UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2006.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to
-----------
Commission file number 0-22916
PHC, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2601571
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Lake Street, Suite 102, Peabody MA 01960
(Address of principal executive offices) (Zip Code)
978-536-2777
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer ____ Accelerated filer___- Non accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ____ No X
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding of each class of common equity, as of October 30,
2006:
Class A Common Stock 17,814,365
Class B Common Stock 775,760
1
PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets - September 30, 2006 (unaudited)
and June 30, 2006.
Condensed Consolidated Statements of Operations (unaudited) - Three
months ended September 30, 2006 and September 30, 2005.
Condensed Consolidated Statements of Cash Flows (unaudited) - Three
months ended September 30, 2006 and September 30, 2005.
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits
Signatures
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
ASSETS 2006 2006
(unaudited)
_______ _____________ __________
Current assets:
Cash and cash equivalents $ 1,774,410 $1,820,105
Accounts receivable, net of allowance
for doubtful accounts of
$3,155,365 at September 30, 2006 and
$3,100,586 at June 30, 2006 7,167,055 6,955,475
Pharmaceutical receivables 1,474,353 1,470,019
Prepaid expenses 948,474 490,655
Other receivables and advances 907,769 751,791
Deferred income tax asset 2,960,768 3,110,000
_____________ __________
Total current assets 15,232,829 14,598,045
Accounts receivable, non-current 35,000 40,000
Other receivable 47,680 53,457
Property and equipment, net 1,943,734 1,799,888
Deferred financing costs, net of
amortization of $115,661 at September
30, 2006 and $106,422 June 30, 2006 107,785 117,023
Customer relationships, net of amortization
of $290,000 at September
30, 2006 and $260,000 at June 30, 2006 2,110,000 2,140,000
Goodwill 2,664,643 2,664,643
Other assets 555,377 571,931
_____________ __________
Total assets $22,697,048 $ 21,984,987
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,831,519 $ 1,518,615
Current maturities of long-term debt 872,518 909,057
Revolving credit note 1,777,931 1,603,368
Deferred revenue 246,286 385,742
Current portion of obligations under capital
leases 146,660 57,881
Accrued payroll, payroll taxes and benefits 1,632,449 1,619,672
Accrued expenses and other liabilities 1,052,408 1,026,419
_____________ __________
Total current liabilities 7,559,771 7,120,754
Long-term debt 890,997 1,021,546
Obligations under capital leases 47,075 61,912
Deferred tax liability 325,000 325,000
_____________ __________
Total liabilities 8,822,843 8,529,212
_____________ __________
Stockholders' equity:
Preferred Stock, 1,000,000 shares
authorized, none issued or outstanding -- --
Class A common stock, $.01 par value,
30,000,000 shares authorized,
17,953,463 and 17,874,966 shares issued
at September 30, 2006 and
June 30, 2006, respectively 179,535 178,749
Class B common stock, $.01 par value,
2,000,000 shares authorized,
775,760 issued and outstanding at
September 30, 2006 and June 30,
2006, respectively, each convertible
into one share of Class A common
Stock 7,758 7,758
Additional paid-in capital 23,852,558 23,718,197
Treasury stock, 199,098 shares of Class A
common stock at September 30,
2006 and June 30, 2006, at cost (191,700) (191,700)
Accumulated deficit (9,973,946) (10,257,229)
_____________ __________
Total stockholders' equity 13,874,205 13,455,775
_____________ __________
Total liabilities and stockholders' equity $22,697,048 $21,984,987
============= ===========
See Notes to Condensed Consolidated Financial Statements
3
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
2006 2005
____________________________
Revenues:
Patient care, net $ 7,876,432 $ 6,712,980
Pharmaceutical studies 1,051,383 1,306,009
Contract support services 1,134,391 925,837
___________ ___________
Total revenues 10,062,206 8,944,826
___________ ___________
Operating expenses:
Patient care expenses 3,955,652 3,261,911
Patient care expenses, pharmaceutical 486,937 563,154
Cost of contract support services 838,555 597,795
Provision for doubtful accounts 452,525 656,887
Administrative expenses 3,095,455 2,629,676
Administrative expenses, pharmaceutical 679,108 633,999
___________ ___________
Total operating expenses 9,508,232 8,343,422
___________ ___________
Income from operations 553,974 601,404
___________ ___________
Other income (expense):
Interest income 32,849 22,864
Other (expense)income (943) 10,785
Interest expense (119,830) (155,218)
___________ ___________
Total other expenses, net (87,924) (121,569)
___________ ___________
Income before provision for taxes 466,050 479,835
Provision for income taxes 182,767 95,628
___________ ___________
Net income $283,283 $384,207
Basic net income per common share $ 0.02 $ 0.02
___________ ___________
Basic weighted average number of shares
outstanding 18,514,142 18,099,342
___________ ___________
Diluted net income per common share $ 0.01 $ 0.02
___________ ___________
Diluted diluted weighted average number of
shares outstanding 19,296,638 19,270,164
___________ ___________
See Notes to Condensed Consolidated Financial Statements.
4
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
September 30
2006 2005
____________________________
Cash flows from operating activities:
Net income $ 283,283 $ 384,207
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 170,591 135,976
Non-cash interest expense 16,489 13,932
Deferred income tax asset 149,232 --
Non-cash stock-based compensation 70,781 75,497
Change in allowance for doubtful accounts 54,779 753,851
Changes in:
Accounts receivable (415,894) 589,090
Prepaid expenses and other current assets (457,819) (465,900)
Other assets (1,188) (33,769)
Accounts payable 312,904 1,282,177
Accrued expenses and other liabilities (100,690) (641,447)
___________ __________
Net cash provided by operating activities 82,468 915,434
___________ __________
Cash flows from investing activities:
Acquisition of property and equipment (152,959) (369,848)
___________ __________
Net cash used in investing activities (152,959) (369,848)
___________ __________
Cash flows from financing activities:
Revolving debt, net 174,563 188,078
Proceeds from borrowings on long-term debt -- 13,932
Principal payments on long-term debt (214,132) (192,420)
Proceeds from issuance of common stock, net 64,365 50,424
Purchase of treasury stock -- (18,533)
___________ __________
Net cash provided by financing activities 24,796 41,481
___________ __________
Net (decrease) increase in cash and cash equivalents (45,695) 587,067
Beginning cash and cash equivalents 1,820,105 917,630
___________ __________
Ending cash and cash equivalents $1,774,410 $ 1,504,697
___________ __________
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 171,548 $ 155,218
Income taxes 116,384 108,300
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in cashless exercise
of warrants $ 30 $ --
Obligations under capital leases 104,497 --
See Notes to Condensed Consolidated Financial Statements.
5
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2006
Note A - The Company
PHC, Inc. (the "Company") is a national healthcare company which operates
subsidiaries specializing in behavioral health services including the treatment
of substance abuse, which includes alcohol and drug dependency and related
disorders and the provision of psychiatric services. The Company also conducts
pharmaceutical research studies, operates help lines for employee assistance
programs, call centers for state and local programs and provides management,
administrative and online behavioral health services. The Company primarily
operates under four business segments:
(1) Behavioral health treatment services, including two substance abuse
treatment facilities: Highland Ridge Hospital, located in Salt Lake City,
Utah, which also treats psychiatric patients, and Mount Regis Center,
located in Salem, Virginia, and eight psychiatric treatment locations which
include Harbor Oaks Hospital, a 64-bed psychiatric hospital located in New
Baltimore, Michigan, Detroit Behavioral Institute, a 50-bed residential
facility and six outpatient behavioral health locations (one in New
Baltimore, Michigan operating in conjunction with Harbor Oaks Hospital, two
in Las Vegas, Nevada operating as Harmony Healthcare and three locations
operating as Pioneer Counseling Center in the Detroit, Michigan
metropolitan area);
(2) Pharmaceutical research study services, including 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
provides help line services through contracts with major railroads and a
call center contract with Wayne County Michigan. The call centers both
operate under the brand name Wellplace; and
(4) Behavioral health administrative services, including delivery of management
and administrative and online services. The parent company provides
management and administrative services for all of its subsidiaries and
online services for its behavioral health treatment subsidiaries and its
call center subsidiaries. It also provides behavioral health information
through its website, Wellplace.com.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended
September 30, 2006 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2007. The accompanying financial
statements should be read in conjunction with the June 30, 2006 consolidated
financial statements and footnotes thereto included in the Company's 10-K filed
on October 13, 2006.
Revenue Recognition
The Company bills for its behavioral healthcare services at its inpatie nt and
outpatient facilities using different software platforms for each type of
service; however, in all cases the charges are contractually adjusted at the
time of billing using adjustment factors based on agreements or contracts with
the insurance carriers and the specific plans held by the individuals. This
method may still require additional adjustment based on ancillary services
provided and deductibles and copays due from the individuals which are estimated
at the time of admission based on information received from the individual.
Adjustments to these estimates are recognized as adjustments to revenue during
the period identified, usually when payment is received.
6
The Company's policy is to collect estimated co-payments and deductibles at the
time of admission. Payments are made by way of cash, check or credit card. If
the patient does not have sufficient resources to pay the estimated co-payment
in advance, the Company's policy is to allow payment to be made in three
installments- one third due upon admission, one third due upon discharge and the
balance due 30 days after discharge. At times the patient is not physically or
mentally stable enough to comprehend or agree to any financial arrangement. In
this case the Company will make arrangements with the patient once his or her
condition is stabilized. At times, this situation will require the Company to
extend payment arrangements beyond the three payment method previously outlined.
Whenever extended payment arrangements are made, the patient, or the individual
who is financially responsible for the patient, is required to sign a promissory
note to the Company, which includes interest on the balance due.
Pharmaceutical study revenue is recognized only after a pharmaceutical study
contract has been awarded and the patient has been selected and accepted based
on study criteria and billable units of service are provided. Where a contract
requires completion of the study by the patient, no revenue is recognized until
the patient completes the study program. All revenues and receivables from our
research division are derived from pharmaceutical companies with no related bad
debt allowance.
Contract support service revenue is a result of fixed fee contracts to provide
telephone support. Revenue for these services is recognized ratably over the
service period. All revenues and receivables from our contract services division
are based on a prorated monthly allocation of the total contract amount and
usually paid within 30 days of the end of the month.
The Company's days sales outstanding ("DSO") are significantly different for
each type of service and each facility based on the payors for each service.
Overall, the DSO for the combined operations of the Company were 86 days for the
three months ended September 30, 2006 and 92 days the fiscal year ended June 30,
2006. The table below shows the DSO by segment for the same periods.
Period Treatment Pharmaceutical Contract
End Services Services Services
09/30/2006 84 129 64
06/30/2006 91 93 51
This increase in the Pharmaceutical Services DSO's is related to the high DSO's
normally associated with research receivables coupled with the recent start up
of a large research contract. Contract Services DSO's fluctuate dramatically by
the delay in payment of a few days for any of our large contracts. There was
such a delay in payments for the Michigan call center at the end of the quarter
ended September 30, 2006, inflating the DSO's for the period.
Note C- Stock Based Compensation
The Company has three active stock plans: a stock option plan, an employee stock
purchase plan and a non-employee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 1,300,000 shares
of Class A common stock of the Company pursuant to the grant of incentive stock
options to employees or nonqualified stock options to employees, directors,
consultants and others whose efforts are important to the success of the
Company. Subject to the provisions of this plan, the compensation committee of
the Board of Directors has the authority to select the optionees and determine
the terms of the options including: (i) the number of shares, (ii) option
exercise terms, (iii) the exercise or purchase price (which in the case of an
incentive stock option will not be less than the market price of the Class A
common stock as of the date of grant), (iv) type and duration of transfer or
other restrictions and (v) the time and form of payment for restricted stock
upon exercise of options.
The employee stock purchase plan provides for the purchase of Class A common
stock at 85 percent of the fair market value at specific dates, to encourage
stock ownership by all eligible employees. A maximum of 500,000 shares may be
issued under this plan.
The non-employee directors' stock option plan provides for the grant of
nonstatutory stock options automatically at the time of each annual meeting of
the Board. Under the plan a maximum of 350,000 shares may be issued. Each
7
outside director is granted an option to purchase 20,000 shares of Class A
common stock annually at fair market value on the date of grant, vesting 25%
immediately and 25% on each of the first three anniversaries of the grant and
expiring ten years from the grant date.
The Company issues stock options to its employees and directors and provides
employees the right to purchase stock pursuant to stockholder approved stock
option and stock purchase plans. Effective July 1, 2005, the Company adopted the
provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No.
123R), using the Statement's modified prospective application method. Prior to
July 1, 2005, the Company followed Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock compensation.
Under the provisions of SFAS No. 123R, the Company recognizes the fair value of
stock compensation in net income, over the requisite service period of the
individual grantees, which generally equals the vesting period. All of the
Company's stock compensation is accounted for as an equity instrument and there
have been no liability awards granted. Any income tax benefit related to stock
compensation will be shown under the financing section of the Cash Flow
Statement. Based on the Company's historical voluntary turnover rates for
individuals in the positions who received options in the period, there was no
forfeiture rate assessed. It is assumed these options will remain outstanding
for the full term of issue. Under the true-up provisions of SFAS 123R, a
recovery of prior expense will be recorded if the actual forfeiture is higher
than estimated.
At June 30, 2005, the Company accelerated the vesting on all previously granted
options. Therefore, as of the date of adoption there was no unrecognized expense
for options issued prior to June 30, 2005. The expense recorded in the three
months ended September 30, 2006, $70,781, is for the vesting of options issued
during the September quarter in fiscal 2006. Under the provisions of SFAS 123R,
the Company recorded $70,781 and $75,497 of stock-based compensation on its
consolidated condensed statement of operations for the three months ended
September 30, 2006 and 2005, respectively, which is included in administrative
expenses as follows:
Three Months Ended Three Months Ended
September 30, 2006 September 30, 2005
Employee compensation $70,781 $75,497
_______ _______
Total $70,781 $75,497
======= =======
The Company had the following activity in its stock option plans for the three
months ended September 30, 2006:
Number Weighted-Average Intrinsic Value
of Exercise Price at
Shares Per Share September 30, 2006
__________ ________________ _________________
Balance - June 30, 2006 1,234,250 $1.45
Granted -- $ --
Exercised (75,500) $0.85
Expired (2,000) $3.50
_________
Balance - September 30, 2006 1,156,750 $1.48 $ 771,256
========= =========
Exercisable 912,688 $1.25 $821,418
========= =========
The total intrinsic value of options exercised during the three-months ended
September 30, 2006 was $103,245.
The following summarizes the activity of the Company's stock options that have
not vested for the three months ended September 30, 2006.
8
Number Weighted-
of Average
Shares Fair Value
_______ __________
Nonvested at July 1, 2006 302,812 $1.16
Granted 0 --
Expired 0 --
Vested 58,750 $1.21
_______
Nonvested at September 30, 2006 244,062 $1.15
=======
The compensation cost related to the fair value of these shares of $281,241 will
be recognized when these options vest over the next three years.
The Company utilized the Black-Scholes valuation model for estimating the fair
value of the stock compensation granted after the adoption of SFAS 123R. There
were no options issued in the quarter ended September 30, 2006. The
weighted-average fair values of the options granted under the stock option plans
for the three months ended September 30, 2005 was $1.21, using the following:
Three Months Ended Three Months Ended
September 30, 2006 September 30, 2005
__________________ __________________
Average risk-free interest -- 4.50%
rate
Expected dividend yield -- None
Expected life -- 4 years
Expected volatility -- 45.0%
The dividend yield of zero is based on the fact that the Company has never paid
cash dividends and has no present intention to pay cash dividends. Expected
volatility is based on the historical volatility of our common stock over the
period commensurate with the expected life of the options. The risk-free
interest rate is the U.S. Treasury rate on the date of grant. The expected life
was calculated using the Company's historical experience for the expected term
of the option.
Note D- Reclassifications
Certain September 30, 2005 amounts have been reclassified to be consistent with
the September 30, 2006 presentation.
Note E - Business Segment Information
The Company's behavioral health treatment services have similar economic
characteristics, services, patients and clients. Accordingly, all behavioral
health treatment services are reported on an aggregate basis under one segment.
The Company's segments are more fully described in Note A above. Residual income
and expenses from closed facilities are included in the administrative services
segment. The following summarizes the Company's segment data:
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
___________ ______________ ________ ______________ ___________ __________
For the three months ended:
September 30, 2006
Revenues - external
customers $7,876,432 $1,051,383 $1,134,391 $ -- $ -- $10,062,206
Revenues - intersegment 4,500 -- 21,640 924,000 950,140) --
Segment Net income (loss) 1,073,638 (126,767) 255,565 (919,153) -- 283,283
Capital Expenditures 105,468 21,268 1,565 21,268 -- 152,959
Depreciation & Amortization 88,764 37,367 13,444 11,309 -- 150,884
9
Interest Expense 87,397 16,605 1,278 14,550 -- 119,830
Income tax expense 138,498 -- 40,343 3,926 -- 182,767
Identifiable assets 11,163,908 5,594,180 1,006,661 4,932,299 -- 22,697,048
Goodwill 969,099 3,805,544 -- -- -- 4,774,643
<c>
Note E - Business Segment Information (continued)
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
___________ ______________ ________ ______________ ____________ _________
September 30, 2005
Revenues - external $6,712,980 $1,306,009 $ 925,837 $ -- $ -- $ 8,944,826
customers
Revenues - intersegment 2,750 -- -- 816,000 (818,750) --
Segment Net income (loss) 684,935 92,828 336,500 (730,056) -- 384,207
Capital Expenditures 333,348 15,495 6,170 14,835 -- 369,848
Depreciation & Amortization 86,503 39,863 2,304 7,306 -- 135,976
Interest Expense 119,479 16,028 -- 19,711 -- 155,218
Income tax expense 81,071 -- 14,557 -- -- 95,628
Note F - Debt covenants
For the quarter ended September 30, 2006, the Company was not in compliance with
its long term debt covenants related Earnings Before Interest Taxes Depreciation
and Amortization. These covenants are based on the Company's projections using
an equally distributed average of the Company's annual projections, which we
failed to meet for the quarter. The first quarter tends to be less profitable
than the third and fourth quarters each year because of lower adolescent census
during the summer months. CapitalSource, the Company's lender, has provided the
Company with a waiver of this covenant for the period.
Note G - Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 108, "Considering the Effects on Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements," ("SAB
108"). SAB 108 requires registrants to quantify errors using both the income
statement method (i.e. iron curtain method) and the rollover method and requires
adjustment if either method indicates a material error. If a correction in the
current year relating to prior year errors is material to the current year, then
the prior year financial information needs to be corrected. A correction to the
prior year results that are not material to those years, would not require a
"restatement process" where prior financials would be amended. SAB 108 is
effective for fiscal years ending after November 15, 2006. We do not anticipate
that SAB 108 will have a material effect on our financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," to
define fair value, establish a framework for measuring fair value in accordance
with generally accepted accounting principles, and expand disclosures about fair
value measurements. SFAS No. 157 will be effective for fiscal years beginning
after November 15, 2007, the beginning of the Company's 2008 fiscal year. The
Company is assessing the impact the adoption of SFAS No. 157 will have on the
Company's financial position and results of operations.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
In addition to historical information, this report contains statements relating
to future events or our future results. These statements are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as amended (the
"Exchange Act") and are subject to the Safe Harbor provisions created by the
statute. Generally words such as "may", "will", "should", "could", "anticipate",
"expect", "intend", "estimate", "plan", "continue", and "believe" or the
negative of or other variation on these and other similar expressions identify
forward-looking statements. These forward-looking statements are made only as of
the date of this report. We do not undertake to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise. Forward-looking statements are based on current
expectations and involve risks and uncertainties and our future results could
differ significantly from those expressed or implied by our forward-looking
statements.
Overview
The Company presently provides behavioral health care services through two
substance abuse treatment centers, a psychiatric hospital, a residential
treatment facility and six outpatient psychiatric centers (collectively called
"treatment facilities"). The Company's revenue for providing behavioral health
services through these facilities is derived from contracts with managed care
companies, Medicare, Medicaid, state agencies, railroads, gaming industry
corporations and individual clients. The profitability of the Company is largely
dependent on the level of patient census and the payor mix at these treatment
facilities. Patient census is measured by the number of days a client remains
overnight at an inpatient facility or the number of visits or encounters with
clients at outpatient clinics. Payor mix is determined by the source of payment
to be received for each client being provided billable services. The Company's
administrative expenses do not vary greatly as a percentage of total revenue but
the percentage tends to decrease slightly as revenue increases. The Company's
internet operation, Behavioral Health Online, Inc., continues to provide
behavioral health information through its web site at Wellplace.com but its
primary function is Internet technology support for the subsidiaries and their
contracts. As such, the expenses related to Behavioral Health Online, Inc. are
included as corporate expenses. The Company's research division, Pivotal
Research Centers, Inc., contracts with major manufacturers of pharmaceuticals to
assist in the study of the effects of certain pharmaceuticals in the treatment
of specific illnesses through its clinics in Utah, 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
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
11
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 the quarter ended September 30, 2006 for
revenue booked in prior years resulted in an increase in net revenue of
approximately $21,400. Net contractual adjustments recorded in fiscal 2006 for
revenue booked in prior years resulted in an increase in net revenue for the
year of approximately $343,700.
During the fiscal year ended June 30, 2006, a Medicare cost report settlement of
$158,100 was received. No cost report settlements were received or recorded
during the three months ended September 30, 2006.
Our accounts receivable systems are capable of providing an aging based on
responsible party or payor. This information is critical in estimating our
required allowance for bad debts. Below is revenue by payor and the accounts
receivable aging information as of September 30, 2006, 2005 and June 30, 2006,
for our treatment services segment.
Net Revenue by Payor (in thousands)
For the Three Months Ended For the Three Months Ended For the Twelve Months Ended
September 30, 2006 September 30, 2005 June 30, 2006
Amount Percentage Amount Percentage Amount Percentage
___________________________ ___________________________ ___________________________
Private Pay $ 340 4% $ 311 5% $ 1,207 5%
Commercial 4,881 62% 4,470 67% 17,572 63%
Medicare * 359 5% 292 4% 946 3%
Medicaid 2,296 29% 1,640 24% 8,137 29%
________ ___ ________ ___ _______ ___
Net Revenue $ 7,876 $ 6,713 $27,862
________ _______ _______
* includes Medicare settlement revenue as noted above
12
Accounts Receivable Aging (Net of allowance for bad debts- in thousands)
Quarter Ended September 30, 2006
Over Over Over Over Over Over Over
Payor Current 30 60 90 120 150 270 360 Total
_____ _______ _____ ____ ____ ____ ____ ____ ____ _____
Private Pay $ 420 $ 333 $280 $158 $136 $ 736 $ 42 $ 18 $2,123
Commercial 1,617 603 259 195 166 514 110 111 3,575
Medicare 202 23 6 2 11 73 -- -- 317
Medicaid 784 101 41 34 40 187 -- -- 1,187
_______ _____ ____ ____ ____ ______ ____ ____ ______
Total $3,023 $1,060 $586 $389 $353 $1,510 $152 $129 $7,202
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
Pharmaceutical study revenue is recognized only after a pharmaceutical study
contract has been awarded and the patient has been selected and accepted based
on study criteria and billable units of service are provided. Where a contract
requires completion of the study by the patient, no revenue is recognized until
the patient completes the study program. All revenues and receivables from our
research division are derived from pharmaceutical companies with no related bad
debt allowance.
Contract support service revenue is a result of fixed fee contracts to provide
telephone support. Revenue for these services is recognized ratably over the
service period. All revenues and receivables from our contract services division
are based on a prorated monthly allocation of the total contract amount and
usually paid within 30 days of the end of the month.
Allowance for doubtful accounts:
The provision for bad debts is calculated based on a percentage of each aged
accounts receivable category beginning at 0-5% on current accounts and
increasing incrementally for each additional 30 days the account remains
outstanding until the account is over 360 days outstanding, at which time the
provision is 80-100% of the outstanding balance. These percentages vary by
facility based on each facility's experience in and expectations for collecting
older receivables. The Company compares this required reserve amount to the
current "Allowance for doubtful accounts" to determine the required bad debt
expense for the period. This method of determining the required "Allowance for
doubtful accounts" has historically resulted in an allowance for doubtful
accounts of 20% or greater of the total outstanding receivables balance.
Income Taxes:
13
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
quarters ended September 30, 2006 and 2005 (in thousands):
2006 2005
(in thousands)
Statements of Operations Data:
Amount % Amount %
Revenue $10,062 100.0% $8,945 100.0%
_______ ______ _______ ______
Cost and Expenses:
Patient care expenses 4,442 44.2% 3,825 42.8%
Contract expenses 839 8.3% 598 6.7%
Administrative expenses 3,774 37.5% 3,264 36.5%
Provision for bad debts 453 4.5% 657 7.3%
Interest expense 120 1.2% 155 1.7%
Other (income) expenses, net (32) -0.3% (34) -0.4%
_______ ______ ______ _______
Total expenses 9,596 95.4% 8,465 94.6%
Income before income taxes 466 4.6% 480 5.4%
Provision for income taxes 183 1.8% 96 1.1%
_______ ______ ______ _______
Net income $ 283 2.8% $ 384 4.3%
_______ ______ ______ _______
Results of Operations
Total net revenue from operations increased 12.5% to $10,062,206 for the three
months ended SepFtember 30,2006 from $8,944,826 for the three months ended
September 30, 2005.
Net patient care revenue increased 17.3% to $7,876,432 for the three months
ended September 30, 2006 from $6,712,980 for the three months ended September
30, 2005. This increase in revenue is due primarily to the addition of the 20
adjudicated juvenile beds at Detroit Behavioral Institute which helped to create
14
a 31.0% increase in patient days for the three months ended September 30, 2006
over the same period last year. Excluding Detroit Behavioral Institute, combined
census in our other inpatient facilities increased 15% largely due to renewed
marketing efforts.
Two key indicators of profitability of inpatient facilities are patient days, or
census, and payor mix. Patient days is the product of the number of patients
times length of stay. Increases in the number of patient days result in higher
census, which coupled with a more favorable payor mix (more patients with higher
paying insurance contracts or paying privately) will usually result in higher
profitability. Therefore, patient census and payor mix are monitored very
closely.
Revenue from pharmaceutical studies decreased 19.5% to $1,051,383 for the three
months ended September 30, 2006 from $1,306,009 for the three months ended
September 30, 2005. This decrease is due to the cyclical nature of the
pharmaceutical research business where the size and number of clinical trial
starts and stops changes daily. As a result, revenues from pharmaceutical
studies vary greatly from period to period based on the number of active studies
and available qualified participants for each active study.
Contract support services revenue provided by Wellplace increased 22.5% to
$1,134,391 for the three months ended September 30, 2006 from $925,837 for the
three months ended September 30, 2005. This increase in revenue is due to the
start of the smoking cessation contract with a government contractor in October
2005, which increased monthly revenue by approximately $70,000 per month since
the executiuon of the contract.
Patient care expenses in our treatment centers increased 21.3% to $3,955,652 for
the three months ended September 30, 2006 from $3,261,911 for the three months
ended September 30, 2005. This increase in expenses is due primarily to the
increase in patient days noted above with the majority of the increases in
expenses directly related to patient census such as payroll, hospital supplies,
food and pharmacy expense. Lower census in some facilities tends to result in a
higher acuity requiring a higher staffing ratio and higher ancillary costs.
Patient care expenses related to our pharmaceutical or research division
decreased 13.5% to $486,937 for the three months ended September 30, 2006 from
$563,154 for the three months ended September 30, 2005. This is due to the
decrease in the number of study patients receiving stipends for participation in
studies.
Contract support services expenses increased 40.3% to $838,555 for the three
months ended September 30, 2006 from $597,795 for the three months ended
September 30, 2005. This increase was due to expenses incurred in the
commencement of the new smoking cessation contract previously mentioned. This
resulted in increased payroll and related expenses and additional depreciation
cost related to new equipment purchases.
Administrative expenses increased 17.7% to $3,095,455 for the quarter ended
September 30, 2006 from $2,629,676 for the quarter ended September 30, 2005.
These changes are a result of the increased administrative payroll and employee
benefits related to the establishment and opening of the additional beds at
Detroit Behavioral Institute. Administrative payroll increased 18.5% and
employee benefits increased 23.8%. Marketing expenses increased approximately
156% as we increased national marketing efforts for our facilities. Rent expense
increased approximately 29% due to the increase in space at Detroit Behavioral
Institute for the girls unit. Insurance expense increased 16.7% for the quarter
ended September 30, 2006. Utilities increased approximately 14.4% for the
quarter ended September 30, 2006.
Administrative expenses related to the research division increased 7.11% to
$679,108 for the three months ended September 30, 2006 from $633,999 for the
three months ended September 30, 2005. This increase is primarily due to a 21.0%
increase in payroll expense, a 17.6% increase in advertising, a 23.2% increase
in telephone expense and a 9.9% increase in office expense as the study business
is rebuilding.
Provision for doubtful accounts decreased 31.1% to $452,525 for the three months
ended September 30, 2006 from $656,887 for the three months ended September 30,
2005. The Company's policy is to maintain reserves based on the age of its
receivables. This decrease in the provision for doubtful accounts is largely
attributable to the additional provision amount last year because of the
software failure at Harbor Oaks. With the software issues largely resolved the
provision for doubtful accounts is leveling off at a more reasonable amount at
6% of net patient care revenue as opposed to the 10% that was recorded last
year.
The environment the Company operates in today makes collection of receivables,
particularly older receivables, more difficult than in previous years.
Accordingly, the Company has increased staff, standardized some procedures for
collecting receivables and instituted a more aggressive collection policy.
15
Interest income increased 43.7% to $32,849 for the three months ended September
30, 2006 from $22,864 for the three months ended September 30, 2005. This
increase is a result of increased cash in our investment accounts resulting in
higher interest payments.
Other income / expense decreased 108.7% to $(943) for the three months ended
September 30, 2006 from $10,785 for the three months ended September 30, 2005.
This change is due processing of the amount lost from the theft at our smallest
inpatient facility. The amount the loss was offset by an insurance settlement of
$10,000.
Interest expense decreased 22.8% to $119,830 for the three months ended
September 30, 2006 from $155,218 for the three months ended September 30, 2005.
This decrease is due to the reduction of our long term debt over the last year.
The Company's provision for income taxes of $182,767 for the three month period
ended September 30, 2006 is based on an estimated combined tax rate of
approximately 39% for both Federal and State taxes based on Company earnings
projections. If this estimate is found to be high or low, adjustments will be
made in the period of the determination. This will most likely be at year end
when tax estimates can be more accurately made.
Liquidity and Capital Resources
The Company's net cash provided by operating activities was $82,468 for the
three months ended September 30, 2006 compared to $915,434 for the three months
ended September 30, 2005. During fiscal 2005, the amount provided was due to an
increase in Accounts Payable of $1,282,177 partially offset by a decrease in
Accrued expenses of $641,447 and an increase in allowance for doubtful account
of $753,851 partially offset by an increse in accounts receivable of $589,090.
Cash flow provided by operations in the three months ended September 30, 2006
consists of net income of $283,283 plus depreciation and amortization of
$170,591, non-cash interest expense $16,489, non-cash equity based charges of
$70,781, a decrease in deferred tax asset of $149,232 and an increase in net
accounts payable of $312,904 less cash used for net changes in accounts
receivable and other operating assets of $362,303, decreases in accrued expenses
of $314,430 and an increase in prepaid expenses of $457,819.
Cash used in investing activities in the three months ended September 30, 2006
consisted of $152,959 in capital expenditures compared to $369,848 in capital
expenditures during the same period last year. The Company has a lease line that
is currently being used to purchase the hardware and software for the Meditech
system. These assets are being put into place but will not be depreciated until
fully operational which is expected to be April 2007.
Cash provided by financing activities of $24,796 in the three months ended
September 30, 2006 was the result of the issuance of common stock for the
exercise of options, an increase in the borrowing on the revolving credit
facility offset by the repayment of long term debt for a total net reduction in
debt of $39,569.
A significant factor in the liquidity and cash flow of the Company is the timely
collection of its accounts receivable. As of September 30, 2006, accounts
receivable from patient care, net of allowance for doubtful accounts, increased
2% to $7,202,055 from $6,995,475 on June 30, 2005. This minimal increase is a
result of increased revenue. The Company monitors increases in accounts
receivable closely and, based on the aging of the receivables outstanding, is
confident that the increase is not indicative of a payor problem. Over the
years, we have increased staff, standardization of some procedures for
determining insurance eligibility and collecting receivables and established a
more aggressive collection policy. The increased staff has allowed the Company
to concentrate on current accounts receivable and resolve any issues before they
become uncollectible. The Company's collection policy calls for earlier contact
with insurance carriers with regard to payment, use of fax and registered mail
to follow-up or resubmit claims and earlier employment of collection agencies to
assist in the collection process. Our collectors will also seek assistance
through every legal means, including the State Insurance Commissioner's office,
when appropriate, to collect claims. The Company has begun the process of
changing its software related to the recording, billing and collecting of
Accounts Receivable. This system will assist staff in the timely billing and
collection of receivables. At the same time, the Company continues to closely
monitor reserves for bad debt based on potential insurance denials and past
difficulty in collections.
Contractual Obligations
16
The Company's future minimum payments under contractual obligations related to
capital leases, operating leases and term notes as of September 30, 2006 are as
follows (in thousands):
YEAR ENDING OPERATING
September 30, TERM NOTES CAPITAL LEASES * LEASES TOTAL
Principal Interest Principal Interest
2007 $ 872 $ 31 $ 181 $ 73 $1,507 $2,684
2008 392 24 195 41 1,524 2,156
2009 135 19 168 28 1,493 1,843
2010 223 15 111 12 1,019 1,380
2011 47 11 97 23 369 547
2012 52 5 -- -- 73 130
Thereafter 44 2 -- -- -- 46
______ _____ _____ _____ ______ ______
Total $1,765 $ 108 $ 752 $ 177 $5,985 $8,786
* This amount includes scheduled payments on the Master lease for the
hardware and software which has not yet been recorded as debt.
In addition to the above, the Company is also subject to three contingent notes
with a total face value of $2,500,000 as part of the Pivotal acquisition. Of
these notes, two totaling $1,500,000, one for $1,000,000 and one for $500,000,
bear interest at 6% per annum. These notes are subject to additional adjustment
based on the earnings of the acquired operations. Since adjustment can be
positive or negative based on earnings, with no ceiling or floor, the liability
for only one of these notes was recorded as of June 30, 2006. 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 $669,908 which
represents the earn out for the Pivotal acquisition through December 31, 2005
net of payments made through September 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 $172,205 is included in the schedule above.
In October 2004, the Company entered into a revolving credit, term loan and
security agreement with CapitalSource Finance, LLC to replace the Company's
primary lender and provide additional liquidity. Each of the Company's material
subsidiaries, other than Pivotal Research Centers, Inc, is a co-borrower under
the agreement. The agreement includes a term loan in the amount of $1,400,000,
with a balance of $564,272 at September 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 September 30, 2006
was $1,777,931. 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 September 30, 2006
is not included in the above table.
During the fiscal year ended June 30, 2006, the Company amended the above
agreement on two separate occasions, first to modify the required covenants to
more closely reflect the fluctuations in the Company's normal business flow and
second to extend the period of the agreement for an additional year through
October 19, 2008.
17
For the quarter ended September 30, 2006, the Company was not in compliance with
its long term debt covenants related Earnings Before Interest Taxes Depreciation
and Amortization. These covenants are based on the Company's projections using
an equally distributed average of the Company's annual projections, which we
failed to meet for the quarter. The first quarter tends to be less profitable
than the third and fourth quarters each year because of lower adolescent census
during the summer months. CapitalSource, the Company's lender, has provided the
Company with a waiver of this covenant for the period.
The Company has operated ongoing operations profitably for twenty-three
consecutive quarters with the exception of the litigation settlement and related
legal costs incurred in the third quarter of fiscal year 2004. While it is
difficult to project whether the current positive business environment towards
behavioral health treatment and the new business opportunities will continue, it
gives us confidence to foresee continued improved results.
Off Balance Sheet Arrangements
The Company has no off-balance-sheet arrangements, except the contingent notes
disclosed in contractual obligations, that have or are reasonably likely to have
a current or future effect on the Company's financial condition, changes in
financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to the Company.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The market price of our common stock could be volatile and fluctuate
significantly in response to various factors, including:
o Differences in actual and estimated earnings and cash flows;
o Operating results differing from analysts' estimates;
o Changes in analysts' earnings estimates;
o Quarter-to-quarter variations in operating results;
o Changes in market conditions in the behavioral health care industry;
o Changes in market conditions in the research industry;
o Changes in general economic conditions; and
o Fluctuations in securities markets in general.
Financial Risk
o Our interest expense is sensitive to changes in the general level of
interest rates. With respect to our interest-bearing liabilities, all
of our long-term debt outstanding is subject to rates at prime plus
2.25% and prime plus 3.5%, which makes interest expense increase with
changes in the prime rate. On this debt, each 25 basis point increase
in the prime rate will affect an annual increase in interest expense
of approximately $5,850.
o Failure to meet targeted revenue projections could cause us to be out
of compliance with covenants in our debt agreements requiring a waiver
from our lender. A waiver of the covenants may require our lender to
perform additional audit procedures to assure the stability of their
security which could require additional fees.
Operating Risk
o Aging of accounts receivables could result in our inability to collect
receivables. As our accounts receivable age and become uncollectible
our cash flow is negatively impacted. Our accounts receivable from
patient accounts (net of allowance for bad debts) were $7,202,055 at
September 30, 2006, $6,995,475 at June 30, 2006 and $6,330,381 at June
30, 2005. As we expand, we will be required to seek payment from a
larger number of payors and the amount of accounts receivable will
likely increase. We have focused on better accounts receivable
management through increased staff, standardization of some procedures
for collecting receivables and a more aggressive collection policy in
18
order to keep the change in receivables consistent with the change in
revenue. We have also established a more conservative reserve policy,
allowing greater amounts of reserves as accounts age from the date of
billing. If the amount of receivables, which eventually become
uncollectible, exceeds such reserves, we could be materially adversely
affected. The following chart represents our Accounts Receivable and
Allowance for Doubtful Accounts at September 30, 2006 and June 30,
2006, respectively, and Bad Debt Expense for the quarter ended
September 30, 2006 and the year ended June 30, 2006:
Accounts Allowance for Bad Debt
Receivable Doubtful Accounts Expense
___________ _________________ _________
September 30, 2006 $10,357,420 $ 3,155,365 $ 452,525
June 30, 2006 10,096,061 3,100,586 1,912,516
o The Company relies on contracts with more than ten clients to maintain
patient census at its inpatient facilities and the loss of any of such
contracts would impact our ability to meet our fixed costs. We have
entered into relationships with large employers, health care
institutions and labor unions to provide treatment for psychiatric
disorders, chemical dependency and substance abuse in conjunction with
employer-sponsored employee assistance programs. The employees of such
institutions may be referred to us for treatment, the cost of which is
reimbursed on a per diem or per capita basis. Approximately 30% of our
total revenue is derived from these clients. No one of these large
employers, health care institutions or labor unions individually
accounts for 10% or more of our consolidated revenues, but the loss of
any of these clients would require us to expend considerable effort to
replace patient referrals and would result in revenue losses and
attendant loss in income.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified within the
SEC's Rules and Forms and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management was necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures to meet the
criteria referred to above. Based on the foregoing, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective.
Change in Internal Controls
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
most recent evaluation.
19
PART II OTHER INFORMATION
Item 6. Exhibits
Exhibit List
Exhibit No. Description
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
20
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHC, Inc.
Registrant
Date: November 14, 2006 /s/ Bruce A. Shear
Bruce A. Shear
President
Chief Executive Officer
Date: November 14, 2006 /s/ Paula C. Wurts
Paula C. Wurts
Treasurer
Chief Financial Officer
21