607 1.6% 655 1.9% 532 2.0%
Other (income) expenses,
net (158) -0.4% (150) -0.4% (140) -0.5%
________ ______ ________ _____ ________ ______
-- 29 --
Total expenses 35,278 93.4% 30,981 91.0% 26,895 100.9%
________ ______ ________ _____ ________ ______
Income (loss) before income
taxes 2,735 7.2% 3,082 9.0% (246) -0.9%
Benefit from (provision
for) income taxes 1,310 7.2% 74 0.2% (11) -0.0%
________ ______ ________ ______ ________ ______
Net income (loss) $ 4,045 10.6% $ 3,156 9.3% $ (257) -1.0%
======== ====== ======== ====== ======== ======
Years ended June 30, 2006 as compared to year ended June 30, 2005
The Company's income from its operations decreased 11.2% to $3,184,426 for
the fiscal year ended June 30, 2006 from $3,587,412 the fiscal year ended June
30, 2005. Net income, increased 28.2% to $4,045,482 for the fiscal year ended
June 30, 2006 from $3,155,900 for the fiscal year ended June 30, 2005. This
increase is primarily the result of $1,638,713 in income tax benefit recorded in
fiscal 2006 as compared to $209,000 tax benefit recorded in fiscal 2005,
start-up costs experienced in fiscal 2006 for a major contract at our Las Vegas
location, start-up costs incurred as a result of the addition of 20 beds at the
Detroit Behavioral Institute facility and increased bad debt and professional
fees related to the system crash at our Harbor Oaks facility.
Total revenues increased 11.6% to $38,013,092 for the year ended June 30,
2006 from $34,063,258 for the year ended June 30, 2005.
Total net patient care revenue from all facilities increased 6.8% to
$27,861,701 for the year ended June 30, 2006 as compared to $26,087,088 for the
year ended June 30, 2005. Patient days increased over 6,861 days for the fiscal
year ending June 30, 2006 over the fiscal year ended June 30, 2005. In December
2004, the Company opened 30 residential beds increasing our available beds from
130 to 160 and in October 2005 the Company opened 20 additional residential
beds, increasing our available beds from 160 to 180. These additional available
beds accounted for the increase in patient days for the fiscal year ended June
30, 2006. 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 1.7% to
$18,775,198 for the year ended June 30, 2006 from $18,469,578 the fiscal year
ended June 30, 2005. This increase is due to a change in payor mix resulting in
part from the increased residential treatment beds. Net partial hospitalization
and outpatient care revenue increased 19.3% to $9,086,503 for the year ended
June 30, 2006 from $7,617,510 for the year ended June 30, 2005. This increase is
partially due to increased outpatient contracts and high usage of these
step-down programs by managed care as a treatment alternative to inpatient care.
Pharmaceutical study revenue increased 28.6% to $5,799,815 for the year ended
June 30, 2006 from $4,509,338 for the year ended June 30, 2005. This increase is
due in part to a large study started in the third quarter of this fiscal year.
Revenues also increased in our contract support services division, Wellplace.
Wellplace revenues increased 25.5% to $4,351,576 for the year ended June 30,
2006 from $3,466,832 for the year ended June 30, 2005. This increase in revenue
is primarily due to the start of a new smoking cessation contract with a major
government contractor in November 2005. 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 $1,364,254, or
10.6%, to $14,269,540 for the year ended June 30, 2006 from $12,905,286 for the
year ended June 30, 2005 due to the increase in available beds and resulting
increase in patient census at our inpatient facilities. Inpatient census
increased by 6,861 patient days, 16%, for the year ended June 30, 2006 compared
to the year ended June 30, 2005. Direct patient care payroll and payroll related
expenses increased 9.7% to $11,764,978 for the year ended June 30, 2006 from
$10,727,317 for the year ended June 30, 2005, food and dietary expense increased
21.4% to $769,367 for the year ended June 30, 2006 from $633,869 for the year
ended June 30, 2005, hospital supplies expense increased 37.9% to $71,539 for
the year ended June 30, 2006 from $51,863 for the year ended June 30, 2005,
laboratory fees increased 36.4% to $219,063 for the year ended June 30, 2006
from $160,603 for the year ended June 30, 2005, agency nursing expense increased
-- 29 --
38.8% to $166,047 for the year ended June 30, 2006 from $119,672 for the year
ended June 30, 2005 and other patient related expenses increased to $94,218 for
the year ended June 30, 2006 from $45,481 for the year ended June 30, 2005. 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 20 bed residential unit in October 2005. 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 33.8% to
$2,242,900 for the year ended June 30, 2006 from $1,676,749 for the year ended
June 30, 2005. This increase is due to increased study activity. Payroll and
related direct care expenses increased 37.0% to $1,763,308 for the year ended
June 30, 2006 from $1,287,038 for the year ended June 30, 2005. Patient supplies
expense increased 68.3% to $38,770 for the year ended June 30, 2006 from $23,040
for the year ended June 30, 2005. Patient stipends and other patient related
expenses increased 23.9% to $453,822 for the year ended June 30, 2006 from
$366,671 for the year ended June 30, 2005. These expenses are expected to
increase in a direct relationship with the increases in related revenue.
Cost of contract support services related to Wellplace increased 21.8% to
$2,676,340 for the year ended June 30, 2006 from $2,197,518 for the year ended
June 30, 2005. This increase is due to the start up costs related to the smoking
cessation contract with a major government contractor which started in November
2005. Expenses are expected to increase as new contracts are added. With the
exception of depreciation and legal fees, all expenses for Wellplace increased
as a result of this contract. Payroll and payroll related expenses increased
27.0% to $1,274,937 for the year ended June 30, 2006 from $1,003,988 for the
year ended June 30, 2005.
Provision for doubtful accounts increased 50.4% to $1,912,516 for the
fiscal year ended June 30, 2006 from $1,272,037 for the fiscal year ended June
30, 2005. This increase is primarily the result of the system crash at Harbor
Oaks which delayed billing and the processing of payments for more than four
months, creating a delay in payments and in appeals processing. The facility
continues to collect on these old accounts, which is evident by the lower
expense for the facility in the last half of the fiscal year; however, the
policy of the Company is to provide an allowance for doubtful accounts based on
the age of receivables resulting in higher bad debt expense and a significant
increase in the 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 for the most part resulted in an overall decrease
in the age of its accounts receivable. The Company's gross receivables from
direct patient care has increased 21.8% to $10,096,061 for the year ended June
30, 2006 from $8,287,365 for the year ended June 30, 2005, the Company believes
its reserve of approximately 31% 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, increased 16.0% to
$11,210,296 for the year ended June 30, 2006 from $9,667,138 for the year ended
June 30, 2005. Legal expense decreased 39.0% to $156,054 for the year ended June
30, 2006 from $255,794 for the year ended June 30, 2005, due to the booking of
some residual legal fees last year for the North Point litigation settled in
fiscal 2004 and legal fees associated with finalizing the collective bargaining
agreement for Harbor Oaks Hospital. Administrative salaries increased 14.9% to
$3,508,980 for the year ended June 30, 2006 from $3,054,294 for the year ended
June 30, 2005. Greater competition for experienced health care administrative
staff resulted in these increased salaries. Insurance expense increased 9.7% to
$644,882 for the year ended June 30, 2006 from $587,751 for the year ended June
30, 2005 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 45.8% to $336,425 for the year
ended June 30, 2006 from $230,791 for the year ended June 30, 2005. Fees and
licenses expense increased 19.1% to $294,165 for the year ended June 30, 2006
from $247,076 for the year ended June 30, 2005. This increase is due to the
Michigan quality assurance assessment fee, which accounted for the majority of
the increase. Rent expense increased 17.1% to $1,117,098 for the year ended June
30, 2006 from $953,667 for the year ended June 30, 2005. This increase is due to
the opening of the additional 20 residential bed unit at Detroit Behavioral
Institute.
-- 30 --
Total administrative expenses for the research division decreased 8.7% to
$2,517,074 for the year ended June 30, 2006 from $2,757,118 for the year ended
June 30, 2005. This decrease is due to a decrease in legal expenses, decrease in
administrative salaries and a decrease in general insurance costs.
Administrative payroll and taxes was the most significant of these changes as it
decreased 10.8% to $1,033,160 for the year ended June 30, 2006 from $1,158,394
for the year ended June 30, 2005 due to the closing of the Las Vegas office and
a decrease in accrued bonuses.
Interest expense decreased 7.3% to $606,893 for the year ended June 30,
2006 from $654,871 for the year ended June 30, 2005. This decrease is due to the
decrease in outstanding debt of the Company. The prime rate, which remained
relatively stable over the last fiscal year, dictates the interest rate on the
majority of the Company's long-term debt, therefore, the reduction of interest
is only a result of the decrease in outstanding debt.
The Company's provision for income taxes of $328,610 and $135,969 for the
years ended June 30, 2006 and June 30, 2005, 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
2006 and 2005 represents state income taxes for certain subsidiaries with no
available net operating loss carry-forwards. In the past, the Company has
provided a significant valuation allowance against its deferred tax asset and
recognized a tax benefit of $209,392 in the fiscal year ended June 30, 2005,
based on the estimated taxable income for the fiscal year ended June 30, 2006.
In the fiscal year ended June 30, 2006, the Company reduced the valuation
allowance due to its evaluation of the future likelihood of realization based on
past profitability and future expectations of profitability, and recognized 100%
of its available tax benefit and eliminated the valuation allowance against the
deferred tax asset for federal purposes.
Years ended June 30, 2005 as compared to year ended 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
-- 31 --
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
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.
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.
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
-- 31 --
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.
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 research division 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
-- 32 --
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 exclusive of deferred income tax benefits 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.
Liquidity and Capital Resources
As of June 30, 2006, the Company had working capital of $7,477,291,
including cash and cash equivalents of $1,820,105, compared to working capital
of $4,106,316, including cash and cash equivalents of $917,630 at June 30, 2005.
Cash provided by operating activities was $3,134,306 for the year ended
June 30, 2006, compared to $983,466 for the year ended June 30, 2005. Cash
provided by operations in fiscal 2006 consists of the net income of $4,045,482,
offset by an increase in total net accounts receivable of $802,945, an increase
in prepaid expenses of $343,667, an increase in other assets of $186,817 and a
non-cash increase in net deferred tax asset of $1,638,713. These uses of cash
from operations were offset by a $611,046 increase in accounts payable, a
$471,930 increase in accrued expenses and other liabilities and further offset
by non-cash items including depreciation and amortization of $777,419, non-cash
interest expense of $65,583 and stock based equity compensation of $134,988.
Cash used in investing activities in fiscal 2006 consisted of $710,638 in
capital expenditures for the acquisition of property and equipment compared to
$483,462 in capital expenditures for property and equipment and $62,258 related
to the acquisition of Pivotal Research Centers, LLC for the year ended June 30,
2005 (See Note K to the consolidated financial statements included herewith for
additional detail regarding the acquisition of Pivotal Research Centers, LLC).
The increase was primarily due to the build-out for the additional beds in
Michigan and telephone and computer equipment upgrades at several of our
operations. The Company expects investment amounts to increase with the purchase
and implementation of the Meditech software and the upgrade of hardware to
accommodate the software Company wide.
Cash used in financing activities in fiscal 2006 consisted of $1,623,379 in
net debt repayments, $15,000 in deferred financing cost due to the extension of
the Company's debt arrangement, $153,799 received from the issuance of common
stock and $36,613 paid in the purchase of treasury 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, 2006 accounts
receivable from patient care, net of allowance for doubtful accounts, increased
approximately 11% to $6,995,475 on June 30, 2006 from $6,330,381 on June 30,
2005. This increase is a result of the delay in billing and collecting of
-- 33 --
receivables at our largest facility, Harbor Oaks Hospital, due to the system
crash previously mentioned and increased net revenue. The Company's goal is to
reduce receivables 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 in April 2004, the Company determined that it
would be in the best interest of the shareholders to finance the cash portion of
the purchase 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, 2006 are as
follows (in thousands):
YEAR ENDING OPERATING MEDITECH
June 30 TERM NOTES CAPITAL LEASES LEASES LEASE* TOTAL**
Principal Interest Principal Interest Payments Payments
2007 $ 909 $133 $ 58 $ 8 $1,525 $134 $2,767
2008 451 55 52 7 1,520 191 2,276
2009 195 24 4 .7 1,496 191 1,911
2010 53 16 4 .2 1,198 118 1,389
2011 215 12 2 .1 486 118 833
2012 51 8 -- -- 144 30 233
Thereafter 57 3 -- -- -- -- 60
______ ____ ____ ___ ______ ____ ______
Total $1,931 $251 $120 $16 $6,369 $782 $9,469
* The Meditech Lease - Although this master lease for the purchase of the
Meditech software was signed in April 2006, no advances were made by the
lender prior to year end. The above table includes the scheduled payments
on the debt to be incurred based on the lease. (See the Company's report on
form 8K dated April 26, 2006, for details regarding the above referenced
lease).
** Total does not include the amount due under the revolving credit note of
$1,603,368. This amount represents an accounts receivable funding described
below and is shown as a current note payable in the accompanying Financial
Statements.
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
-- 34 --
can be positive or negative based on earnings, with no ceiling or floor, the
liability for only one of these notes was recorded as of June 30, 2006. 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 $728,218
which represents the earn out for the Pivotal acquisition through December 31,
2005 net of payments made through June 30, 2006. 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 $169,648 is included in the schedule above. (See Note
K 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,
with a balance of $662,840 at June 30, 2006, and an accounts receivable funding
revolving credit agreement with a maximum loan amount of $3,500,000, including
$900,000 available as an overline for growth.
The term loan note carries interest at prime plus 3.5%, but not less than
9%, with twelve monthly principal payments of $25,000, twelve monthly principal
payments of $37,500, and eleven monthly principal payments of $50,000 beginning
November 1, 2004 with balance due at maturity, on October 1, 2007 and is
included in the above table.
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, 2006 was $1,603,368. 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, 2006 is not included in the above table.
During the current fiscal year, the Company amended the above agreement on
two separate occasions, first to modify the required covenants to more closely
reflect the fluctuations in the Company's normal business flow and second to
extend the period of the agreement for an additional year through October 19,
2008.
The Company has operated ongoing operations profitably for twenty-two
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.
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 $6,995,475 at June 30, 2006 compared with
$6,330,381 at June 30, 2005. As we expand, we will be required to seek payment
from a larger number of payors and the amount of accounts receivable will likely
increase. We have focused on better accounts receivable management through
increased staff, standardization of some procedures for collecting receivables
and a more aggressive collection policy in order to keep the change in
receivables consistent with the change in revenue. We have also established a
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, 2006 and 2005, respectively, and Bad Debt
Expense for the years ended June 30, 2006 and 2005:
-- 35 --
Allowance for
Accounts Receivable doubtful accounts Bad Debt Expense
___________________ _________________ ________________
June 30, 2006 $10,096,061 $3,100,586 $1,912,516
June 30, 2005 8,287,365 1,956,984 1,272,037
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 February 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment
of FASB Statements No. 133 and 140," to permit fair value re-measurement for any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation in accordance with the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities.". The Company
does not expect the adoption of SFAS No. 155 to have a material affect on the
company's Consolidated Financial Statements.
In June 2006 the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109, (FIN
48), which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We do not expect the adoption of FIN 48 to
have a material impact on our financial reporting, and we are currently
evaluating the impact, if any, the adoption of FIN 48 will have on our
disclosure requirements.
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;
o Quarter-to-quarter variations in operating results;
o Changes in market conditions in the behavioral health care industry;
o Changes in market conditions in the research industry;
o Changes in general economic conditions; and
o Fluctuations in securities markets in general.
Financial Risk
o Our interest expense is sensitive to changes in the general level of
interest rates. With respect to our interest-bearing liabilities, all of
our long-term debt outstanding is subject to rates at prime plus 2.25% and
prime plus 3.5%, which makes interest expense increase with changes in the
-- 36 --
prime rate. On this debt, each 25 basis point increase in the prime rate
will affect an annual increase in interest expense of approximately $5,700.
o Failure to meet targeted revenue projections could cause us to be out of
compliance with covenants in our debt agreements requiring a waiver from
our lender. A waiver of the covenants may require our lender to perform
additional audit procedures to assure the stability of their security which
could require additional fees. (For additional information see Part II,
Item "Management's Discussion and Analysis of Financial Condition and
Results of Operations").
-- 37 --
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
Reports of Independent Registered Public Accounting Firm F2-F-3
Consolidated balance sheets F-4
Consolidated statements of operations F-5
Consolidated statements of changes in stockholders' equity F-6
Consolidated statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-32
F-1
-- 38 --
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
PHC, Inc.
We have audited the accompanying consolidated balance sheet of PHC, Inc.
and subsidiaries as of June 30, 2006, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the year then
ended. 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 audit.
We conducted our audit 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
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 audit provides 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, 2006, and the results of their operations
and their consolidated cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Eisner, LLP
New York, New York
October 12, 2006
F-2
-- 39 --
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
PHC, Inc.
We have audited the accompanying consolidated balance sheet of PHC, Inc. and
subsidiaries as of June 30, 2005, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the two
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 the results of their operations and
their cash flows for each of the two 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-3
-- 40 --
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2006 2005
___________ ___________
ASSETS (Note A)
Current assets:
Cash and cash equivalents (Note A) $ 1,820,105 $ 917,630
Accounts receivable, net of allowance for
doubtful accounts of $3,100,586
and $1,956,984 at June 30, 2006 and 2005,
respectively (Note A) 6,955,475 6,265,381
Pharmaceutical research receivables (Note A) 1,470,019 1,414,340
Prepaid expenses 490,655 146,988
Other receivables and advances (Note A) 751,791 638,654
Deferred tax assets (Note F) 3,110,000 1,375,800
___________ ___________
Total current assets 14,598,045 10,758,793
___________ ___________
Accounts receivable, non-current (Note A) 40,000 65,000
Other receivables (Note A) 53,457 84,422
Property and equipment, net (Notes A, B, C, D and K) 1,799,888 1,516,114
Deferred financing costs, net of amortization of
$106,422 and $62,507 at June 30, 2006
and 2005, respectively 117,023 145,938
Customer relationships, net of amortization of
$260,000 and $140,000 at June 30, 2006 and 2005,
respectively (Notes A and K) 2,140,000 2,260,000
Goodwill (Notes A and K) 2,664,643 2,648,209
Other assets (Note A) 571,931 417,172
___________ ___________
Total assets $21,984,987 $17,895,648
============ ============
LIABILITIES
Current liabilities:
Accounts payable $ 1,518,615 $ 907,569
Current maturities of long-term debt
(Notes C and K) 909,057 769,599
Revolving credit note (Note C) 1,603,368 2,385,629
Deferred revenue 385,742 85,061
Current portion of obligations under capital
leases (Note D) 57,881 29,777
Accrued payroll, payroll taxes and benefits 1,619,672 1,411,653
Accrued expenses and other liabilities (Note E) 1,026,419 1,063,189
___________ ___________
Total current liabilities 7,120,754 6,652,477
Long-term debt, less current maturities
(Notes C and K) 1,021,546 1,900,022
Obligations under capital leases (Note D) 61,912 12,210
Deferred tax liabilities (Note F) 325,000 229,000
___________ ___________
Total liabilities 8,529,212 8,793,709
Commitments and contingent liabilities (Notes D, G, H, I and K)
STOCKHOLDERS' EQUITY (Notes A, G, H, I and K)
Preferred stock, 1,000,000 shares authorized,
none issued or outstanding -- --
Class A common stock, $.01 par value; 30,000,000
shares authorized, 17,874,966
and 17,490,818 shares issued at June 30, 2006
and 2005, respectively 178,749 174,908
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 775,760 and 776,991 issued and
outstanding at June 30, 2006 and 2005, respectively,
each convertible into one share of class A common
stock 7,758 7,770
Additional paid-in capital 23,718,197 23,377,059
Treasury stock, 199,098 and 181,738 class A common
shares at cost at June 30, 2006
and 2005, respectively. (191,700) (155,087)
Accumulated deficit (10,257,229) (14,302,711)
___________ ___________
Total stockholders' equity 13,455,775 9,101,939
Total liabilities and stockholders' equity $21,984,987 $17,895,648
=========== ============
See accompanying notes to consolidated financial statements.
F-4
-- 41 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended June 30,
2006 2005 2004
____ ____ ____
Revenues: (Note A)
Patient care, net $27,861,701 $26,087,088 $22,418,355
Pharmaceutical study 5,799,815 4,509,338 1,246,013
Contract support services 4,351,576 3,466,832 2,984,477
Total revenues 38,013,092 34,063,258 26,648,845
___________ ___________ ___________
Operating expenses:
Patient care expenses 14,269,540 12,905,286 11,577,336
Patient care expenses, pharmaceutical 2,242,900 1,676,749 845,291
Cost of contract support services 2,676,340 2,197,518 2,391,660
Provision for doubtful accounts 1,912,516 1,272,037 1,355,770
Administrative expenses 11,210,296 9,667,138 9,695,274
Administrative expenses, pharmaceutical 2,517,074 2,757,118 637,978
___________ ___________ ___________
Total operating expenses 34,828,666 30,475,846 26,503,309
___________ ___________ ___________
Income from operations 3,184,426 3,587,412 145,536
___________ ___________ ___________
Other income (expense):
Interest income 68,397 73,176 44,731
Interest expense (606,893) (654,871) (531,564)
Other income, net 89,449 76,760 95,588
___________ ___________ ___________
Total other expense, net (449,047) (504,935) (391,245)
___________ ___________ ___________
Income (loss) before income taxes 2,735,379 3,082,477 (245,709)
Benefit from (provision for) income
taxes (Notes A and F) 1,310,103 73,423 (11,294)
___________ ___________ ___________
Net income (loss) $ 4,045,482 $ 3,155,900 $ (257,003)
=========== =========== ============
Basic net income (loss) per common share
(Note A) $ 0.22 $ 0.18 $ (0.02)
=========== =========== ============
Basic weighted average number of
shares outstanding (Note A) 18,213,901 17,574,678 14,731,395
=========== =========== ============
Fully diluted net income (loss) per
common share (Note A) $ 0.21 $ 0.17 $ (0.02)
=========== =========== ============
Fully diluted weighted average number of
shares outstanding (Note A) 19,105,193 18,364,076 14,731,395
=========== =========== ============
See accompanying notes to consolidated financial statements.
F-5
-- 42 --
PHC, INC. AND SUBSIDIARIES Consolidated Statements of Changes In Stockholders'
Equity (Notes A, G, H, I and K)
Class A Class B Additional
Common Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
_________ ________ ________ ______ __________
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 2,660,01 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
Stock options issued for
compensation -- -- -- -- 116,425
Purchase of treasury shares
from former employee -- -- -- -- --
Issuance of shares for
warrants exercised 98,473 984 -- -- 51,466
Issuance of shares for
options exercised 269,827 2,698 -- -- 81,379
Common shares issued as
compensation 2,000 20 -- -- 5,640
Disgorgement -- -- -- -- 112
Value of acceleration of
certain stock options -- -- -- -- 9,875
Non-cash value of warrant
issued in connection with
an acquisition -- -- -- -- 56,180
Conversion from Class B to
Class A 1,231 12 (1,231) (12) --
Issuance of employee stock
purchase plan shares 12,617 127 -- -- 20,061
____________________________________________________
Net income year ended June
30,2006 -- -- -- -- --
____________________________________________________
Balance - June 30, 2006 17,874,966 $178,749 775,760 $7,758 $23,718,197
========== ========= ======== ======= ===========
See accompanying notes to consolidated financial statements.
-- 43 --
PHC, INC. AND SUBSIDIARIES (continued)
Consolidated Statements of Changes In Stockholders' Equity (Notes A, G, H, I and
K)
Notes
Class A Receivable
Treasury Stock Common Stock Accumulated
Shares Amount Purchase Deficit Total
______ ______ _________ __________ _____
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 of 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
Stock options issued as
compensation -- -- -- -- 116,425
Purchase of treasury shares
from former employee 17,360 (36,613) -- -- (36,613)
Issuance of shares for
warrants exercised -- -- -- -- 52,450
Issuance of shares for
options exercised -- -- -- -- 84,077
Common shares issued as
compensation -- -- -- -- 5,660
Disgorgement -- -- -- -- 112
Value of acceleration of certain
stock options -- -- -- -- 9,875
Non-cash value of warrant issued
in connection with an
acquisition -- -- -- -- 56,180
Conversion from Class B to
Class A -- -- -- -- --
Issuance of employee stock
purchase plan shares -- -- -- -- 20,188
_________________________________________________________
Net income year ended June 30,
2006 -- -- -- 4,045,482 4,045,482
_________________________________________________________
Balance - June 30, 2006 199,098 $(191,700) $ -- $(10,257,229) $13,455,775
======= ========= ======= ============ ===========
F-6
See accompanying notes to consolidated financial statements.
-- 44 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30,
2006 2005 2004
___________ ___________ __________
Cash flows from operating activities:
Net income (loss) $4,045,482 $3,155,900 $(257,003)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 777,419 511,211 321,835
Non-cash interest expense 65,583 51,080 --
Deferred income taxes (1,638,713) (303,994) (34,199)
Stock based compensation 134,988 105,681 99,498
Change in allowance for doubtful
accounts 1,143,602 (68,904) (322,557)
Fair value of warrants issued in
exchange for services -- -- 25,356
Changes in operating assets and
liabilities:
Accounts and other receivables (1,946,547) (2,183,027) (408,983)
Prepaid expenses and other current
assets (343,667) 21,554 (99,001)
Other assets (186,817) (92,044) (135,904)
Accounts payable 611,046 (754,011) 813,077
Accrued expenses and other
liabilities 471,930 540,020 (126,507)
___________ ___________ __________
Net cash provided by
(used in) operating
activities 3,134,306 983,466 (149,744)
___________ ___________ __________
Cash flows from investing activities:
Acquisition of property and
equipment (710,638) (483,462) (193,185)
Costs related to business
acquisition (Note K) -- (62,258) (2,191,697)
___________ ___________ __________
Net cash used in investing
activities (710,638) (545,720) (2,384,882)
___________ ___________ __________
Cash flows from financing activities:
Proceeds from repayment on
revolving debt, net (782,261) 671,249 610,819
Proceeds from borrowings on
long term debt 17,551 1,430,154 49,633
Principal payments on
long-term debt (858,669) (2,307,709) (987,832)
Deferred financing costs (15,000) (208,445) 4,000
Purchase of treasury stock (36,613) (13,880) (68,827)
Proceeds from issuance of
common stock, net 153,799 313,692 3,026,665
___________ ___________ __________
Net cash (used in) provided
by financing activities (1,521,193) (114,939) 2,634,458
___________ ___________ __________
Net increase in cash and cash
equivalents 902,475 322,807 99,832
Cash and cash equivalents, beginning
of year 917,630 594,823 494,991
___________ ___________ __________
Cash and cash equivalents, end of year $ 1,820,105 $ 917,630 $ 594,823
=========== =========== ==========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 606,893 $ 652,582 $ 452,454
=========== ========== =========
Income taxes $ 296,100 $ 123,150 $ 35,986
=========== ========== =========
F-7
See accompanying notes to consolidated financial statements.
-- 45 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30,
2006 2005 2004
___________ ___________ __________
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 186 -- 15,000
Issuance of common stock in
cashless exercise of warrants 380 3,229 --
Pivotal Acquisition Note A earn out
adjustments recorded (Notes C & K) (39,746) 1,169,832 --
Value of warrants issued with debt
recorded as debt discount -- 167,185 --
Value of warrants issued in
connection with the Pivotal
Acquisition 56,180 -- --
Obligations under capital leases 154,069 -- --
________ __________ __________
See accompanying notes to consolidated financial statements.
F-8
-- 46 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
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 50-bed residential facility and six outpatient behavioral
health locations (one in New Baltimore, Michigan operating in
conjunction with Harbor Oaks Hospital, two in Las Vegas, Nevada
operating as Harmony Healthcare and three locations operating as
Pioneer Counseling Center in the Detroit, Michigan metropolitan area);
(2) Pharmaceutical research study services, including 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;
(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 under the brand name
Wellplace; and
(4) Behavioral health administrative services, including delivery of
management and administrative and online services. The parent company
provides management and administrative services for all of its
subsidiaries and online services for its behavioral health treatment
subsidiaries and its call center subsidiaries. It also provides
behavioral health information through its website, Wellplace.com.
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-9
-- 47 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
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 based on established rates depending on the
level of care provided and are adjusted prospectively. 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 changed the TEFRA-based (Tax Equity and Fiscal
Responsibility Act of 1982) system to the 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
"Center for Medicare and Medicaid Services, ("CMS's"), administrative data base
(cost reports and claims data). Patient-specific characteristics include, but
are not limited to, 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 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.
For the fiscal year ended June 30, 2006, Medicare reimbursements rates were
based 75% on provisional rates that are adjusted retroactively based on annual
cost reports filed by the Company with Medicare and 25% on the new prospective
payment rates. The Company will continue to file cost reports to Medicare to
determine the new TEFRA portion of the rate for the following year. These cost
reports 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 46%, 21%
and 23% of the Company's total revenue is derived from Medicare and Medicaid
payors for the years ended June 30, 2006, 2005 and 2004, respectively.
Differences between the amounts provided and subsequent settlements are recorded
in operations in the year of the settlement. The Company is unable to estimate
any future adjustment at this time but past adjustments have not been material
to the financial statement.
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 until authorization for the services can be obtained. As of June 30,
2006, the Company has no outstanding balance in other receivables, 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. Each study
calls for a participant to complete a specific number of visits in order to
validate the study. While some studies require all visits to be complete before
any services can be billed, most studies will allow billing for each visit once
the participant is randomized, or identified as a meeting all study criteria,
F-10
-- 48 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenues and accounts receivable (continued):
even if the participant does not complete the study. Where a contract requires
completion of the study by the patient, no revenue is recognized until the
patient completes the study program. Advance payment provided by the
pharmaceutical companies is recorded as deferred revenue until study receivables
are produced based on the above criteria. The Company expects to complete the
studies related to the deferred revenue within the next fiscal year.
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
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. Reserves are provided for accounts of former patients
that do not comply with these supplemental payment agreements and accounts 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 $150,511, $242,385 and $147,096 for
the years ended June 30, 2006, 2005 and 2004, respectively. Patient care revenue
is presented net of charity care in the accompanying consolidated statements of
operations.
The Company had accounts receivable from Medicaid and Medicare of
approximately $1,786,000 at June 30, 2006 and $1,257,000 at June 30, 2005.
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. Such estimates include patient care billing rates, realizability of
receivables from third-party payors, rates for Medicare and Medicaid and the
realization of deferred tax benefits represent a significant portion of the
estimates made by management.
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 and attendant losses.
F-11
-- 49 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
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
(2 to 10 years)
Other assets:
Other assets consists of deposits, deferred expenses, licensure fees 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, 2006.
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 determined by Company
analysis. Such valuations require the Company to make 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.
F-12
-- 50 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and other intangible assets (continued):
Customer relationships, acquired as a part of the assets acquired in the
membership interest purchase of Pivotal Research Centers, LLC, (Note K) are used
to acquire new studies on an ongoing basis. Since there is no true "consumption"
of the relationship that can be defined the asset is 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 and
$20,000 for the fiscal years ended June 30, 2006, 2005, and 2004 respectively,
is included in administrative expenses in the accompanying consolidated
statement of operations. The following is a summary of expected amortization
expense of intangible assets for the succeeding fiscal years and thereafter as
of June 30, 2006:
Year Ending
June 30, Amount
___________ ______
2007 $ 120,000
2008 120,000
2009 120,000
2010 120,000
2011 120,000
thereafter 1,540,000
_________
$2,140,000
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 required 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 $1,695,544 related to the research study
services reporting unit of the Company were evaluated under SFAS No. 142 as of
June 30, 2006. 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, accrued expenses and long term dabt 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
F-13
-- 51 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic and diluted income (loss) per share: (Continued)
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,
2006 and 2005. Any increase in number of shares of common stock equivalents for
the year ended June 30, 2004 would be anti-dilutive based on the loss for that
year and therefore not included.
The weighted average number of common shares outstanding used in the
computation of earnings per share is summarized as follows:
Years Ended June 30,
2006 2005 2004
____ ____ ____
Weighted average shares
outstanding - basic 18,213,901 17,574,678 14,731,395
Employee stock options 510,731 530,896 --
Warrants 380,561 258,502 --
__________ __________ ___________
Weighted average shares
outstanding - fully
diluted 19,105,193 18,364,076 14,731,395
========== ========== ==========
The following table summarizes securities outstanding as of June 30, 2006,
2005 and 2004, but not included in the calculation of diluted net earnings per
share because such shares are antidilutive:
Years Ended June 30,
2006 2005 2004
____ ____ ____
Employee stock options 253,500 32,500 945,000
Warrants -- 471,360 1,415,357
Convertible debentures -- -- 125,000
__________ __________ ___________
Total 253,500 503,860 2,485,357
========== ========== ==========
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. The Company considers estimated future taxable
income or loss and other available evidence when assessing the need for its
deferred tax valuation allowance. As a result of this assesment, during fiscal
2006, the Company, eliminated 100% of the Federal deferred tax valuation
allowance.
F-14
-- 52 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Stock-based compensation:
The Company issues stock options to its employees and directors and
provides employees the right to purchase stock pursuant to stockholder approved
stock option and stock purchase plans. Effective July 1, 2005, the Company
adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment"
(SFAS No. 123R), using the Statement's modified prospective application method.
Prior to July 1, 2005, the Company followed Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock compensation.
Under the provisions of SFAS No. 123R, the Company recognizes the fair
value of stock compensation in net income, over the requisite service period of
the individual grantees, which generally equals the vesting period. All of the
Company's stock compensation is accounted for as equity instruments and there
have been no liability awards granted.
At June 30, 2005, the Company accelerated the vesting on all previously
granted options. Therefore, as of the date of adoption there is no unrecognized
expense of these options and the expense recorded in the year ended June 30,
2006 is for options issued and vested during that period. The unrecognized
expense of awards not yet vested will be recognized in net income in the periods
in which they vest. Under the provisions of SFAS 123R, the Company recorded
$126,300 of stock-based compensation on its consolidated statement of operations
for the year ended June 30, 2006, which is included in administrative expenses
as follows:
Year ended June 30,
2006
Directors fees $ 21,000
Employee compensation 105,300
___________
Total $ 126,300
===========
The Company utilized the Black-Scholes valuation model for estimating the
fair value of the stock compensation granted after the adoption of SFAS 123R.
The weighted-average fair values of the options granted under the stock option
plans was $2.42, $.63 and $.46 for the years ended June 30, 2006, 2005 and 2004,
respectively, using the following assumptions:
F-15
-- 53 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-based compensation: (continued)
June 30,
2006 2005 2004
_____________________________________
Risk free interest rate 4.45% 4.00% 4.00%
Expected dividend yield -- -- --
Expected lives 5-10 years 5-10 years 5-10 years
Expected volatility 47.27% 45% 30%
Weighted average value of grants
per share $2.42 $.63 $ .46
Weighted average remaining contractual
life of options outstanding (years) 3.65 3.70 4.05
The dividend yield of zero is based on the fact that the Company has never
paid cash dividends and has no present intention to pay cash dividends. Expected
volatility is based on the historical volatility of the Company's common stock
over the period commensurate with the expected life of the options. The
risk-free interest rate is the U.S. Treasury rate on the date of grant. The
expected life was calculated using the Company's historical experience for the
expected term of the option.
Based on the Company's historical voluntary turnover rates for individuals
in the positions who received options in the period, there was no forfeiture
rate assessed. It is assumed these options will remain outstanding for the full
term of issue. Under the true-up provisions of SFAS 123R, a recovery of prior
expense will be recorded if the actual forfeiture is higher than estimated.
SFAS 123R requires the presentation of pro forma information for the
comparative period prior to the adoption as if all of the Company's employee
stock options had been accounted for under the fair value method of the original
SFAS 123. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation to the prior-year period.
For the years ended June 30, 2005 and 2004 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 had 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:
F-16
-- 54 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-based compensation: (continued)
Year Ended June 30,
2005 2004
______________________________
Net income (loss), as reported $ 3,155,900 $ (257,003)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 105,681 74,142
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related taxes (298,084) (134,630)
____________ ____________
Pro forma net income (loss) $2,963,497 $ (317,491)
============ ============
Earnings (loss) per share:
Basic - as reported $ 0.18 $ (0.02)
============ ============
Basic - pro forma $ 0.17 $ (0.02)
============ ============
Diluted - as reported $ 0.17 $ (0.02)
============ ============
Diluted - pro forma $ 0.16 $ (0.02)
============ ============
Reclassifications:
Certain June 30, 2005 and 2004 amounts have been reclassified to be
consistent with the June 30, 2006 presentation.
Recent accounting pronouncements:
In February 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments--an amendment
of FASB Statements No. 133 and 140," to permit fair value re-measurement for any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation in accordance with the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities.". The company
does not expect the adoption of SFAS No. 155 to have a material affect on the
company's Consolidated Financial Statements.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an
interpretation of FASB Statement No. 109, (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
F-17
-- 55 --
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,
2006 2005
___________________________________
Land $ 69,259 $ 69,259
Buildings 1,136,963 1,136,963
Furniture and equipment 2,048,006 1,610,327
Motor vehicles 174,302 174,302
Leasehold improvements 1,224,624 816,197
__________ ___________
4,653,154 3,807,048
Less accumulated depreciation and
amortization 2,853,266 2,290,934
__________ ___________
Property and equipment, net $1,799,888 $1,516,114
=========== ===========
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is summarized as follows:
As of June 30,
2006 2005
________________________
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. $728,218 $1,068,510
Term mortgage note payable with monthly 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 (6.25%
at June 30, 2006) plus 3.5% and is
collateralized by all of the assets of the
Company and its material subsidiaries except
Pivotal Research Centers, Inc. 662,840 1,019,612
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. 302,273 331,808
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 interest imputed at
6%. (Note K) 169,648 159,793
Note payable due in monthly installments of $578
including interest at 5.9% through May 2010. 23,746 29,108
Note payable due in monthly installments of $555
including interest at 3.9% through March 2010. 23,180 28,811
F-18
-- 56 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Long-term debt is summarized as follows: (continued)
As of June 30,
2006 2005
____________________
Note payable due in monthly installments
of $775 including interest at 3.9%
through October 2008. 20,698 28,998
Note payable due in monthly installments
of $665 including interest at 10.8 %
through November 2005. -- 2,981
_________ __________
Total 1,930,603 2,669,621
Less current maturities 909,057 769,599
_________ __________
Long-term portion $ 1,021,546 $ 1,900,022
=========== ===========
Maturities of long-term debt are as follows as of June 30, 2006:
Year Ending
June 30, Amount
________________ _________
2007 $ 909,057
2008 450,853
2009 194,528
2010 52,816
2011 215,893
Thereafter 107,456
__________
$1,930,603
In October 2004, the Company refinanced its revolving credit note under
which a maximum of $3,500,000 may be outstanding at any time. The outstanding
balance on this note was $1,603,368 and $2,385,629 at June 30, 2006 and 2005,
respectively. 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 (6.25% at June 30,
2006) 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. In November 2005,
by mutual agreement, the Company and the lender extended the Agreement through
October 2008. 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, 2006, the Company was in compliance with all of its
financial covenants under the revolving line of credit note.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 2006, the Company was obligated under various capital leases
for equipment providing for aggregate monthly payments of approximately $4,600
and terms expiring from June, 2008 through June 2011.
F-19
-- 57 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
The carrying value of assets under capital leases included in property and
equipment is as follows:
June 30,
2006 2005
____________________________
Equipment and improvements $ 287,099 $ 131,989
Less accumulated amortization (168,869) (95,446)
__________ __________
$ 118,230 $ 36,543
========== ==========
Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 2006:
Year Ending June 30,
2007 $65,546
2008 58,157
2009 4,572
2010 4,572
2011 2,666
_______
Future minimum lease payments 135,513
Less amount representing interest 15,720
Total future principle payments 119,793
Less current portion 57,881
_______
Long-term obligations under capital leases $61,912
=======
In addition to the above capital lease obligations, on April 20, 2006, in
conjunction with the agreement the Company entered into with Medical Information
Technologies, Inc., ("Meditech"), as disclosed in the Company's report on form
8-K filed with the Securities and Exchange Commission on April 26, 2006, the
Company signed a Master Lease Agreement with Bank of America to finance the
acquisition of the software and the required hardware which will provide the
Company with enhanced billing, collection and clinical reporting capabilities.
Future minimum lease payments under the terms of this master lease are as
follows at June 30, 2006:
Year Ending June 30,
2007 $134,125
2008 191,206
2009 191,206
2010 118,425
2011 118,425
Thereafter 29,606
_________
Future minimum lease payments 782,993
Less amount representing interest 120,561
_________
Total future principle payments on the
master lease 662,432
Less current portion 87,861
_________
Long-term principle obligation under the master lease $574,571
=========
As of June 30, 2006 no funds had been advanced on these leases. During the
first quarter of fiscal 2007, the Company has now been advanced funds for the
purchase of hardware and has begun making payments according to the above
schedule. The expected date of completion of the hardware installation is
November 1, 2006 and the software is April 1, 2007.
F-20
-- 58 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE E - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
June 30
2006 2005
___________________________
Accrued professional fees $ 249,260 $ 767,592
Accrued operating expenses 522,063 284,181
Income tax payable 255,096 11,416
_________ __________
Total $1,026,419 $1,063,189
=========== ==========
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the
accompanying balance sheets:
Years Ended June 30,
2006 2005
___________________________
Deferred tax asset:
Allowance for doubtful accounts $ 1,179,000 $ 744,000
Depreciation 261,000 120,000
Reserves not currently deductible and other -- --
Difference between book and tax bases of
intangible assets 8,000 9,000
Operating loss carryforward 1,837,000 3,094,00
___________ ___________
Gross deferred tax asset 3,285,000 3,967,000
___________ ___________
Less:
Valuation allowance (175,000) (2,291,200)
___________ ___________
Deferred tax asset 3,110,000 1,375,800
___________ ____________
Current portion (3,110,000) (1,375,800)
___________ ___________
Long-term portion $ -- $ --
=========== ===========
Deferred tax liability:
Difference between book and tax bases
of intangible assets $ (325,000) $ (229,000)
___________ ___________
Net deferred tax liability $ (325,000) $ (229,000)
=========== ===========
F-21
-- 59 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE F - INCOME TAXES (CONTINUED)
The components of the income tax provision (benefit) for the years ended
June 30, 2006, 2005, and 2004 are as follows:
2006 2005 2004
___________________________________
Current
Federal $ 78,399 $ -- $ --
State 250,211 230,571 45,493
328,610 230,571 45,493
_______ _________ _________
Deferred
Federal $(1,467,302) (235,595) --
State (171,411 (68,399) (34,199)
__________ _________ _________
(1,638,713) (303,994) (34,199)
Income tax provision (benefit) $1.310,103 $(73,423) $ 11,294
__________ _________ _________
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended June 30, 2006, 2005 and 2004 is as follows:
2006 2005 2004
___________________________________
Income tax provision at federal
statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax
resulting from:
State tax provision, net of
federal benefit 4.7% 4.5% 4.5%
Non-deductible expenses 1.7% 1.0% 1.0%
Other, net -- 1.5% (5.0%)
Valuation allowance (88.3%) (43.0%) (34.0%)
________ _______ _______
Effective income tax rate (49.9%) (2.0%) 1.0%
========= ======= =======
At June 30, 2006, the Company had a federal net operating loss carryforward
amounting to approximately $4,548,000. 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 valuation allowance ($175,000)
against its state net operating loss carryforwards ($4,375,000) due to the
uncertainty of the utilization of these net operating loss carryforwards.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. The valuation
allowance changed by ($2,416,200), ($2,076,994) and 608,801 for the years ended
June 30, 2006, 2005 and 2004 respec6tively.
In the past, the Company has provided a significant valuation allowance
against its deferred tax asset based on the projections for the next fiscal
year. During the fiscal year ended June 30, 2006, the Company recognized 100% of
the tax benefit associated with the federal loss carry forwards based on the
Company's future projections.
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
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, 2006, 2005 and 2004 was approximately
$1,695,000, $1,484,000 and $1,035,000, 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,
2006 are as follows:
F-22
-- 60 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Year Ending
June 30, Amount
2007 $ 1,524,688
2008 1,519,616
2009 1,495,551
2010 1,198,459
2011 486,249
Thereafter 144,291
____________
$ 6,368,854
In addition to the above leases, during the fiscal year ended June 30,
2006, the Company entered into a lease agreement to lease the Seven Hills
Hospital property, a 60-bed psychiatric hospital located in Las Vegas, Nevada,
with initial rent payments of $68,351 per month beginning upon completion of the
building estimated to be in the quarter ending March 31, 2007. In addition to
the 10-year lease on the property, the Company also has an option to purchase a
50% membership interest in the property.
Contingent Notes Payable:
In conjunction with the acquisition of Pivotal Research Centers, LLC (Note
K), 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 was 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 earn-out
period ended and resulted in the recording of $1,209,832 as a liability. On
April 1, 2006 the second earn-out adjustment was made to this note. This
adjustment resulted in the reduction of the liability of $39,746 as earn-out
targets were not met for the calendar year ended December 31, 2005. The
earn-outs are recorded as a change in the purchase price and effect goodwill.
(See Note K for discussion of the terms of these notes.)
Litigation:
The Company is a party in two separate actions between a former employee
who was terminated and filed a claim for wrongful termination and a breach of
contract on an indemnification claim against the same terminated employee where
the company is the plaintiff. Both matters are being resolved through binding
arbitration and awards in either case will offset. The outcome of the two
actions together cannot be determined at this time, but management does not
expect the outcome to have a material adverse effect on the financial position
or results of operations of the Company.
The Company is subject to various claims and legal action that arise in the
ordinary course of business. In the opinion of management, the Company is not
currently a party to any proceeding that would have a material adverse affect on
its financial condition or results of operations.
Other:
On December 20, 2004, Harbor Oaks Hospital experienced a loss due to a
flood at the facility. The physical damage has been repaired and the claim for
that damage has been paid. The Company subsequently filed a claim for lost
business income as allowed by the insurance policy. The outcome of this claim is
not estimable at this time.
F-23
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
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.
Class B Common Stock
The Class B common stock is entitled to five votes 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 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, and three
expired plans, the 1993 Employee and Directors Stock Option plan, the 1995
Non-employee Directors' stock option plan and the 1995 Employee Stock Purchase
Plan.
F-24
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE H - STOCK AND STOCK PLANS (CONTINUED)
The stock option plan dated December 2003 and expiring December 2013,
provides for the issuance of a maximum of 1,300,000 shares of Class A common
stock of the Company pursuant to the grant of incentive stock options to
employees or nonqualified stock options to employees, directors, consultants and
others whose efforts are important to the success of the Company. Subject to the
provisions of this plan, the compensation committee of the Board of Directors
has the authority to select the optionees and determine the terms of the options
including: (i) the number of shares, (ii) option exercise terms, (iii) the
exercise or purchase price (which in the case of an incentive stock option will
not be less than the market price of the Class A common stock as of the date of
grant), (iv) type and duration of transfer or other restrictions and (v) the
time and form of payment for restricted stock upon exercise of options. As of
June 30, 2006, 703,750 options were granted under this 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 to encourage stock ownership by all eligible
employees. 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. On January 31, 2006 the stockholders approved a replacement Employee
Stock Purchase Plan to replace the 1995 plan which expired on October 18, 2005.
A maximum of 500,000 shares may be issued under the January 2006 plan. As of
June 30, 2006, no shares hae been issued under this plan. The new plan is
identical to the old plan and expires on January 31, 2016. As of June 30, 2006,
a total of 157,034 shares of Class A Common Stock have been issued under the
1995 plan. Fourteen employees are participating in the current offering period
under the new plan, which began on February 1, 2006 and will end on January 31,
2007.
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, 2006, options for 145,500 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
350,000 shares may be issued. As of June 30, 2006, a total of 100,000 options
were issued under the plan. On January 31, 2006, this plan was amended to
increase the number of options issued to each outside director each year from
10,000 options to 20,000 options. Each outside director is granted an option to
purchase 20,000 shares of Class A common stock annually at fair market value on
the date of grant, vesting 25% immediately and 25% on each of the first three
anniversaries of the grant and expiring ten years from the grant date. The new
plan will expire in January 2015, ten years from the date of shareholder
approval.
Under the above plans, at June 30, 2006, 1,373,750 shares were available
for future grant or purchase.
The Company had the following activity in its stock option plans for fiscal
2006, 2005 and 2004:
Weighted-Average
Number Remaining
of Exercise Contractual Aggregate
Shares Price Term Intrinsic Value
______________________________________________________________
Outstanding
Balance - June 30,
2003 1,002,000 $0.54
Granted 130,000 $1.17
Exercised (68,500) $0.41
Expired (118,500) $0.49
__________ _____
Outstanding
Balance - June 30,
2004 945,000 $0.64
Granted 320,000 $1.30
Exercised (104,750) $0.33
Expired (22,000) $0.76
__________ _____
Outstanding
Balance - June 30,
2005 1,138,250 $0.85
========== =======
Granted 408,750 $2.42
Exercised (277,750) $0.39
Expired (35,000) $1.84
__________ _____
Outstanding
Balance - June 30,
2006 1,234,250 $1.45 3.65 $1,052,605
_________ _____ ____ __________
Exercisaqble
at June 30,
2006 933,313 $1.14 3.18 $1,032,486
_________ _____ ____ __________
Of the options granted during the fiscal year ended June 30, 2006, 102,188
were veste, the other 306,562 will vest over the next three years. The fair
value of the options vested was $1.17 per option.
F-25
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE H - STOCK AND STOCK PLANS (CONTINUED)
The following tables summarize information about stock options outstanding
and exercisable at June 30, 2006:
Weighted-Average
Number Remaining Contractual
Exercise Outstanding Life of Options Number Exercisable
Price At June 30,2006 Outstanding years At June 30, 2006
________ _______________ ___________________ __________________
$ .22 6,000 4.54 6,000
.35 40,000 4.22 40,000
.45 19,000 0.47 19,000
.55 138,000 0.80 138,000
.69 35,000 1.47 35,000
.74 50,000 5.53 50,000
.75 146,000 1.24 146,000
.81 6,000 3.48 6,000
1.03 6,000 2.48 6,000
1.07 10,000 1.94 10,000
1.11 50,000 2.94 50,000
1.17 20,000 2.64 20,000
1.20 35,000 3.26 35,000
1.21 50,000 3.28 50,000
1.33 50,000 6.53 50,000
1.37 15,000 3.35 15,000
1.38 5,000 3.56 5,000
1.41 50,000 3.48 50,000
1.45 50,000 3.49 31,250
1.48 50,000 7.53 50,000
1.95 1,250 4.35 313
2.05 3,750 4.35 938
2.06 6,000 1.49 6,000
2.11 80,000 8.30 20,000
2.20 30,000 4.23 7,500
2.28 23,750 4.23 5,938
2.35 5,000 4.35 1,250
2.38 15,000 3.96 15,000
2.53 37,500 4.00 9,375
2.68 90,000 4.23 22,500
2.73 105,000 4.23 26,250
3.50 6,000 0.64 6,000
_____ _________ _____ _________
$1.45 1,234,250 3.65 933,313
===== ========== ===== ========
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. During the fiscal year ended June 30, 2006, an
additional $9,875 was recognized as a result of this accelerated vesting.
F-26
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE H - STOCK AND STOCK PLANS (CONTINUED)
In February 2006, 12,617 shares of common stock were issued under the
employee stock purchase plan. The Company recorded as compensation expenses
$3,028.
During the fiscal year ended June 30, 2006 277,750 options were exercised
resulting in $84,077 in proceeds. Included in the above balance, 26,500 options
were exercised using a cashless exercise feature resulting in the issuance of
18,577 common shares.
The weighted average grant-date fair value of options granted during the
fiscal years ended June 30, 2006, 2005 and 2004 was $1.17, $2.33 and $.66
respectively. The total intrinsic value of options exercised during the fiscal
years ended June 30, 2006, 2005 and 2004 was $517,917, $188,243 and $47,432
respectively.
As of June 30, 2006, there was $357,459 in unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under
existing stock option plans. This cost is expected to be recognized over a
weighted average pe5iod of three years.
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, 2006:
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
_____________________________________________________________________________________
04/01/2003 Warrants issued for
consulting services $3,185
charged to professional fees. 10,000 shares $1.00 per share April 2008
09/22/2003 Warrants issued for consulting
services $6,261 charged
to professional fees 20,000 shares $.90 per share Sept 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 15,113 shares $1.10 per share Mar 2007
04/29/2004 Warrants issued in a private
placement of class A
common stock 246,590 shares $1.10 per share Apr 2007
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
10/10/2005 Warrants issued as a finder's fee
in connection with the
acquisition of Pivotal, $56,180
recorded as acquisition costs. 100,000 shares $1.10 per share Sept 2007
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 in fiscal 2004. There
were no charges to operations in connection with warrants in fiscal 2006 or
2005. All of these warrants were fully vested at the grant date.
F-27
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE I - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
On October 19, 2004, the Company issued 250,000 warrants to purchase shares
of common stock of the Company, exercisable at $1.15 and expiring ten years from
the date first issued, to a lender in connection with a long term debt
transaction (see next to last item in the above table). Under the terms of the
warrant agreement, future issuances of equity resulting in a dilutive
transaction will require the Company to adjust shares issuable under the Warrant
Agreement. The additional shares issuable is determined by performing the
following calculation: divide the non-dilutive price of a warrant share then in
effect multiplied by the number of warrant shares then issuable hereunder, by
the weighted average per share value. In addition, the warrant also provides for
a put right that provides for the right of the holder to put the warrant shares
back to the Company during any put period, as defined, provided that the Company
does not have reserved and available for issuance and delivery, sufficient
shares to permit the exercise in full of this warrant, and each period:
commencing on the earlier of: a) maturity of the debt agreement, b) the
occurrence of a value event, c) occurrence of any event of default, and d) the
payment date. The put period is limited to the earlier of the expiration date of
the warrant or the 60th calendar day after the commencement of the put period.
The Company analyzed this financial instrument in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 133 and Emerging Issues Task
Force ("EITF") Issue No. 00-19 to determine if this hybrid contract has embedded
derivatives that must be bifurcated. The Company evaluated the put rights in
accordance with SFAS No. 150. In addition, free standing warrants are accounted
for as either equity or liabilities in accordance with the provisions of EITF
Issue No. 00-19. The Company determined that it has within its control the
ability to limit the effects of the dilution provision thereby not requiring the
Company to issue an indeterminable number of common shares which would exceed
its authorized capital, and the Company concluded that they do have sufficient
available and unissued shares and, therefore, physical share settlement is
within the control of the Company. The Company also evaluated the put rights and
concluded they are not a liability under SFAS 150.
The Company initially recorded the warrants as debt discount of $167,185 at
the date of issuance and recorded as interest expense of $55,728 and $41,796 in
the years ended June 30, 2006 and 2005, respectively. (See the Company's report
on form 8-K, filed with the Securities and Exchange commission on October 22,
2004, for additional information regarding this transaction).
During the fiscal year ended June 30, 2006, the Company acquired 17,360
shares of Class A common stock for $36,613 from a former employee.
During the fiscal year ended June 30, 2006, 121,409 warrants were exercised
resulting in $52,450 in proceeds. Included in the above total are 60,909 warants
exercised using a cashless exercise feature resulting in the issuance of 37,973
common shares.
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.
F-28
-- 66 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE J - BUSINESS SEGMENT INFORMATION(CONTINUED)
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:
Behavioral
Health
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
_______________________________________________________________________________________
For the Year ended
June 30, 2006
Revenues-external
customers $27,861,701 $5,799,815 $4,351,576 $ -- $ -- $38,013,092
Revenues - intersegment 38,750 -- 88,875 3,264,000 (3,391,625) --
Segment net income
(loss) 3,172,699 972,973 1,636,408 (1,950,045) -- 4,045,482
Total assets 10,399,918 5,584,753 844,784 6,093,650 -- 21,984.987
Capital expenditures 603,152 51,628 144,636 65,291 -- 864,707
Depreciation &
amortization 436,488 170,167 62,220 61,139 -- 730,014
Goodwill 969,099 1,695,544 -- -- -- 2,664,643
Interest expense 485,589 67,528 5,048 48,728 -- 606,893
Income tax expense
(benefit) 210,231 3,840 34,860 (2,497,152) -- (1,310,103)
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
NOTE K - 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
F-29
-- 67 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE K - ACQUISITIONS(CONTINUED)
of the former owners and CEO signed a three-year employment and non-compete
agreements.
Pivotal, at the time of the acquisition, performed 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 promissory 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.
Promissory note A is a secured 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
was adjusted in the first and second years of the note based on adjusted EBITDA
as defined in the agreement of $780,000. When adjusted EBITDA was greater then
$780,000 for the period the note value increased by the difference and when
adjusted EBITDA was less than $780,000 for the period the note value decreased
by the difference. Quarterly payments are then made based on the adjusted value
of the promissory 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. The second adjustment of ($39,746) was made
on April 1, 2006. As of June 30, 2006, $728,218 is due under Note A.
Promissory note B is a secured 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, 2007 based on annual adjusted EBITDA as defined
in the agreement of $780,000 for the adjustment period of January 1, 2006
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 promissory notes. As of June 30, 2006, no amounts have been recorded under
promissory note B.
Promissory note C is a secured note with a face value of $1,000,000, 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, 2004 and each year thereafter multiplied by .35. In addition this promissory
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 than 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.
Since all but $200,000 of these promissory notes is contingent on future
earnings, only $200,000, less imputed interest, was recorded as of June 30, 2004
as stipulated in SFAS No. 141. At June 30, 2006 the balance on this note is
$169,648.
F-30
-- 68 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2006
NOTE K - ACQUISITIONS (CONTINUED)
The purchase price was allocated as follows:
2006 2005 2004
____ ____ ____
Property and equipment $ -- $ -- $ 85,000
Intangible assets 16,434 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 (56,180) -- (51,307)
Cash paid for purchase 2,191,697
Note recorded for earn-out 39,746 (1,209,832) --
__________ __________ ___________
Fair value of stock issued $ -- $ -- $ 500,000
=========== =========== ===========
The fair value assigned to customer relationships was determined by the
Company based on information provided by the former owners.
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
F-31
-- 69 --
customer relationships to be twenty years.
NOTE L - QUARTERLY INFORMATION (Unaudited)
The following presents selected quarterly financial data for each of the
quarters in the years ended June 30, 2006 and 2005.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
___________ ___________ ___________ ___________
2006
Revenue $8,944,826 $8,702,513 $9,953,959 $10,411,794
Income from operations 601,404 549,060 1,112,980 920,982
Net income available to
common shareholders 384,207 346,782 950,549 2,363,944
Earnings per share:
Basic $ 0.02 $ 0.02 $ 0.05 $ 0.13
Diluted $ 0.02 $ 0.02 $ 0.05 $ 0.12
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
The Company has reassessed its recoverability of its deferred tax assets in
the fourth quarter. Based upon all information available to the Company, it has
concluded that no valuation allowance is necessary except for it's State net
operating loss carryforwards. The Company has reduced its valuation allowance by
$2,416,200 and has recorded a federal income tax benefit of $1,638,713 as of
June 30, 2006.
F-32
-- 70 --
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the fiscal year ended June 30, 2006, the Company changed independent
registered public accounting firms from BDO Seidman, LLP, to Eisner, LLP. This
change was not made as a result of any disagreements between the accountants and
the management of the Company. See the Company's report on form 8-K and 8-K/A
filed with the Securities and Exchange Commission on March 10, 2006 and March
23, 2006, respectively.
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
During the quarter ended June 30, 2006, the Company became aware of a loss
from a theft of funds by an individual in our smallest in-patient facility who
had the responsibility for the collection of patient payments. The Company
investigated further and has identified approximately $20,000 in missing or
misappropriated funds. Corrections have been made to the patient accounts to
reflect the correct receivables as discrepancies were discovered. As of June 30,
2006 $2,500 in loss from this theft was recorded. The Company has increased its
reserve by $20,000 to account for additional amounts discovered after year end.
The Company believes it has identified the full extent of the theft and all
infractions of the policies. The Company has put systems in place to prevent
recurrence of the problem. The Company does not believe the total amount to be
material.
Except as noted above, 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.
-- 71 --
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 the date of the Company's
Annual Report on Form 10-K are as follows:
Name Age Position
__________________________ ___ ____________________________________
Bruce A. Shear 51 Director, President and Chief
Executive Officer
Robert H. Boswell 58 Senior Vice President
Paula C. Wurts 57 Treasurer, Chief Financial Officer
and Clerk
Donald E. Robar (1)(2)(3) 69 Director
Howard W. Phillips 76 Director
William F. Grieco (1)(2)(3) 52 Director
David E. Dangerfield (1)(3) 65 Director
(1) Member of Audit Committee. (2) Member of Compensation Committee.
(3) Member of the Nominating/Governance 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 various committees of the Board
are shown below. 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 from January 1996 until February 2006, when she became Clerk, 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.
-- 72 --
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. (Counseling) from the University
of Massachusetts in 1978, an M.A. in Clinical Psychology 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
1996 and has been employed by the Company as a public relations specialist since
August 1995. From 1982 until 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
1997. Mr. Grieco is the Vice President and General Counsel of American Science
and Engineering, Inc., an X-Ray inspection technology company. Prior to that,
from 1999 to 2005, he was Managing Director of Arcadia Strategies, LLC, a legal
and business consulting organization servicing science and technology companies.
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 B.S. from
Boston College in 1975, an M.S. in Health Policy and Management from Harvard
University in 1978 and a J.D. 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 trade
organization in Utah. 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.
Meetings of the Board of Directors
During fiscal 2006, 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.
Audit Committee
The Board of Directors has appointed an audit committee to assist the Board
in the oversight of the financial reports, internal controls, accounting
policies and procedures. 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.
-- 73 --
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.
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 2006 the Audit Committee consisted of Dr. David Dangerfield,
Mr. Donald Robar and Mr. William Grieco. As required by the SEC, all members of
the audit committee are "independent" as such term is defined pursuant to
applicable SEC rules and regulations. Dr. Dangerfield serves as the chairman and
is the audit committee financial expert. The Audit Committee met five times
during fiscal 2006. All of the committee members attended the meetings.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee was established in
October, 2005. This committee is appointed by the Board of Directors for the
purpose of identifying individuals qualified to become Board members and to
recommend that the Board select these individuals as nominees for election to
the Board at the next annual meeting of the Company's stockholders, and
developing and recommending to the Board a set of effective corporate governance
policies and procedures applicable to the Company. The Nominating and Corporate
Governance Committee consists of Dr. David Dangerfield, Mr. Donald Robar and Mr.
William Grieco.
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
2006 the Compensation Committee consisted of Mr. Donald Robar and Mr. William
Grieco. The Compensation Committee met once during fiscal 2006. Mr. Shear does
not participate in discussions concerning, or vote to approve, his salary. All
members of the compensation committee are independent under Rule 4200(a)(15) of
the NASD Manual.
Code of Ethics
The Company maintains a Corporate Compliance Plan, which incorporates our
code of ethics that is applicable to all employees, including all officers. The
Corporate Compliance Plan incorporates our guidelines designed to deter
wrongdoing and to promote honest and ethical conduct and compliance with
applicable laws and regulations. It also incorporates our expectations of our
employees that enable us to provide accurate and timely disclosure in our
filings with the Securities and Exchange Commission and other public
communications. In addition, it incorporates our guidelines pertaining to topics
such as health and safety compliance, diversity and non-discrimination, patient
care and privacy.
[
The full text of our Corporate Compliance Plan is published on our website
at www.phc-inc.com. We will post any amendments to the Corporate Compliance
Plan, as well as any waivers that are required to be disclosed by the rules of
the SEC, on our website.
-- 74 --
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.
During a review of these filings the Company found that Robert H. Boswell
failed to file a Form 4 reporting the sale of 7,000 shares on May 25, 2006.
These shares were reported on an amended Form 5 filed on July 27, 2006 when the
oversight was discovered. Based on the review of the filings and written
representations from the Company's directors and executive officers, except as
noted, 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 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 2006
fiscal year, which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 2006, 2005 and 2004:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
___________________ ____________
(a) (b) (c) (d) (e) (g) (i)
Other Securities
Name and Annual Underlying All Other
Principal Year Salary Bonus Compensation Options/SARs Compensation
Position ($) ($) ($) (#) ($)
___________________________________________________________________________________________
Bruce A. Shear 2006 $393,515 $70,000 $27,458 (1) 105,000 $124,800
President and Chief 2005 $383,965 $45,000 $62,498 (2) 60,000 $ 37,050
Executive Officer 2004 $345,416 $25,147 $15,395 (3) -- $ --
Robert H. Boswell 2006 $176,878 $40,000 $14,701 (4) 28,750 $ 33,488
Senior Vice 2005 $164,590 $10,000 $29,016 (5) 25,000 $ 15,750
President 2004 $155,417 $32,794 $15,582 (6) -- $ --
Paula C. Wurts 2006 $152,878 $35,000 $15,029 (7) 27,500 $ 32,300
Chief Financial 2005 $140,586 $10,000 $35,009 (8) 25,000 $ 15,750
Officer, Clerk 2004 $129,125 $17,647 $13,901 (9) -- $ --
and Treasurer
(1) This amount represents $8,910 contributed by the Company to the Company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $13,648 in premiums
paid by the Company with respect to life and disability insurance for the
benefit of Mr. Shear, $864 in club membership dues paid by the Company for
the benefit of Mr. Shear, and $4,036 personal use of a Company car held by
Mr. Shear.
-- 75 --
(2) 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.
(3) 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.
(4) This amount represents a $6,000 automobile allowance, $8,172 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell and $529 in benefit derived from the purchase of shares through
the employee stock purchase plan.
(5) 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.
(6) 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.
(7) This amount represents a $4,800 automobile allowance, $10,053 contributed
by the Company to the Company's Executive Employee Benefit Plan on behalf
of Ms. Wurts and $176 in benefit derived from the purchase of shares
through the employee stock purchase plan.
(8) 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.
(9) 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.
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 $10,000 stipend per year and $2,500 for each Board meeting they attend.
The Audit Committee Chairperson receives an annual stipend of $5,000, members of
the audit committee receive an annual stipend of $3,000 and compensation
committee and nominating/governance committee receive an annual stipend of
$2,000. 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 Interlocks and Insider Participation
During fiscal 2006 the Compensation Committee consisted of Mr. Donald Robar
and Mr. William Grieco, neither of which was an officer or employee of the
-- 76 --
Company during the 2006 fiscal year. Mr. Robar served as the Company's Treasurer
from February 1996 until April 2000. During the 2006 fiscal year, none of our
executive officers served on our Compensation Committee (or equivalent), or
board of directors, of another entity whose executive officer(s) served on our
Compensation Committee or Board of Directors.
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
358,000 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
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, 2006, the Company issued additional
options to purchase 408,750 shares of Class A Common Stock under the 2003 Stock
Plan at a price per share ranging from $1.45 to $2.73. 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 277,750 options were exercised during the fiscal year ended June
30, 2006, of which 11,250 options were exercised at $1.05, 25,900 options were
exercised at $.79, 2,000 options were exercised at $.22 and 230,500 were
exercised at $.30.
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. On January 31, 2006 the stockholders approved
a replacement Employee Stock Purchase Plan to replace the 1995 plan which
expired on October 18, 2005. The new plan is identical to the old plan and
expires on January 31, 2016.
As of June 30, 2006, a total of 157,034 shares of Class A Common Stock have
been issued under the 1995 plan. Fourteen employees are participating in the
current offering period under the new plan, which began on February 1, 2006 and
will end on January 31, 2007.
Non-Employee Director Stock 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, 2006, options for 145,500 shares were granted under
-- 77 --
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
350,000 shares may be issued. A total of 40,000 options were issued under the
plan on January 6, 2005. On January 31, 2006, this plan was amended to increase
the number of options issued to each outside director each year from 10,000
options to 20,000 options. Each outside director is granted an option to
purchase 20,000 shares of Class A Common Stock annually at fair market value on
the date of grant, vesting 25% immediately and 25% on each of the first three
anniversaries of the grant and expiring ten years from the grant date. The new
plan will expire in January 2015, ten years from the date of shareholder
approval.
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, 2006, 60,000 options were issued
under the new plan. As of June 30, 2006 no options have been exercised under the
original plan; however, 5,500 options expired unexercised.
The following table provides information about options granted to the named
executive officers during fiscal 2006 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
(a) (b) (c) (d) (e) (h)
Number of % of Total Alternative
Securities Options/SARs Exercise to (f) and
Underlying Granted to or Base (g) Grant
Options/SARs Employees Price Expiration Date
Name Granted (#) in Fiscal Year ($/Share)* Date Value
_____________________________________________________________________________________
Bruce A. Shear 15,000 3.67% 2.68 09/20/2010 18,300
75,000 18.35% 2.68 09/20/2010 91,500
15,000 3.67% 2.20 05/22/2011 15,000
Robert H. Boswell 20,000 4.89% 2.73 09/22/2010 24,800
1,250 0.31% 1.95 02/16/2011 1,188
7,500 1.83% 2.20 05/22/2011 7,500
Paula C. Wurts 20,000 4.89% 2.73 09/22/2010 24,800
7,500 1.83% 2.20 05/22/2011 7,500
* Exercise Price of options at issue date was equal to or greater than the
fair market value.
The Company utilized the Black-Scholes valuation model for estimating the
Grant Date Value with no adjustments for non-transferability or risk of
forfeiture. The assumptions used are as follows:
Risk free interest rate 4.5%
Expected dividend yield 0.0%
Expected lives 5
Expected volatility 5.0%
-- 78 --
The following table provides information about options exercised by the
named executive officers during fiscal 2006 and the number and value of options
held at the end of fiscal 2006.
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options/SARs Options/SARs at
on Value at FY-End (#) FY-End ($)
Name Exercise Realized Exercisable/ Exercisable/
(#) ($) Unexercisable Unexercisable
_______________ ______ ________ ______________ ________________
Bruce A. Shear 67,000 $127,300 146,250/78,750 $140,950/$199,238
Robert H. Boswell 36,000 $ 68,400 82,188/21,562 $ 98,078/$54,533
Paula C. Wurts 36,000 $ 68,400 81,875/20,625 $ 98,000/$52,181
On June 30, 2005, the Company accelerated the vesting on the 326,250 of
outstanding unvested options held by employees. This resulted in a non-cash
charge to compensation of $9,875 and $27,025 in the fiscal years ended June 30,
2006 and 2005, respectively.
-- 79 --
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 August
10, 2006 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. Shares of common stock subject
to stock options vesting on or before October 9, 2006 (within 60 days of August
10, 2006) are deemed to be outstanding and beneficially owned for purposes of
computing the percentage ownership of such person but are not treated as
outstanding for purposes of computing the percentage ownership of others. 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:
Name and Address Amount and Nature Percent
Title of Class of Beneficial Owner of Beneficial Owner (11) of Class
____________________ ___________________ ________________________ ________
Class A Common Stock Bruce A. Shear 661,245(1) 3.7%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Robert H. Boswell 248,754(2) 1.4%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Paula C. Wurts 202,106(3) 1.1%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 178,750(4) 1.0%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 137,232(5) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
William F. Grieco 142,750(6) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
David E. Dangerfield 55,000(7) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and
Officers as 1,625,837(8) 8.9%
a Group (7 persons)
Marathon Capital Mgmt,
LLC 1,302,750 7.3%
P. O. Box 771
Hunt Valley, MD 21030
-- 80 --
Class B Common Bruce A. Shear
Stock (9) c/o PHC, Inc. 721,259(10) 93.0%
200 Lake Street
Peabody, MA 01960
All Directors and Officers
as a Group
(7 persons) 721,259 93.0%
* Less than 1%
1. Includes 146,250 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.55
to $2.68 per share.
2. Includes 82,188 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options at an exercise price range of $.45 to
$2.73 per share.
3. Includes 81,875 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.45
to $2.73 per share.
4. Includes 75,500 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options having an exercise price range of $.35
to $2.11 per share.
5. Includes 82,500 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.
6. Includes 82,500 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.
7. Includes 50,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $
.55 to $2.11 per share.
8. Includes an aggregate of 605,813 shares of Class A Common Stock issuable
pursuant to currently exercisable stock options. Of those options, 4,000
have an exercise price of $3.50 per share, 10,000 have an exercise price of
$2.73 per share, 22,500 have an exercise price of $2.68 per share, 15,000
have an exercise price of $2.38 per share, 7,500 have an exercise price of
$2.20, 20,000 have an exercise price of $2.11 per share, 4,000 have an
exercise price of $2.06 per share, 313 have an exercise price of $1.25 per
share, 40,000 have an exercise price of $1.48 per share, 50,000 have an
exercise price of $1.41 per share, 15,000 have an exercise price of $1.37
per share, 40,000 have an exercise price of $1.33 per share, 15,000 have an
exercise price of $1.21, 4,000 have an exercise price of $1.03 per share,
4,000 have an exercise price of $.81 per share, 130,000 have an exercise
price of $.75 per share, 40,000 have an exercise price of $.74 per share,
15,000 have an exercise price of $.69 per share, 120,500 have an exercise
price of $.55 per share, 15,000 have an exercise price of $.45 per share,
30,000 have an exercise price of $.35 per share and 4,000 have an exercise
price of $.22 per share.
9. 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.
10. 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.
11. "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 93% 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.
-- 81 --
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 August 10, 2006:
Bruce A. Shear ........................................19.59%
All Directors and Officers as a Group
(7 persons).........................................23.53%
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS as of JUNE
30, 2006
(a) (b) (c)
PLAN Number of Number of
securities securities
to be remaining
issued Weighted- available for
upon average further issuance
exercise exercise under equity
of price of compensation
outstanding outstanding plans (excluding
options, options securities
warrents warrents and reflected
and rights rights in column (a))
_________________________________________________
1993 Option plan 358,000 $0.64
2003 Option plan 636,250 $1.94 623,750
2006 Employee stock Purchase
plan -- $0 500,000
1995 Director plan 140,000 $0.99 --
2005 Director plan 100,000 $1.86 250,000
__________ __________ ____________
Total Shares and Options
authorized 1,234,250 $1.45 1,373,750
========== ========= =========
All equity compensation plans were approved by the security holders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
None
Item 14. Principal Accountant Fees and Services
The Company changed independent registered public accounting firms during
the fiscal year ended June 30, 2006. The following table presents fees for
professional audit services rendered by BDO Seidman, LLP and Eisner, LLP for the
Company's annual financial statements and quarterly review services and other
related services for the fiscal years ended June 30, 2006 and 2005:
2006 2005
____ ___
Audit Fees $ 186,600 $ 125,500
All other fees 5,000 --
__________ _________
Total fees $ 191,600 $ 125,500
========= =========
In fiscal 2006, BDO Seidman, billed the Company an additional $5,000 in
connection with the review of the company's S-8. This amount is 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 2006 and determined that such services were
-- 82 --
compatible with BDO Seidman, LLP's independence. Firms other than BDO Seidman,
LLP, and Eisner, LLP, provide tax and other accounting services.
Neither BDO Seidman, LLP nor Eisner, LLP directly or indirectly, operate,
or supervise the operation of, the Company's information systems or manage the
Company's local area network, nor did they 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.
-- 83 --
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: Page Number
o Report of Independent Registered Public Accounting Firms F-2-F3
o Consolidated balance sheets F-4
o Consolidated statements of operations F-5
o Consolidated statements of changes in stockholders' equity F-6
o Consolidated statements of cash flows F-7-F-8
o Notes to consolidated financial statements F-9-F-32
2) Financial Statement Schedules: All schedules are included in the
Consolidated financial statements and footnotes thereto
3) The following exhibits are filed as part of or furnished with this Form
10-K as applicable:
(b) Exhibits
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).
3.2 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.)
4.1 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).
4.2 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 4.17 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).
4.3 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 4.19 to the Company's report on Form 10-KSB dated
September 25, 2001. Commission file number 0-22916).
4.4 Form of Subscription Agreement and Warrant. (Filed as exhibit 4.20 to the
Company's report on Form 8-K filed with the Securities and Exchange
Cmmission on May 13, 2004. Commission file number 0-22916).
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 10.1 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).
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 10.2 to the Company's Registration Statement on
Form SB-2 dated March 2, 1994. Commission file number 333-71418).
10.3 Agreement between Family Independence Agency and Harbor Oaks Hospital
effective January 1, 1997. (Filed as exhibit 10.4 to the Company's report
on Form 10-KSB, with the Securities and Exchange Commission on October 14,
1997. Commission file number 0-22916)
-- 84 --
Exhibit No. Description
10.4 Master Contract by and between Family Independence Agency and Harbor Oaks
Hospital effective January 1, 1997. (Filed as exhibit 10.5 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).
10.5 The Company's 1993 Stock Purchase and Option Plan, as amended December
2002. (Filed as exhibit 10.23 to the Company's report on Form S-8 dated
January 8, 2003. Commission file number 333-102402).
10.6 The Company's 1995 Non-Employee Director Stock Option Plan, as amended
December 2002. (Filed as exhibit 10.24 to the Company's report on Form S-8
dated January 8, 2003. Commission file number 333-102402).
10.7 The Company's 1995 Employee Stock Purchase Plan, as amended December 2002.
(Filed as exhibit 10.25 to the Company's report on Form S-8 dated January
8, 2003. Commission file number 333-102402).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
-- 85 --
Exhibit No. Description
10.18 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).
10.19 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).
10.20 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).
10.21 One of two (2) Revolving Credit Notes in the amount of $1,500,000 issued
to replace the $3,500,000 note signed in favor of CapitalSource Finance,
LLC dated October 19, 2004 by and between PHC of Michigan, Inc., PHC of
Nevada, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., North Point -
Pioneer, Inc., Wellplace, Inc., Detroit Behavioral Institute, Inc. and
CapitalSource Finance LLC. (Filed as exhibit 10.47 to the Company's report
on Form 10-QSB dated May 13, 2005. Commission file number 0-22916).
10.22 One of two (2) Revolving Credit Notes in the amount of $2,000,000 issued
to replace the $3,500,000 note signed in favor of CapitalSource Finance,
LLC dated October 19, 2004 by and between PHC of Michigan, Inc., PHC of
Nevada, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., North Point -
Pioneer, Inc., Wellplace, Inc., Detroit Behavioral Institute, Inc. and
CapitalSource Finance LLC. (Filed as exhibit 10.48 to the Company's report
on Form 10-QSB dated May 13, 2005. Commission file number 0-22916).
10.23 Agreement to purchase licensed software by and between PHC, Inc., and
Medical Information Technology, Inc., dated March 31, 2006. (Filed as
exhibit 10.49 to the Company's report on Form 10-QSB dated May 22, 2006.
Commission file number 0-22916).
10.24 Master lease agreement by and between PHC, Inc., and
Banc of America Leasing & Capital, LLC, dated April 20, 2006, effective
April 1, 2006, in the amount of $662,431. (Filed as exhibit 10.50 to the
Company's report on Form 10-QSB dated May 22, 2006. Commission file number
0-22916).
*10.25 First Amendment to 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. , adjusting the covenants for census and
EBITDAM.
*10.26 Second Amendment to 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. , extending the term of the agreement through
October 19, 2008.
*14.1 Code of Ethics
21.1 List of Subsidiaries.
*23.1 Consent of Eisner, LLP, an independent registered public accounting firm.
*23.2 Consent of BDO Seidman, LLP, an independent registered public accounting
firm.
-- 86 --
23.3 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
-- 87 --
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: October 12, 2006 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 October 12, 2006
_________________________ Executive Officer and
Bruce A. Shear Director (principal
executive officer)
/s/ PAULA C. WURTS Chief Financial Officer October 12, 2006
_________________________ Treasurer and Clerk
Paula C. Wurts (principal financial
and accounting officer)
/s/ DONALD E. ROBAR Director October 12, 2006
_________________________
Donald E. Robar
/s/ HOWARD PHILLIPS Director October 12, 2006
_________________________
Howard Phillips
/s/ WILLIAM F. GRIECO Director October 12, 2006
_________________________
William F. Grieco
/S/ DAVID E. DANGERFIELD Director October 12, 2006
_________________________
David E. Dangerfield
-- 88 --