UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended June 30, 2007
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to
Commission file number: 1-33323
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:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
Securities registered under Section 12(g) of the Act:
NONE
(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 ___ No X
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, 2006 the aggregate market value of the shares of common stock
of the registrant held by non-affiliates of the registrant was approximately
$57.2 million.
As of September 24, 2007, 19,272,978 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
Portions of the Registrant's Proxy Statement for the 2007 Annual Meeting of
Stockholders are incorporated herein by reference in Part III of this Annual
Report on Form 10-K to the extent stated herein.
1
Table of Contents
Index Page
Explanatory Note 3
10-K Table of Contents 4
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 5
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 8. Financial Statements and Supplementary Data 22
Index to financial statements F-1
PART III
Item 10. Directors, Executive Officers and Corporate Governance 54
Item 11. Executive Compensation 57
PART IV
Item 15. Exhibits and Financial Statement Schedules 66
List of Exhibits included in this report on form 10-K/A 66
Signatures 67
2
Explanatory Note
This amendment to the Company's report on Form 10-K, filed with the
Commission on September 28, 2007, is being filed to correct information in the
original filing as follows:
Table of Contents
The original table of contents is being corrected to show the correct page
numbers for the report on Form 10-K as originally filed.
PART II
Item 5, Market for Registrant's Common Equity and related Stockholder
Matters, is being amended to correct the date of the referenced 8-K filing from
December 20, 2007 to December 20, 2006 and to include the market performance
graph as required in the annual report to shareholders.
Item 6, Selected Financial Data, is being amended to correct a
typographical error in the amount shown as Administrative Expenses for 2006 from
$13,727 to $13,728.
Item 7, Management's Discussion and analysis of Financial Condition and
Results of Operations:
Results of Operations, Statements of Operations Data table to correct the
2007 percentages of Income before income taxes, Benefit from (provision for)
income taxes, and Net Income; to correct the amount of total patient care and
administrative expenses and related percentages; and, to change the footnote
reference from Note I to Note K - Segment Information.
Year ended June 30, 2007 compared to June 30, 2006 to correct comparisons
of patient care expenses to more accurately reflect the accounts included; to
correct the patient care and administive expense comparisons to reflect the
reallocation of these expenses in the Income Statement; and, to change the
footnote reference from Note I to Note K - Segment Information.
Liquidity and Capital Resources is being amended to correct the amount
shown as capital expenditures and net debt repayments to reflect the correct
amounts as shown in the Statement of Cash flows; to correct the name of the LLC
the Company invested in, to Seven Hills Psych Center, LLC; to correct the filing
date of the referenced 8-K filing from December 20, 2007 to December 20, 2006;
to include the average interest rate paid on our revolving credit line of credit
and additional information regarding the refinancing of our long term debt in
June 2007 and to correct the precentage of revenue derived from a single client
from 15% to 10%.
Item 8, Financial Statements and Supplementary Data, is being amended to
correct the page numbers of the financial reports from F-27 through F-31; to
correct a typographical error on the balance sheet under the heading Other
receivables 2007 which was filed as $93,697 but should be $91,697; to reclassify
amounts on the income statement under the heading Patient care expenses 2007 to
Administrative Expenses 2007; to correct the name of the LLC the Company
invested in, to Seven Hills Psych Center, LLC: to eliminate information
duplicated in NOTE E which includes the information on the Pivotal acquisition
note (Note B) at $729,801 and the information regarding the Company's compliance
with its financial covenants and to correct the segment net income allocation
for the year ended June 30, 2007 and the total assets from $21,984,987 to
$21,715,987 for the year ended June 30, 2006 in Note K.
PART III
Item 10, Directors, Executive Officers, Promoters and Control Persons, is
being amended to correct the number of meetings of the Compensation Committee
held during 2007 to include telephonic meetings.
Item 11, Executive Compensation, is being amended to correct the
compensation to directors previously reported incorrectly.
PART IV
3
Item 15, Exhibits and Financial Statement Schedules, is being amended to
correct the final page number of the Notes to the consolidated financial
statements.
This Form 10-K/A does not amend, update or change any other items or any
other disclosure in the Original Report or reflect events that occurred after
the date of the Original Report. Therefore, this Amendment should be read in
conjunction with our Original Report and our other filings made with the
Securities and Exchange Commission subsequent to the filing of the Original
Report.
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 Disclosures 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 and Corporate Governance 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 Transactions and
Director Independence 81
Item 14. Principal Accountant Fees and Services 81
PART IV
Item 15. Exhibits and Financial Statement Schedules 83
Signatures 87
4
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A Common Stock has been listed on the American Stock Exchange
since February 2007 under the symbol "PHC". Prior to that date it was 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.
HIGH LOW
____ ___
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
2007
First Quarter (July 1, 2006 - September 30, 2006) $2.39 $2.00
Second Quarter (October 1, 2006 - December 31, 2006) $3.18 $2.00
Third Quarter (January 1, 2007 - March 31, 2007) $3.78 $2.76
Fourth Quarter (April 1, 2007 - June 30, 2007) $3.32 $2.77
On August 15, 2007, there were 683 holders of record of the Company's Class
A Common Stock and 300 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 fiscal 2007.
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 market price of the Company's common stock has been volatile in the
past. The shares have sold at prices varying between a low of $1.75 and a high
of $3.78 from July 2005 through June 2007. Trading prices may continue to
fluctuate in response to changes in the Company's results of operations from
quarter.
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.
During the twelve month period ended June 30, 2007, the Company did not issue
any preferred stock; however, it did issue 961,539 shares of unregistered Class
A common stock in a private placement with the requirement to register the
common stock which was done in February 2007. (See the Company's report on form
8-K filed with the Securities and Exchange Commission on December 20, 2006 for
additional details regarding this transaction).
5
STOCK PERFORMANCE GRAPH
The following table depicts the cumulative total return on the Company's
common stock compared to the cumulative total return for the Nasdaq Composite-US
Index and the Nasdaq Health Services Index (which includes both U.S. and foreign
companies), an index published by the University of Chicago's Center for
Research in Security Prices. The table assumes the investment of $100 on June
30, 2002.
Comparison of Five-Year Cumulative Total Returns
Performance Report for
PHC, Inc.
Prepared by the Center for Research in Security Prices
Produced on 09/27/2007 including data to 06/29/2007
Company Index: CUSIP Ticker Class Sic Exchange
69331510 PHC A 8082 AMEX
Fiscal Year-end is 06/30/2007
Market Index: Nasdaq Stock Market (US Companies)
Peer Index: Nasdaq Health Services Stocks
SIC 8000-8099 US & Foreign
Date Company Index Market Index Peer Index
06/28/2002 100.000 100.000 100.000
07/31/2002 83.544 90.869 90.624
08/30/2002 96.203 89.904 88.230
09/30/2002 94.937 80.235 87.980
10/31/2002 94.937 91.195 89.481
11/29/2002 87.342 101.362 89.865
12/31/2002 103.797 91.534 85.991
01/31/2003 101.266 90.545 88.801
02/28/2003 100.000 91.817 82.374
03/31/2003 117.722 92.081 85.353
04/30/2003 106.329 100.450 87.320
05/30/2003 94.937 109.270 98.341
06/30/2003 97.468 111.023 105.272
07/31/2003 106.329 118.673 112.688
08/29/2003 102.532 123.849 114.804
09/30/2003 108.861 122.239 118.153
10/31/2003 111.392 132.080 125.005
11/28/2003 156.962 134.038 131.553
12/31/2003 175.949 136.863 131.497
01/30/2004 193.671 140.920 141.880
02/27/2004 158.228 138.268 146.977
03/31/2004 170.886 135.913 146.220
04/30/2004 145.570 131.409 150.293
05/28/2004 130.380 135.773 150.496
06/30/2004 140.506 139.945 156.311
07/30/2004 146.835 129.263 142.018
08/31/2004 132.911 126.099 136.695
09/30/2004 153.165 129.860 138.118
10/29/2004 172.152 135.125 141.260
11/30/2004 192.405 143.451 156.938
12/31/2004 182.278 148.944 165.721
01/31/2005 206.329 141.194 162.956
02/28/2005 232.911 140.391 170.209
03/31/2005 254.430 136.821 180.643
04/29/2005 253.165 131.844 181.097
05/31/2005 251.899 142.037 186.528
06/30/2005 320.253 141.461 197.526
07/29/2005 367.089 150.488 202.057
08/31/2005 306.329 148.101 206.869
09/30/2005 360.759 148.219 209.084
10/31/2005 322.785 146.315 212.473
11/30/2005 302.532 154.296 230.843
12/30/2005 263.291 152.110 227.863
01/31/2006 278.481 158.826 242.328
02/28/2006 272.152 157.247 235.339
03/31/2006 291.139 161.346 238.946
04/28/2006 275.949 160.077 229.412
05/31/2006 278.481 150.420 227.725
06/30/2006 278.481 150.417 226.575
07/31/2006 298.734 144.682 227.431
08/31/2006 265.823 151.106 229.161
09/29/2006 272.152 156.308 219.257
10/31/2006 259.494 163.962 209.430
11/30/2006 282.278 168.248 216.406
12/29/2006 402.532 167.115 227.554
01/31/2007 392.405 170.371 230.059
02/28/2007 474.684 166.886 233.926
03/30/2007 411.392 167.357 239.310
04/30/2007 398.734 174.615 251.628
05/31/2007 417.722 179.974 267.219
06/29/2007 386.076 179.305 265.692
The index level for all series was set to 100.0 on 06/28/2002
6
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, 2007 and 2006
and for each of the three years in the period ended June 30, 2007 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, 2007 and
2006 and BDO Seidman, LLP, with respect to June 30, 2005. Each of these firms is
an independent registered public accounting firm. The selected consolidated
financial data as of and for the years ended June 30, 2004 and 2003 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,
2007 2006 2005 2004 2003
____ ____ ____ ____ ____
(in thousands, except share and per share data)
Statements of Operations Data:
Revenues $ 45,127 $ 38,013 $ 34,063 $ 26,649 $ 23,833
Cost and Expenses:
Patient care expenses 21,965 16,512 14,582 12,422 11,676
Contract expenses 3,103 2,676 2,198 2,392 1,399
Administrative expenses 15,116 13,728 12,424 10,333 8,204
Provision for doubtful accounts 1,934 1,913 1,272 1,356 1,108
Interest expense 649 607 655 532 542
Other (income) expenses including
interest income, net (469) (158) (150) (140) (129)
____________ ___________ __________ ____________ ____________
Total expenses 42,298 35,278 30,981 26,895 22,801
____________ ___________ __________ ____________ ____________
Income (loss) before income taxes 2,829 2,735 3,082 (246) 1,032
Provision for (benefit from) income 1,147 (1,310) (74) 11 54
taxes ____________ ___________ __________ ____________ ___________
Net income (loss) 1,682 4,045 3,156 (257) 978
____________ ___________ __________ ____________ ___________
Net income (loss) applicable to
common shareholders $ 1,682 $ 4,045 $ 3,156 $ (257) $ 978
=========== =========== =========== ============ ===========
Basic income (loss) per common share $ 0.09 $ 0.22 $ 0.18 $ (0.02) $ 0.07
=========== =========== =========== ============ ==========
Basic weighted average number of
shares outstanding 19,287,665 18,213,901 17,574,678 14,731,395 13,944,047
========== =========== ========== =========== ==========
Diluted income (loss) per common
share $ 0.09 $ 0.21 $ 0.17 $ (0.02) $ 0.07
=========== =========== ========== =========== ===========
Diluted weighted average number of
shares outstanding 19,704,697 19,105,193 18,364,076 14,731,395 14,564,078
========== ========== =========== =========== ==========
7
2007 2006 2005 2004 2003
____ ____ ____ ____ ____
Balance Sheet Data:
Cash and cash equivalents $ 3,395 $ 1,820 $ 918 $ 595 $ 495
Working capital 7,546 7,208 4,106 241 736
Long-term debt and obligations under
capital leases 2,398 2,059 2,712 2,285 3,002
Total stockholders' equity 18,250 13,455 9,102 5,367 1,935
Total assets 27,290 21,715 17,896 13,312 9,412
8
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, 2007, 2006 and
2005. 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 nine 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 (The
Parity Act). 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
9
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 period 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 two "at-risk" contracts. The contracts call for
the Company to provide for all of the inpatient and outpatient behavioral health
needs of the insurance carrier's enrollees in a specified area for a fixed
monthly fee per member per month. Revenues are recorded monthly based on this
formula and the expenses related to providing the services under these contracts
are recorded as incurred. The Company provides as much of the outpatient care
directly and, through utilization review, monitors closely, all inpatient and
outpatient services not provided directly. The contracts are 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 2007 for revenue booked in prior
years resulted in an increase in net revenue of approximately $26,430. Net
contractual adjustments recorded in fiscal 2006 for revenue booked in prior
years resulted in an increase in net revenue of approximately $343,700.
During the fiscal year ended June 30, 2007, a Medicare cost report
settlement of $255,600 was received and in the fiscal year ended June 30, 2006,
a Medicare cost report settlement of approximately $158,100 was received. No
cost report settlements were received during the fiscal year ended June 30,
2005. For the fiscal years ended June 30, 2007, 2006 and 2005, 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, 2007, June 30, 2006 and June 30,
2005 for our treatment services segment.
Net Patient Care Revenue by Payor (in thousands)
For the Twelve Months Ended
June 30, 2007 June 30, 2006 June 30, 2005
_____________ _____________ _____________
Amount Percent Amount Percent Amount Percent
______ _______ ______ _______ ______ _______
Private Pay $ 1,632 5% $ 1,207 5% $ 1,212 5%
Commercial 23,477 65% 17,572 63% 17,608 67%
Medicare* 1,379 4% 946 3% 999 4%
Medicaid 9,535 26% 8,137 29% 6,268 24%
_______ _______ _______
Net Revenue $36,023 $27,862 $26,087
======== ======== ========
10
* 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, 2007
Over Over Over Over Over Over Over
Payor Current 30 60 90 120 150 270 360 Total
_____ ______ ______ ____ ____ ____ ______ ____ ____ _____
Private Pay $ 102 $ 119 $151 $108 $121 $ 77 $178 $ 36 $ 892
Commercial 1,608 974 616 197 105 100 160 96 3,856
Medicare 134 69 4 15 24 28 -- -- 274
Medicaid 1,030 143 68 42 24 230 -- -- 1,537
______ ______ ____ ____ ____ ______ ____ ____ ______
Total $2,874 $1,305 $839 $362 $274 $ 435 $338 $132 $6,559
====== ======= ==== ==== ==== ======= ==== ==== ======
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
====== ====== ==== ==== ==== ====== ==== ==== ======
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.
11
Income Taxes:
The Company follows the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
prescribes an asset and liability approach, which requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of the
assets and liabilities. The Company's policy is to record a valuation allowance
against deferred tax assets unless it is more likely than not that such assets
will be realized in future periods. During the fourth quarter of fiscal year
ended June 30, 2006, the Company recognized 100% of its federal deferred tax
benefit based on past profitability and future projections. The total tax
benefit recorded was $1,638,713. During fiscal 2007 the company recorded a
provision for tax expense of $1,147,000 a blended state and federal tax rate of
approximately 40.5%.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are initially created as a result of
business combinations or acquisitions. The Company makes 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 in determining the value ascribed to the assets acquired. 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.
Investment in Seven Hills
Included in other assets as of June 30, 2007 is the Company's investment in
Seven Hills Psych Center, LLC of $400,000. This LLC holds the assets of the
Seven Hospital currently being built and expected to be complete in the early
part of calendar year 2008. Also included is the escrow deposit of $1,362,000
the Company has made toward the leasehold improvements for the anticipated
leasing arrangement upon completion of the construction of the building.
Results of Operations
During the fiscal year ended June 30, 2007 the Company experienced a
significant decrease in the revenues in the research division due to delays in
study starts. This change in the research division is not evident in the table
below because of large increases in the Company's core business. The decrease in
the research division results are outlined below and detailed in Note K to the
financial statements accompanying this report under the heading "Pharmaceutical
Study Services".
The following table illustrates our consolidated results of operations for
the years ended June 30, 2007, 2006 and 2005 (in thousands):
2007 2006 2005
____ ____ ____
Statements of Operations Data: (in thousands)
Amount % Amount % Amount %
Revenue $45,127 100.0% $38,013 100.0% $34,063 100.0%
_______ ______ _______ ______ _______ ______
Costs and expenses:
Patient care expenses 21,921 48.6% 16,512 43.5% 14,582 42.8%
Contract expenses 3,103 6.9% 2,676 7.0% 2,198 6.5%
Administrative expenses 15,161 33.6% 13,727 36.1% 12,424 36.5%
Provision for bad debts 1,933 4.3% 1,913 5.0% 1,272 3.7%
Interest expense 649 1.4% 607 1.6% 655 1.9%
12
Other (income)expenses, net (469) -1.0% (158) -0.4% (150) -0.4%
_______ ______ _______ ______ _______ ______
Total expenses 42,298 93.7% 35,278 92.8% 30,981 91.0%
_______ ______ _______ ______ _______ ______
Income before income taxes 2,829 6.3% 2,735 7.2% 3,082 9.0%
Benefit from (provision for)
income taxes (1,147) -2.5% 1,310 3.4% 74 0.2%
_______ ______ _______ ______ _______ ______
Net income $ 1,682 3.8% $ 4,045 10.6% $3,156 9.3%
======= ==== ======= ===== ======= =====
Year ended June 30, 2007 as compared to year ended June 30, 2006
The Company's income from its operations decreased 5.48% to $3,009,904 for
the fiscal year ended June 30, 2007 from $3,184,426 for the fiscal year ended
June 30, 2006. Net income, decreased 58.4% to $1,682,283 for the fiscal year
ended June 30, 2007 from $4,045,482 for the fiscal year ended June 30, 2006.
This decrease is the result of $1,147,000 in provision for tax expense recorded
in fiscal 2007 as compared to $1,310,103 in net income tax benefit recorded in
fiscal 2006. Income before taxes increased 3.43% to $2,829,283 for the fiscal
year ended June 30, 2007 from $2,735,379 for the fiscal year ended June 30,
2006. This increase was primarily due to the two new contracts added during the
year that are projected to increase gross revenues by $10,000,000 annually, once
fully implemented, and increased patient census . This increase is significant
since it includes start-up costs of these contracts of approximately $100,000
and uncapitalizable costs of the Meditech software implementation in progress
and the construction in progress of the Seven Hills Hospital. We also
experienced a down-turn in the pharmaceutical revenue as it is dependent on
unpredictable study starts and largely volatile as shown in "Note K - Segment
Information" in the accompanying financial statements for the period ended June
30, 2007, 2006 and 2005.
Total revenues increased 18.72% to $45,127,477 for the year ended June 30,
2007 from $38,013,092 for the year ended June 30, 2006.
Total net patient care revenue from all facilities increased 29.29% to
$36,022,529 for the year ended June 30, 2007 as compared to $27,861,701 for the
year ended June 30, 2006. Patient days increased over 5,291 days for the fiscal
year ending June 30, 2007 over the fiscal year ended June 30, 2006. In October
2005 the Company opened 20 additional residential beds, increasing our available
beds from 160 to 180. These additional available beds accounted for
approximately 74% of the increase in patient days for the fiscal year ended June
30, 2007. The contracted rate for these residential beds is lower than that of
our other facilities, which negatively impacts our revenue per patient day
without positive changes in our census and payor mix at our other facilities.
Net inpatient care revenue from inpatient psychiatric services increased 14.56%
to $21,508,417 for the year ended June 30, 2007 from $18,775,198 the fiscal year
ended June 30, 2006. This increase is due to a change in payor mix to payors
with more favorable approved rates and from the increase in residential
treatment beds. Net partial hospitalization and outpatient care revenue
increased 59.7% to $14,514,112 for the year ended June 30, 2007 from $9,086,503
for the year ended June 30, 2006. This increase is primarily due to the new
capitated contract and high usage of these step-down programs by managed care as
a treatment alternative to inpatient care. Pharmaceutical study revenue
decreased 21.3% to $4,564,314 for the year ended June 30, 2007 from $5,799,815
for the year ended June 30, 2006. This decrease is largely due to the delay in
the start of some significant studies that were expected to start in the first
quarter of the year but did not start until the fourth quarter of fiscal 2007
and a large study that ran in the last half of fiscal 2006. Revenues increased
in our contract support services division, Wellplace. Wellplace revenues
increased 4.3% to $4,540,634 for the year ended June 30, 2007 from $4,351,576
for the year ended June 30, 2006. This increase in revenue is primarily due to
increases in contract rates. 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 $5,468,817, or
38.3%, to $19,738,357 for the year ended June 30, 2007 from $14,269,540 for the
year ended June 30, 2006 due to the increase in available beds contributing to
the increase in patient census at our inpatient facilities and the increased
utilization of our out-patient services as a result of the new capitated rate
contract. Inpatient census increased by 5,291 patient days, 10.7%, for the year
ended June 30, 2007 compared to the year ended June 30, 2006. Contract expense,
which includes the cost of outside service providers for our capitated contracts
13
increased 650.6% to $1,785,697 for the year ended June 30, 2007 from $237,899
for the year ended June 30, 2006 due to the new capitated rate contract
effective January 1, 2007. This contract has an expected annual gross revenue of
approximately $8,000,000 and calls for the Company to provide behavioral health
care for approximately 325,000 members. Payroll and service related consultant
including agency nursing increased 31.6% to $14,579,031 for the year ended June
30, 2007 from $11,075,774 for the year ended June 30, 2006, Food and dietary
expense increased 1.0% to $776,796 for the year ended June 30, 2007 from
$769,367 for the year ended June 30, 2006, hospital supplies expense increased
30.3% to $93,204 for the year ended June 30, 2007 from $71,539 for the year
ended June 30, 2006, and other patient related expenses increased to 7.5% to
$101,277 for the year ended June 30, 2007 from $94,218 for the year ended June
30, 2006. All of these increases were a result of increased patient census and
increased utilization of our out patient services. 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 and
out patient visits. (see "Operating Statistics" Part I, Item 1).
Patient care expenses for the research division decreased 2.7% to
$2,182,357 for the year ended June 30, 2007 from $2,242,900 for the year ended
June 30, 2006. This decrease is due to the delay in the start of studies.
Payroll and related direct care expenses decreased 17.0% to $1,463,009 for the
year ended June 30, 2007 from $1,763,308 for the year ended June 30, 2006.
Patient supplies expense decreased 36.0% to $24,830 for the year ended June 30,
2007 from $38,770 for the year ended June 30, 2006. Other patient related
expenses increased 53.0% to $694,518 for the year ended June 30, 2007 from
$453,822 for the year ended June 30, 2006. This increase is primarily due to the
increased advertising to gear up for the new studies started in the fourth
quarter of the 2007 fiscal year.
Cost of contract support services related to Wellplace increased 15.9% to
$3,102,551 for the year ended June 30, 2007 from $2,676,340 for the year ended
June 30, 2006. This increase is due to the increased staffing to support the
smoking cessation contract which started in November 2005 and increases in
related employee expenses and the increased cost related to the smoking
cessation software maintenance. Payroll and payroll related expenses increased
23.6% to $1,576,061 for the year ended June 30, 2007 from $1,274,937 for the
year ended June 30, 2006.
Provision for doubtful accounts increased 1.1% to $1,933,499 for the fiscal
year ended June 30, 2007 from $1,912,516 for the fiscal year ended June 30,
2006. This increase is a result of increases in accounts receivable in line with
increases in revenue. 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 as receivables age. The goal of the Company, given this policy, is to
keep any increase in the provision for doubtful accounts in line with increases
in revenue.
The environment the Company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the Company has increased staff, standardized some
procedures for collecting receivables and instituted a more aggressive
collection policy, 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 2.3% to $10,323,972 for the year ended June
30, 2007 from $10,096,061 for the year ended June 30, 2006, the Company believes
its reserve of approximately 36% 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 higher contractual
adjustments and a higher rate of denials requiring and higher reserves.
Total administrative expenses, excluding research, increased 13.5% to
$12,722,007 for the year ended June 30, 2007 from $11,210,296 for the year ended
June 30, 2006. Administrative salaries increased 20.6% to $4,232,863 for the
year ended June 30, 2007 from $3,508,980 for the year ended June 30, 2006.
Payroll tax expense increased 16.9% to $354,229 for the year ended June 30, 2007
from $302,932 for the year ended June 30, 2006. Employee benefits increased
16.1% to $676,464 for the year ended June 30, 2007 from $582,785 for the year
ended June 30, 2006. Other employee benefits increased 93.1% to $239,555 for the
year ended June 30, 2007 from $124,035 for the year ended June 30, 2006. All of
these increases in payroll and employee related expenses are a result of an
increase of approximately 200% in the staff at our Las Vegas out patient
location to service the new capitated rate contract and greater competition for
experienced health care administrative staff resulted in these increased
salaries. General insurance expense increased 17.9% to $760,338 for the year
ended June 30, 2007 from $644,882 for the year ended June 30, 2006 due to
general increases in property and liability insurance and the addition of three
additional out patient sites, two in Las Vegas and one in Arizona. Rent expense
14
increased 28.9% to $1,440,342 for the year ended June 30, 2007 from $1,117,098
for the year ended June 30, 2006. This increase is due to the three additional
clinics opened this year and normal CPI increases included in our property
leases. Transfer fee expense increased 255.6% to $91,932 for the year ended June
30, 2007 from $25,856 for the year ended June 30, 2006 as a result of the
initial American Stock Exchange listing fee.
Total administrative expenses for the research division decreased 3.1% to
$2,438,802 for the year ended June 30, 2007 from $2,517,074 for the year ended
June 30, 2006. Administrative payroll and taxes was the most significant of the
change as it decreased 5.7% to $974,695 for the year ended June 30, 2007 from
$1,033,160 for the year ended June 30, 2006 due to the closing of the Michigan
office and the decrease in study activity. Advertising expense decreased 25.4%
to $216,953 for the year ended June 30, 2007 from $290,673 for the year ended
June 30, 2006. This decrease was also a result of the decrease in study
activity.
Interest expense increased 7.0% to $649,166 for the year ended June 30,
2007 from $606,893 for the year ended June 30, 2006. This increase is due to the
amortization of $55,728 and the write off of $13,932 debt discount on the old
debt to interest and amortization of $4,868 on the new debt discount as a part
of the debt refinancing in June 2007.
The Company's provision for income taxes of $1,147,000 for the year ended
June 30, 2007 represents a blended state and federal tax rate of approximately
40.5% compared to the prior years tax provision excluding the tax benefit of
$328,610 for the year ended June 30, 2006, which was significantly below the
Federal statutory rate of 34% primarily due to the utilization of net operating
loss carry-forwards. 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 federal tax benefit of
$1,638,713 and eliminated the valuation allowance against the deferred tax asset
for federal purposes.
Year 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
15
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
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
16
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.
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 exclusive of deferred income tax
benefits 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.
Liquidity and Capital Resources
As of June 30, 2007, the Company had working capital of $7,545,549,
including cash and cash equivalents of $3,395,173, compared to working capital
of $7,208,291, including cash and cash equivalents of $1,820,105 at June 30,
2006.
Cash provided by operating activities was $3,543,597 for the year ended
June 30, 2007, compared to $3,134,306 for the year ended June 30, 2006. Cash
provided by operations in fiscal 2007 consists of the net income of $1,682,283,
offset by an increase in total increase in accounts receivable of $855,237, an
increase in prepaid expenses of $197,945, an increase in other assets of
$229,885 and a decrease in accounts payable of $247,818. These uses of cash from
operations were offset by a $735,933 increase in accrued expenses and other
liabilities and further offset by non-cash items including depreciation and
amortization of $744,206, non-cash interest expense of $164,994, change in
deferred tax expense asset of $863,000, a change in allowance for bad debt of
$663,999 and stock based compensation of $220,067.
Cash used in investing activities in fiscal 2007 consisted of $955,459 in
capital expenditures for the acquisition of property and equipment, $400,000
investment in the Seven Hills Psych Center, LLC and $1,719,623 in advances on
the construction in progress for the Seven Hills Hospital compared to $710,638
in
17
capital expenditures for property and equipment in the fiscal year ended June
30, 2006. Other than Seven Hills related investments, the increase was primarily
due the purchase and implementation of the Meditech software and the upgrade of
hardware to accommodate the software Company wide.
Cash provided by financing activities in fiscal 2007 consisted of
$1,246,798 in net debt repayments, $83,664 in deferred financing costs, and
$64,783 in private placement costs offset by $2,501,798 received from the
issuance of common 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, 2007 accounts
receivable from patient care, net of allowance for doubtful accounts, decreased
approximately 6% to $6,559,387 on June 30, 2007 from $6,995,475 on June 30,
2006. This decrease is due to an increase in the allowance for bad debt and the
faster turn around of receivables related to the new capitatated contract. 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
uncollectible. 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 equity component for the build-out of the
Company's Las Vegas hospital project, Seven Hills, on December 19, 2006, the
Company entered into an agreement pursuant to which the Company sold $2,000,000
in unregistered Class A Common Stock to a single investor. The agreement allowed
the investor, Camden Partners Limited Partnership, to purchase $2,000,000 in
PHC, Inc. Class A Common Stock at $2.08 per share, which is the average selling
price per share over the 20 trading days prior to the sale, minus 4%. (For
additional details regarding this transaction see the Company's current report
on form 8-K filed with the Securities and Exchange Commission on December 20,
2006).
Contractual Obligations
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes as of June 30, 2007 are as
follows (in thousands):
YEAR OPERATING
ENDING TERM NOTES CAPITAL LEASES LEASES TOTAL**
_______ __________ _____________ _________ _______
June 30
Principal Interest Principal Interest Payments
2008 $1,134 $ 25 $ 206 $ 41 $2,088 $3,494
2009 625 20 170 25 2,072 2,912
2010 53 16 45 14 1,764 1,892
2011 46 12 11 6 721 796
2012 51 8 -- -- 304 363
2013 57 3 -- -- 261 321
______ ____ _____ ____ ______ ______
Total $1,966 $ 84 $ 432 $ 86 $7,210 $9,778
====== ==== ===== ===== ======= =======
* The Meditech Lease - The total Capital Lease amount above includes the
Meditech Lease, which was previously listed separately since almost
the total amount on the lease has been advanced and we have begun the
implementation process as of July 1, 2007.
** Total does not include the amount due under the revolving credit note
of $1,518,742. This amount represents an accounts receivable funding
described below and is shown as a current note payable in the
accompanying Financial Statements.
18
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, 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 these notes was only
recorded after the required revenue targets were met. 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 $441,109 which
represents the earn out for the Pivotal acquisition through December 31, 2005
net of payments made through June 30, 2007. Earn-out requirements have been met
on the $500,000 note which resulted in the recording of this earn-out note in
the amount of $923,934 which includes $80,000 in accrued interest. The above
table includes the outstanding balance on this note of $729,801. 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 $180,112 is included in the schedule above. (See Note
C 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. This agreement was amended on June 13, 2007 to increase the
amount available under the term loan, extend the term, decrease the interest
rates and modify the covenants based on the Company's current financial
position. The agreement now includes a term loan in the amount of $3,000,000,
with a balance of $289,143 at June 30, 2007, and an accounts receivable funding
revolving credit agreement with a maximum loan amount of $3,500,000. In
conjunction with this refinancing the Company paid $32,500 in commitment fees
and approximately $53,000 in legal fees and issued a warrant to purchase 250,000
shares of class A common stock at $3.09 per share valued at $456,880. The
relative fair value of the warrants was recorded as deferred financing costs and
is being amortized over the period of the loan as additional interest.
The term loan note carries interest at prime plus .75%, but not less than
6.25%, with twelve monthly reductions in available credit of $50,000 beginning
July 1, 2007 and increasing to $62,500 on July 1, 2009 until the expiration of
the loan. As of June 30, 2007 the Company had $2,710,857 available under the
term loan.
The revolving credit note carries interest at prime plus .25%, but not less
than 4.75% 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, 2007 was
$1,518,742. 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, 2007 for
the revolving credit note is not included in the above table. The average
interest rate paid on the revolving credit loan, which includes the amortization
of deferred financing costs related to the financing of the debt, was 14.28%.
This agreement was amended on June 13, 2007 to modify the terms of the
agreement. 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 (8.25% at June 30, 2007) plus
0.25%, but not less than 4.75%. The amended term of the agreement is for two
years, renewable for two additional one year terms. Upon expiration, all
remaining principal and interest are due. The revolving credit note is
collateralized by substantially all of the assets of the Company's subsidiaries
except Pivotal Research Centers, Inc. and guaranteed by PHC.
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
19
of allowance for bad debts) were $6,559,387 at June 30, 2007 compared with
$6,995,475 at June 30, 2006. 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, 2007 and 2006, respectively, and Bad Debt
Expense for the years ended June 30, 2007 and 2006:
Allowance for
Accounts Receivable doubtful accounts Bad Debt Expense
June 30, 2007 $10,323,972 $3,764,585 $1,933,499
June 30, 2006 10,096,061 3,100,586 1,912,516
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 June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an
interpretation of FASB Statement No. 109, (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements,
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 108, "Considering the Effects on Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108"). SAB 108 requires registrants to quantify errors using
both the income statement method (i.e. iron curtain method) and the rollover
method and requires adjustment if either method indicates a material error. If a
correction in the current year relating to prior year errors is material to the
current year, then the prior year financial information needs to be corrected. A
correction to the prior year results that are not material to those years, would
not require a "restatement process" where prior financials would be amended. SAB
108 is effective for fiscal years ending after November 15, 2006. Upon adoption
SAB 108 did not 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 2009 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.
In February 2007, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities ("SFAS No. 159"), including an amendment of FASB Statement No. 115.
SFAS No. 159 allows companies to choose to elect to measure eligible financial
instruments and certain other items at fair value that are not required to be
measured at fair value. SFAS No. 159 requires that unrealized gains and losses
20
on items for which the fair value option has been elected be reported in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007 and is required to be adopted by the
Company beginning in the first quarter of fiscal 2009. The Company is assessing
the impact the adoption of SFAS No. 159 will have on the Company's financial
position and results of operations.
21
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 Firms F-2 - F-3
Consolidated balance sheets F-4
Consolidated statements of income 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-31
F-1
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
PHC, Inc.
We have audited the accompanying consolidated balance sheets of PHC, Inc. and
subsidiaries as of June 30, 2007 and 2006, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years ended June 30, 2007 and 2006. 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 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, 2007 and 2006, and the consolidated results of
their operations and their consolidated cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Eisner LLP
New York, New York
September 27, 2007
F-2
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
PHC, Inc.:
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity and cash flows of PHC, Inc. and subsidiaries for the year
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 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
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
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 results of operations and
cash flows of PHC, Inc. and subsidiaries for the year 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
24
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2007 2006
____ ____
ASSETS (Note A)
Current assets:
Cash and cash equivalents
$3,395,173 $1,820,105
Accounts receivable, net of allowance for doubtful
accounts of $3,764,583 and $3,100,586 at June 30,
2007 and 2006, respectively 6,524,387 6,955,475
Pharmaceutical research receivables 1,942,268 1,470,019
Prepaid expenses 688,600 490,655
Other receivables and advances 868,628 751,791
Deferred tax assets 2,015,000 2,841,000
_________ _________
Total current assets 15,434,056 14,329,045
_________ _________
Accounts receivable, non-current 35,000 40,000
Other receivables 91,697 53,457
Property and equipment, net 2,121,191 1,799,888
Deferred financing costs, net of amortization of
$150,124 and $106,422 at June 30, 2007 and 2006,
respectively 613,865 117,023
Customer relationships, net of amortization of
$380,000 and $260,000 at June 30, 2007 and 2006,
respectively 2,020,000 2,140,000
Goodwill 3,508,576 2,664,643
Other assets 3,465,356 571,931
_________ _________
Total assets $27,289,741 $21,715,987
============ ===========
LIABILITIES
Current liabilities:
Accounts payable $ 1,261,841 $1,509,659
Current maturities of long-term debt 1,134,300 918,013
Revolving credit note 1,518,742 1,603,368
Deferred revenue 433,301 385,742
Current portion of obligations under capital leases 205,858 57,881
Accrued payroll, payroll taxes and benefits 1,631,693 1,619,672
Accrued expenses and other liabilities 1,702,772 1,026,419
_________ _________
Total current liabilities 7,888,507 7,120,754
Long-term debt, less current maturities 831,387 1,021,546
Obligations under capital leases 226,706 61,912
Deferred tax liabilities 93,000 56,000
_________ _________
Total liabilities 9,039,600 8,260,212
Commitments and contingent liabilities (Notes D, G, H, I and K)
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized, none
issued or outstanding -- --
Class A Common Stock, $.01 par value; 30,000,000
shares authorized, 19,622,076 and 17,874,966
shares issued at June 30, 2007 and 2006, respectively 196,221 178,749
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 775,760 and 775,760 issued and outstanding
at June 30, 2007 and 2006, respectively, each
convertible into one share of Class A Common Stock 7,758 7,758
Additional paid-in capital 26,812,808 23,718,197
Treasury stock, 199,098 and 199,098 class A common
shares at cost at June 30, 2007 and 2006,
respectively (191,700) (191,700)
Accumulated deficit (8,574,946)(10,257,229)
_________ ___________
Total stockholders' equity 18,250,141 13,455,775
__________ __________
Total liabilities and stockholders' equity $27,289,741 $21,715,987
=========== ===========
See accompanying notes to consolidated financial statements. F-4
25
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended June 30,
2007 2006 2005
____ ____ ____
Revenues:
Patient care, net $36,022,529 $27,861,701 $26,087,088
Pharmaceutical study 4,564,314 5,799,815 4,509,338
Contract support services 4,540,634 4,351,576 3,466,832
___________ ___________ ___________
Total revenues 45,127,477 38,013,092 34,063,258
___________ ___________ ___________
Operating expenses:
Patient care expenses 19,738,357 14,269,540 12,905,286
Patient care expenses, pharmaceutical 2,182,357 2,242,900 1,676,749
Cost of contract support services 3,102,551 2,676,340 2,197,518
Provision for doubtful accounts 1,933,499 1,912,516 1,272,037
Administrative expenses 12,722,007 11,210,296 9,667,138
Administrative expenses, pharmaceutical 2,438,802 2,517,074 2,757,118
___________ ___________ ___________
Total operating expenses 42,117,573 34,828,666 30,475,846
___________ ___________ ___________
Income from operations 3,009,904 3,184,426 3,587,412
___________ ___________ ___________
Other income (expense):
Interest income 159,946 68,397 73,176
Interest expense (649,166) (606,893) (654,871)
Other income, net 308,599 89,449 76,760
___________ ___________ ___________
Total other expense, net (180,621) (449,047) (504,935)
___________ ___________ ___________
Income before income taxes 2,829,283 2,735,379 3,082,477
Benefit from (provision for) income taxes (1,147,000) 1,310,103 73,423
___________ ___________ ___________
Net income $ 1,682,283 $ 4,045,482 $ 3,155,900
=========== =========== ===========
Basic net income per common share $ 0.09 $ 0.22 $ 0.18
=========== =========== ===========
Basic weighted average number of shares
outstanding 19,287,665 18,213,901 17,574,678
=========== ========== ===========
Fully diluted net income per common
share $ 0.09 $ 0.21 $ 0.17
=========== ========== ===========
Fully diluted weighted average number of
shares outstanding 19,704,697 19,105,193 18,364,076
=========== ========== ===========
See accompanying notes to consolidated financial statements. F-5
26
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity
Class A Class B Additional
Common Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
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
Costs related to private
placements (64,783)
Fair value of options 214,606
Issuance of shares for warrants
exercised 543,089 5,431 330,692
Issuance of shares for options
exercised 231,627 2,316 143,060
Issuance of shares in a private
placement 961,539 9,616 1,990,384
Non-cash value of warrant issued
in connection with a
refinancing 456,880
Issuance of employee stock
purchase plan shares 10,855 109 23,772
Net income year ended June 30, 2007
__________ _________ _______ _______ __________
Balance - June 30, 2007 19,622,076 $ 196,221 775,760 $ 7,758 $ 26,812,808
__________ ________ _______ _______ __________
See accompanying notes to consolidated financial statements.
27
PHC, INC. AND SUBSIDIARIES (continued)
Consolidated Statements of Changes In Stockholders' Equity
Class A
Treasury Stock Accumulated
Shares Amount Deficit Total
______ ______ ___________ _____
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
Costs related to private
placements (64,783)
Fair value of options 214,606
Issuance of shares for warrants
exercised 336,123
Issuance of shares for options
exercised 145,376
Issuance of shares in a private
placement 2,000,000
Non-cash value of warrant issued
in connection with a
refinancing 456,880
Issuance of employee stock
purchase plan shares 23,881
Net income year ended June 30, 2007 1,682,283 1,682,283
____________________________________________________
Balance - June 30, 2007 199,098 (191,700) (8,574,946) 18,250,141
======= ========== ============= ===========
See accompanying notes to consolidated financial statements. F-6
28
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30,
2007 2006 2005
____ ____ ____
Cash flows from operating activities:
Net income $1,682,283 $4,045,482 $3,155,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 744,206 777,419 511,211
Non-cash interest expense 164,994 65,583 51,080
Deferred income taxes 863,000 (1,638,713) (303,994)
Stock based compensation 220,067 134,988 105,681
Change in allowance for doubtful accounts 663,999 1,143,602 (68,904)
Changes in operating assets and liabilities:
Accounts and other receivables (855,237) (1,946,547) (2,183,027)
Prepaid expenses and other current assets (197,945) (343,667) 21,554
Other assets (229,885) (186,817) (92,044)
Accounts payable (247,818) 611,046 (754,011)
Accrued expenses and other liabilities 735,933 471,930 540,020
____________ __________ __________
Net cash provided by operating
activities 3,543,,597 3,134,306 983,466
____________ __________ __________
Cash flows from investing activities:
Acquisition of property and equipment (955,459) (710,638) (483,462)
Equity investment in unconsolidated subsidiary (400,000) -- --
Construction in progress ($1,362,000 in escrow
for improvements) (1,719,623) -- --
Costs related to business acquisition -- -- (62,258)
____________ __________ ___________
Net cash used in investing activities (3,075,082) (710,638) (545,720)
____________ __________ __________
Cash flows from financing activities:
(Repayment) Proceeds on revolving debt, net (84,626) (782,261) 671,249
Proceeds from borrowings on long term debt -- 17,551 1,430,154
Principal payments on long-term debt (1,162,172) (858,669) (2,307,709)
Deferred financing costs (83,664) (15,000) (208,445)
Purchase of treasury stock -- (36,613) (13,880)
Proceeds from issuance of common stock, net 2,437,015 153,799 313,692
____________ __________ __________
Net cash provided by (used in)
financing activities 1,106,553 (1,521,193) (114,939)
____________ __________ __________
Net increase in cash and cash equivalents 1,575,068 902,475 322,807
Cash and cash equivalents, beginning of year 1,820,105 917,630 594,823
____________ __________ __________
Cash and cash equivalents, end of year $ 3,395,173 $ 1,820,105 $ 917,630
=========== ========== ==========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 472,169 $ 606,893 $ 652,582
Income taxes $ 354,777 $ 296,100 $ 123,150
See accompanying notes to consolidated financial statements. F-7
29
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30,
2007 2006 2005
____ ____ ____
Supplemental disclosures of non-cash investing and
financing activities:
Conversion of debt into common stock $ -- $ -- $ 14,250
Issuance of common stock in cashless exercise of
options 299 186 --
Issuance of common stock in cashless exercise
of warrants 2,239 380 3,229
Pivotal Acquisition Note A earn out adjustments
recorded 843,934 (39,746) 1,169,832
Value of warrants issued with debt recorded as
deferred financing costs 456,880 -- 167,185
Value of warrants issued in connection with the
Pivotal Acquisition -- 56,180 --
Obligations under capital leases 497,014 154,069 --
Disposal of fully depreciated equipment 15,928 -- --
See accompanying notes to consolidated financial statements. F-8
30
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and business segments:
PHC, Inc. (the "Company") is incorporated in the state of Massachusetts.
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 eleven 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, four in Las Vegas, Nevada and
one in Bullhead City, Arizona, operating as Harmony Healthcare and
three locations operating as Pioneer Counseling Center in the Detroit,
Michigan metropolitan area);
(2) Pharmaceutical research study services, including three clinic study
sites: two in Arizona, in Peoria and Mesa and one in Midvale, Utah.
These research sites conduct studies of the effects of specified
pharmaceuticals on a controlled population through contracts with
major manufacturers of the pharmaceuticals. All of the Company's
research sites operate as Pivotal Research;
(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. In January 2007, the Company
purchased a 15.24% membership interest in the Seven Hills Psych Center, LLC, the
entity that will be the landlord of the Seven Hills Hospital subsidiary once the
facility is built. This investment is included in other assets on the
consolidated balance sheet as this is an unconsolidated subsidiary. (Note D)
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
F-9
31
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues and accounts receivable (continued):
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 period 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. During fiscal 2007 we were
operating in the second stage at 50/50. In the current fiscal year we are in the
third and final phase of the conversion to PPS.
For the fiscal year ended June 30, 2007, Medicare reimbursements rates were
based 25% on provisional rates that are adjusted retroactively based on annual
cost reports filed by the Company with Medicare and 75% 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 24%, 23%,
and 21% of the Company's total revenue is derived from Medicare and Medicaid
payors for the years ended June 30, 2007, 2006 and 2005, 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,
2007, 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 meeting all study criteria, even
if the participant does not complete the study. Where a contract requires
F-10
32
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues and accounts receivable (continued):
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
$231,702, $150,511, and $242,385 for the years ended June 30, 2007, 2006 and
2005, 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 $1,811,000 at June 30, 2007 and $1,786,000 at June 30, 2006.
Included in accounts receivable is approximately $450,000 and $284,000 in
unbilled receivables at June 30, 2007 and 2006, respectively.
Allowance for doubtful accounts:
The Company records an allowance for uncollectible accounts which reduces
the stated value of receivables on the balance sheet. This allowance 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.
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
F-11
33
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Estimates and assumptions: (continued)
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, which represents 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.
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 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 advances, construction
in progress, investment in Seven Hills LLC, licensure fees, internally developed
and acquired software which is being amortized over three to seven years based
on it's estimated useful life.
F-12
34
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2007.
Fair value of financial instruments:
The carrying amounts of cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value
based on their short-term maturity. The carrying value of long term debt, which
have variable interest rates, approximates fair value.
Basic and diluted income per share:
Income per share is computed by dividing the income applicable to common
shareholders, by the weighted average number of shares of both classes of common
stock outstanding for each fiscal year. Class B common stock has additional
voting rights. All dilutive common stock equivalents have been included in the
calculation of diluted earnings per share for the fiscal years ended June 30,
2007, 2006 and 2005 using the treasury stock method.
The weighted average number of common shares outstanding used in the
computation of earnings per share is summarized as follows:
Years Ended June 30,
____________________
2007 2006 2005
____ _____ ____
Weighted average shares
outstanding - basic 19,287,665 18,213,901 17,574,678
Employee stock options 397,428 510,731 530,896
Warrants 19,604 380,561 258,502
__________ __________ __________
Weighted average shares
outstanding - fully diluted 19,704,697 19,105,193 18,364,076
=========== ========== ==========
The following table summarizes securities outstanding as of June 30, 2007,
2006 and 2005, but not included in the calculation of diluted net earnings per
share because such shares are antidilutive:
Years Ended June 30,
____________________
2007 2006 2005
____ _____ ____
Employee stock options 190,000 253,500 32,500
Warrants -- -- 471,360
__________ __________ __________
Total 190,000 253,500 503,860
=========== ========== ==========
In August 2007, the Company repurchased 150,000 shares of its Class A
common stock (See Note M). If this transaction had been completed prior to year
end it would not have had an impact on earnings per share.
F-13
35
PHC, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, when the deferred tax asset is not recoverable. 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 assessment, during fiscal 2006, the Company eliminated 100% of
the Federal deferred tax valuation allowance.
Comprehensive income:
SFAS No. 130, "Reporting Comprehensive Income", requires companies to
classify items of other comprehensive income in a financial statement.
Comprehensive income 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 is equal to its net
income 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 was 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
$214,606 and $126,300 of stock-based compensation on its consolidated statements
of income for the years ended June 30, 2007 and 2006, respectively, which is
included in administrative expenses as follows:
Year ended June 30, Year ended June 30,
___________________ __________________
2007 2006
____ ____
Directors fees $ 47,088 $ 21,000
Employee compensation 167,518 105,300
________ ________
Total $214,606 $126,300
======== ========
F-14
36
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-based compensation: (continued)
The Company utilized the Black-Scholes valuation model for estimating the
fair value of the stock compensation granted after the adoption of SFAS 123R.
The weighted-average fair values of the options granted under the stock option
plans for the years ended June 30, 2007, 2006 and 2005 were calculated using the
following assumptions:
Year ended June 30,
2007 2006 2005
____ ____ ____
Risk free interest rate 4.60% 4.45% 4.00%
Expected dividend yield -- -- --
Expected lives 5-10 years 5-10 years 5-10 years
Expected volatility 48.0% 47.27% 45%
Weighted average value of grants
per share $1.54 $2.42 $.63
Weighted average remaining contractual
life of options outstanding (years) 3.56 3.65 3.70
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.
For the years ended June 30, 2005 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 and net income per share
would have decreased to the pro forma amounts indicated as follows:
F-15
37
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-based compensation: (continued)
Year Ended
__________
June 30,
________
2005
_________
Net income, as reported $3,155,900
Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects 105,681
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related taxes (298,084)
____________
Pro forma net income (loss) $2,963,497
Earnings (loss) per share:
Basic - as reported $ 0.18
==========
Basic - pro forma $ 0.17
==========
Diluted - as reported $ 0.17
==========
Diluted - pro forma $ 0.16
==========
Advertising Expenses:
Advertising costs are expensed when incurred. Advertising expense for the
year ended June 30, 2007, 2006 and 2005 were $184,678, $455,806 and $378,899,
respectively.
Reclassifications:
Certain June 30, 2006 amounts have been reclassified to be consistent with
the June 30, 2007 presentation.
Recent accounting pronouncements:
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an
interpretation of FASB Statement No. 109, (FIN 48), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting, and we are currently evaluating the impact, if any, the
adoption of FIN 48 will have on our disclosure requirements.
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 108, "Considering the Effects on Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108"). SAB 108 requires registrants to quantify errors using
both the income statement method (i.e. iron curtain method) and the rollover
method and requires adjustment if either method indicates a material error. If a
correction in the current year relating to prior year errors is material to the
current year, then the prior year financial information needs to be corrected. A
correction to the prior year results that are not material to those years,
F-16
38
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements: (continued)
would not require a "restatement process" where prior financials would be
amended. SAB 108 is effective for fiscal years ending after November 15, 2006.
Adopting SAB 108 did not 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 2009 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.
In February 2007, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities ("SFAS No. 159"), including an amendment of FASB Statement No. 115.
SFAS No. 159 allows companies to choose to elect to measure eligible financial
instruments and certain other items at fair value that are not required to be
measured at fair value. SFAS No. 159 requires that unrealized gains and losses
on items for which the fair value option has been elected be reported in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007 and is required to be adopted by the
Company beginning in the first quarter of fiscal 2009. The Company is assessing
the impact the adoption of SFAS No. 159 will have on the Company's financial
position and results of operations.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is composed of the following:
As of June 30,
______________
2007 2006
____ ____
Land $ 69,259 $ 69,259
Buildings 1,136,963 1,136,963
Furniture and equipment 2,614,274 2,048,006
Motor vehicles 178,478 174,302
Leasehold improvements 1,462,260 1,224,624
__________ __________
5,461,234 4,653,154
Less accumulated depreciation and
amortization 3,340,043 2,853,266
__________ __________
Property and equipment, net $2,121,191 $ 1,799,888
=========== ===========
Total depreciation expense was $502,705, $580,933 and $314,394 for the
fiscal years ended June 30, 2007, 2006 and 2005, respectively.
F-17
39
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets are initially created as a result of
business combinations or acquisitions. Critical estimates and assumptions used
in the initial valuation of goodwill and other intangible assets include, but
are not limited to: (i) future expected cash flows from services to be provided,
customer contracts and relationships, and (ii) the acquired market position.
These estimates and assumptions may be incomplete or inaccurate because
unanticipated events and circumstances may occur. If estimates and assumptions
used to initially value goodwill and intangible assets prove to be inaccurate,
ongoing reviews of the carrying values of such goodwill and intangible assets
may indicate impairment which will require the Company to record an impairment
charge in the period in which the Company identifies the impairment.
Customer relationships, acquired as a part of the assets acquired in the
membership interest purchase of Pivotal Research Centers, LLC, 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, $120,000
and $120,000 for the fiscal years ended June 30, 2007, 2006 and 2005,
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, 2007:
Year Ending
June 30, Amount
_________ __________
2008 $120,000
2009 120,000
2010 120,000
2011 120,000
2012 120,000
Thereafter 1,420,000
___________
$2,020,000
Goodwill:
SFAS No. 142, "Goodwill and Other Intangible Assets", requires, among other
things, that companies not 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 $2,539,477 related to the research study
services reporting unit of the Company were evaluated under SFAS No. 142 as of
June 30, 2007. 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.
On April 30, 2004, the Company acquired Phoenix-based Pivotal Research
Centers, LLC, ("Pivotal") significantly expanding the Company's clinical
research capabilities and geographic presence. As part of the acquisition, one
of the former owners and CEO signed 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.
F-18
40
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS: (CONTINUED)
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 were 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. Note A was subject to
adjustment in the first and second years of the note based on adjusted EBITDA as
defined in the agreement. 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, 2007, $441,109 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. This note was recorded in
December 2006 as EBITDA targets defined in the agreement were met. An earn-out
of $343,934 was recorded on February 1, 2007 as stipulated in the agreement.
Eight quarterly payments are due on this note with a maturity date of December
31, 2008. As of June 30, 2007, the principal balance due on this note is
$729,801.
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. As of June 30, 2007, the balance on Note C is
$180,112.
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
customer relationships to be twenty years.
F-19
41
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE D - OTHER ASSETS
Included in other assets as of June 30, 2007 is the Company's investment in
Seven Hills Psych Center, LLC of $400,000. This LLC holds the assets of the
Seven Hills Hospital currently being built and expected to be complete in the
early part of calendar year 2008. Also included is the escrow deposit of
$1,362,000 the Company has made toward the leasehold improvements for the
anticipated leasing arrangement upon completion of the construction of the
building.
The following table lists amounts included in other assets:
Description As of June 30,
______________
2007 2006
____ ____
Construction in progress ($1,362,000 in
escrow for improvements) $1,719,623 $ --
Licensure fees 701,220 158,271
Investment in unconsolidated subsidiary 400,000 --
Deferred Expense 319,842 153,507
Deposits 314,671 250,153
Excess of cost over book value 10,000 10,000
__________ __________
Total $3,465,356 $ 571,931
========== =========
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt is summarized as follows:
As of June 30,
______________
2007 2006
____ ____
Pivotal acquisition note (Note A) due in sixteen
quarterly principal installments, plus interest
at 6% per annum, beginning January 2005.
Current quarterly payments are $73,518 plus
accumulated interest at 6% per annum. No further
adjustment to Note A are required. $ 441,109 $728,218
Pivotal acquisition note (Note B) due in eight
quarterly principal installments, plus interest at
6% per annum beginning January 2007. Current
quarterly payments are $121,633 plus
accumulated interset at 6% per annum. No further
adjustments to Note B are required. 729,801 --
Note payable (Note C) in conjunction with the
earn out of the Pivotal Research Centers, LLC
acquisition. Minimum payment amount $200,000
in common stock due March 2009 with interest
imputed at 6%. 180,112 169,648
Term mortgage note payable with monthly principal
installments of $50,000 beginning July 1, 2007
increasing to $62,500 July 1, 2009 until the
loan terminates. The note bears interest at
prime (8.25% at June 30, 2007) plus 0.75% and
is collateralized by all of the assets of the
Company and its material subsidiaries except
Pivotal Research Centers, Inc. At June 30,
2007 the Company had $2,710,857 available
credit on the term loan. 289,143 732,500
9% mortgage note due in monthly installments of
$4,850 including interest through July 1, 2012,
when the remaining principal balance is payable,
collarteralized by a first mortgage on the PHC,
Inc. of Virginia, Inc. Mount Regis Center
facility. 269,986 302,273
F-20
42
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Notes payable and long-term debt is summarized as follows:
As of June 30,
______________
2007 2006
____ ____
Note payable due in monthly installments of $578
including interest at 5.9% through May 2010. 18,058 23,746
Note payable due in monthly installments of $555
including interest at 3.9% through March 2010. 17,327 23,180
Note payable due in monthly installments of $775
including interest at 3.9% through October 2008. 12,061 20,698
Unamortized debt discount in connection with the
Term loan -- (69,660)
Insurance installment notes renewed annually 8,090 8,956
_________ __________
Total 1,965,687 1,939,559
Less current maturities 1,134,300 918,013
_________ ___________
Long-term portion $ 831,387 $ 1,021,546
========= ===========
Maturities of notes payable and long-term debt are as follows as of June 30,
2007:
Year Ending
June 30, Amount
___________ _________
2008 $ 1,134,300
2009 624,870
2010 52,817
2011 46,244
2012 50,582
Thereafter 56,874
___________
$1,965,687
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 $1,518,742 and $1,603,368 at June 30, 2007 and 2006,
respectively. This agreement was amended on June 13, 2007 to modify the terms of
the agreement. 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 (8.25% at June 30,
2007) plus 0.25%, but not less than 4.75%. The average interest rate paid during
the fiscal year ended June 30, 2007 was 14.28%, which includes the amortization
of deferred financing costs related to the initial financing. The amended term
of the agreement is for two years, renewable for two additional one year terms.
Upon expiration, all remaining principal and interest are due. The revolving
credit note is collateralized by substantially all of the assets of the
Company's subsidiaries except Pivotal Research Centers, Inc. and guaranteed by
PHC. The Company paid $32,500 in commitment fees and issued a warrant to
purchase 250,000 shares of Class A common stock at $3.09 expiring on June13,
2017.
As of June 30, 2007, the Company was in compliance with all of its
financial covenants under the revolving line of credit note. These covenants
were modified with the refinancing of the debt in June 2007 to include only a
debt coverage ratio of 1:1 and a decreased minimum EBITDA.
F-21
43
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE F - CAPITAL LEASE OBLIGATION
At June 30, 2007, the Company was obligated under various capital leases
for equipment providing for aggregate monthly payments of approximately $14,765
and terms expiring from June 2008 through June 2011.
The carrying value of assets under capital leases included in property and
equipment and other assets are as follows:
June 30,
________
2007 2006
____ ____
Equipment and software $ 784,114 $ 287,099
Less accumulated amortization (225,055) (168,869)
__________ _________
$ 559,059 $ 118,230
========== =========
Amortization expense for the years ended June 30, 2007 and 2006 was $56,186 and
$73,423, respectively.
Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 2007:
Year Ending June 30,
____________________
2008 $246,475
2009 195,777
2010 58,483
2011 17,786
________
Future minimum lease payments 518,521
Less amount representing interest 85,957
________
Total future principle payments 432,564
Less current portion 205,858
________
Long-term obligations under capital leases $226,706
========
NOTE G - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
June 30
_______
2007 2006
____ ____
Accrued professional fees $ 896,874 $ 249,260
Accrued operating expenses 630,898 522,063
Income tax payable 175,000 255,096
_________ __________
Total $1,702,772 $1,026,419
=========== ==========
F-22
44
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE H - INCOME TAXES
The Company has the following deferred tax assets included in the
accompanying balance sheets:
Years Ended June 30,
____________________
2007 2006
____ ____
Deferred tax asset:
Allowance for doubtful accounts $1,430,000 $1,179,000
Depreciation 332,000 261,000
Difference between book and tax bases of
intangible assets 7,000 8,000
Operating loss carryforward 585,000 1,837,000
__________ __________
Gross deferred tax asset 2,354,000 3,285,000
__________ __________
Less:
Valuation allowance -- (175,000)
__________ __________
Deferred tax asset 2,354,000 3,110,000
__________ __________
Current portion 2,015,000 2,841,000
__________ __________
Long-term portion 339,000 269,000
========== ==========
Deferred tax liability:
Difference between book and tax bases of
intangible assets (432,000) (325,000)
__________ __________
Net deferred tax liability $ ( 93,000) $ ( 56,000)
========== ==========
The components of the income tax provision (benefit) for the years ended
June 30, 2007, 2006 and 2005 are as follows:
2007 2006 2005
____ ____ ____
Current
Federal $ 68,000 $ 78,399 $ --
State 216,000 250,211 230,571
_________ ________ _______
284,000 328,610 230,571
_________ ________ _______
Deferred
Federal 811,000 (1,467,302) (235,595)
State 52,000 (171,411) (68,399)
_________ ________ _______
863,000 (1,638,713) (303,994)
_________ ________ _______
Income tax provision (benefit) $1,147,000 $(1,310,103) $ (73,423)
========== ============ ==========
F-23
45
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE H - INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended June 30, 2007, 2006 and 2005 is as follows:
2007 2006 2005
____ ____ ____
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 10.4% 4.7% 4.5%
Non-deductible expenses 2.6% 1.7% 1.0%
Other, net -- -- 1.5%
Valuation allowance (6.5%) (88.3%) (43.0%)
______ _______ _______
Effective income tax rate 40.5% (47.9%) (2.0%)
======= ====== ======
At June 30, 2007, the Company had a federal net operating loss carryforward
amounting to approximately $1,181,000. The Company's Federal net operating loss
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service. The Federal carryforward expires beginning in 2011 through
2024. The Company's state net operating loss carryforwards of $4,209,841 have
expired. 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 except as described above, 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 ($175,000), ($2,416,200) and ($2,076,994) for
the years ended June 30, 2007, 2006 and 2005, respectively.
In the past, the Company had 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 I - COMMITMENTS AND CONTINGENT LIABILITIES
Operating leases:
The Company leases office and treatment facilities, furniture and equipment
under operating leases expiring on various dates through May 2014. Rent expense
for the years ended June 30, 2007, 2006 and 2005 was approximately $2,026,000,
$1,695,000 and $1,484,000, 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,
2007 are as follows:
Year Ending
June 30, Amount
___________ _______
2008 $ 2,087,819
2009 2,071,512
2010 1,763,949
2011 721,268
2012 304,084
Thereafter 260,510
___________
$ 7,209,142
===========
F-24
46
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
In addition to the above leases, on June 24, 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
approximately $70,000 per month beginning upon completion of the building
estimated to be in the quarter ending March 31, 2008. In addition to the 10-year
lease on the property, the Company has also purchased approximately 15%
membership interest in the entity that owns the property.
Contingent Notes Payable:
In conjunction with the acquisition of Pivotal Research Centers, LLC (Note
C), the Company signed three notes, A, B and C, respectively, with face amounts
of $1,000,000, $500,000 and $1,000,000. The ultimate amount payable under these
notes are 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.
As of June 30, 2007 $180,112 has been recorded on Note C. In December 2004 the
first earn-out period ended and resulted in the recording of $1,209,832,
(including $40,000 in interest), as a liability on Note A. On April 1, 2006 the
second earn-out adjustment was made on Note A. This adjustment resulted in the
net reduction of the liability of $39,746 as earn-out targets were not met for
the calendar year ended December 31, 2005. Note B was recorded in December 2006
at its face value of $500,000 as earnings targets were met for the calendar year
ended December 31, 2006. The total amount recorded on February 1, 2007 as
earn-out under this Note B was $343,934. The earn-outs are recorded as a change
in the purchase price and affect goodwill. (See Note C 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 was repaired quickly and the claim
for the damage paid. The Company subsequently filed a claim for lost business
income as allowed by the insurance policy. During the fourth quarter of fiscal
2007 this claim was settled for $325,000, which is included in the consolidated
statements of income as other income, net of legal fees of $25,000.
F-25
47
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS
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.
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.
All of the outstanding shares of Class A common stock are fully paid and
nonassessable.
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.
F-26
48
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS (CONTINUED)
Private Placement
On December 19, 2006, the Company entered into an agreement pursuant to
which the Company sold $2,000,000 in unregistered Class A Common Stock to a
single investor to provide the equity component for the build-out of the
Company's Las Vegas hospital project, Seven Hills Behavioral Institute.
The agreement allowed the investor, Camden Partners Limited Partnership, to
purchase $2,000,000 in PHC, Inc. Class A Common Stock at $2.08 per share, which
was the average selling price per share over the 20 trading days prior to the
sale, minus 4%. In addition to providing a certificate evidencing the 961,539
unregistered shares within three business days from the close of the
transaction, the Company is also obligated to file a Registration Statement with
the Securities and Exchange Commission within 90 days of the close of the
transaction to register the shares issued, to put forth it's best efforts to
cause the Registration Statement to be brought effective within 120 days of the
close of the transaction and to maintain the Registration Statement's current
status for a period of two years from the date of the close of the transaction.
The Registration Statement was declared effective on April 2, 2007.
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.
The stock option plan, dated December 2003 and expiring in 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, 2007, 744,687 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, 2007, 10,855 shares have been issued under this plan. The new plan is
identical to the old plan and expires on January 31, 2016. As of June 30, 2007,
a total of 157,034 shares of Class A Common Stock have been issued under the
1995 plan. Thirteen employees are participating in the current offering period
under the new plan, which began on February 1, 2007 and will end on January 31,
2008. There are 489,145 shares available for issue under the January 2006 plan.
F-27
49
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS (CONTINUED)
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, 2007, 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, 2007, a total of 160,000 options
were issued under the new 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, 2007, 1,234,458 shares were available
for future grant or purchase.
The Company had the following activity in its stock option plans for fiscal
2007, 2006 and 2005:
Weighted-Average
Number Remaining Aggregate
of Exercise Contractual Intrinsic
Shares Price Term Value
________ ________ ___________ _________
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
Granted 177,500 $2.64
Exercised (241,687) $0.74
Expired (74,063) $1.94
__________ _____
Outstanding balance - June 30, 2007 1,096,000 $1.76 3.56 $1,413,840
========= ===== ==== ===========
Exercisable at June 30, 2007 791,626 $1.46 3.04 $1,258,685
========= ===== ==== ===========
Of the options granted during the fiscal year ended June 30, 2007, 39,688
were vested and the remaining options will vest over the next three to five
years. The fair value of the options vested was $1.50 per option.
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.
In February 2007, 10,855 shares of common stock were issued under the
employee stock purchase plan. The Company recorded as share based compensation
expenses of $3,582.
During the fiscal year ended June 30, 2007, 241,687 options were exercised
resulting in $145,376 in proceeds. Included in the above balance, 40,000 options
were exercised using a cashless exercise feature resulting in the issuance of
29,940 common shares.
F-28
50
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS (CONTINUED)
The weighted average grant-date fair value of options granted during the
fiscal years ended June 30, 2007, 2006 and 2005 was $1.54, $1.17 and $2.33,
respectively. The total intrinsic value of options exercised during the fiscal
years ended June 30, 2007, 2006 and 2005 was $522,921, $517,917 and $188,243,
respectively.
As of June 30, 2007 and 2006, there were $323,313 and $357,459,
respectively, 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 the next four years.
In addition to the outstanding options under the Company's stock plans, the
Company has the following warrants outstanding at June 30, 2007:
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
06/13/2007 Warrants issued in conjunction with
long-term debt transaction, $456,880
recorded as deferred financing
costs. 250,000 shares $3.09 per share June 2017
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 $1,880 in fiscal 2007. 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.
The Company had the following warrant activity during fiscal 2007:
Outstanding balance - June 30, 2006 708,453
Warrants issued 250,000
Exercised 675,953
Expired 2,500
_______
Outstanding balance - June 30, 2007 280,000
=======
During fiscal 2007, the Company issued warrants to purchase 250,000 shares
of Class A common stock to the Company's lender as part of the refinancing of
its term loan. The relative fair value of the warrant of $456,880 was recorded
as deferred financing costs and will be amortized as non-cash interest expense
over the period of the loan of two years.
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, 2007, 675,953 warrants were exercised resulting in
$336,123 in proceeds. Included in the above total are 356,750 warrants exercised
using a cashless exercise feature resulting in the issuance of 223,886 common
shares.
F-29
51
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE K - 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:
Behavioral
Health
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
__________ ______________ ________ ______________ ____________ ________
For the year ended
June 30, 2007
Revenues-external
customers $36,022,529 $4,564,314 $4,540,634 $ -- $ -- $45,127,477
Revenues - intersegment 182,700 -- 79,390 3,696,000 (3,958,090) --
Segment net income 4,459,796 (228,104) 1,072,837 (3,622,246) -- 1,682,283
(loss)
Total assets 10,624,784 6,792,439 807,361 9,065,157 -- 27,289,741
Capital expenditures 522,790 48,402 15,964 368,303 -- 955,459
Depreciation &
amortization 391,960 156,536 106,427 52,328 -- 707,251
Goodwill 969,099 2,539,477 -- -- -- 3,508,576
Interest expense 395,445 172,804 4,236 76,681 -- 649,166
Income tax expense
(benefit) 845,156 3,100 368,441 (69,697) -- 1,147,000
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 3,172,699 972,973 1,636,408 (1,736,598) -- 4,045,482
(loss)
Total assets 10,399,918 5,584,753 844,784 4,886,532 -- 21,715,987
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 (1,559,034) -- (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 4,543,372 180,820 1,243,514 (2,811,806) -- 3,155,900
(loss)
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)
F-30
52
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE K - BUSINESS SEGMENT INFORMATION (CONTINUED)
All revenues from contract services provided for the treatment services
segment and treatment services provided to other facilities included in the
treatment services segment are elimated in the consolidation and shown on the
table above under the heading "Revenues Intersegment".
The Company has one customer in its Behavioral Health Treatment Services
segment whose revenues approximate 26% of its total external revenues for the
segment or $9,500,000 for the yaear ended June 30, 2007. For the years ended
June 30, 2006 and 2005, the total revenues for this payor were 27% and 17% or
$7,661,431 and $4,440,274 respectively.
NOTE L - QUARTERLY INFORMATION (Unaudited)
The following presents selected quarterly financial data for each of the
quarters in the years ended June 30, 2007 and 2006.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
___________ ___________ __________ ___________
2007
Revenue $10,062,206 $9,952,360 $12,318,043 $12,794,868
Income from operations 553,974 604,994 638,155 1,212,781
Net income available to
common shareholders 283,283 261,088 315,779 822,133
Earnings per share:
Basic $ 0.02 $ 0.01 $ 0.02 $ 0.04
Diluted $ 0.01 $ 0.01 $ 0.02 $ 0.04
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
NOTE M - SUBSEQUENT EVENT
In September 2006, the Board approved the acquisition of up to $2,000,000
in treasury stock without further communication. In August, 2007, the Company
purchased 150,000 shares of Class A common stock at a total price of $394,515
which included $4,515 in broker fees.
F-31
53
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 52 Director, President and Chief Executive
Officer
Robert H. Boswell 59 Senior Vice President
Paula C. Wurts 58 Treasurer, Chief Financial Officer and
Clerk
Donald E. Robar (1)(2)(3) 70 Director
Howard W. Phillips 77 Director
William F. Grieco (1)(2)(3) 53 Director
David E. Dangerfield (1)(3) 66 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. The board appoints officers of the Company for undefined terms.
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 Chief Financial Officer and 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.
54
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. Mr Dangerfield formerly 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 2007, the Board of Directors held a total of four meetings
and took action by written consent seven 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.
55
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 2007 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 and as required under AMEX listing standard
Section 121. Dr. Dangerfield serves as the chairman and is the audit committee
financial expert. The Company reviewed Dr. Dangerfield's extensive experience
managing the budget and operations for large Behavioral Healthcare organizations
and determined that this industry experience qualifies him to act as the
financial expert in accordance with SEC requirements. The Audit Committee met
four times during fiscal 2007. 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. The
Compensation Committee is a chartered committee made up of independent members
of the Board of Directors. During fiscal 2007 the Compensation Committee
consisted of Mr. Donald Robar and Mr. William Grieco. The Compensation Committee
met three times during fiscal 2007, twice telephonically and once in person. Mr.
Shear does not participate in discussions concerning, or vote to approve, his
salary.
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.
56
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.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the SEC reports of ownership and reports of
changes in ownership of Common Stock. SEC rules also require the reporting
persons and entities to furnish the Company with a copy of the reports they
file. The Company is required to report any failure to file these reports.
Based on the review of the filings and written representations from the
Company's directors and executive officers, the Company believes that all
reports required to be filed with the SEC by Section 16(a) during the most
recent fiscal year have been filed on a timely basis.
Item 11. Executive Compensation
Compensation Discussion and Analysis
The Board of Directors, the Compensation Committee and senior management
share responsibility for establishing, implementing and continually monitoring
our executive compensation program, with the Board making the final
determination with respect to executive compensation. The goal of our executive
compensation program is to provide a competitive total compensation package to
our executive management team through a combination of base salary, quarterly
cash incentive bonuses, long-term equity incentive compensation in the form of
stock options and benefits programs. This Compensation Discussion and Analysis
explains our compensation objectives, policies and practices with respect to our
Chief Executive Officer, Chief Financial Officer and one of our other most
highly-compensated executive officers as determined in accordance with
applicable SEC rules, which are collectively referred to in this report as the
Named Executive Officers.
Objectives of our Executive Compensation Program
Our executive compensation program is designed to achieve the following
objectives:
o to attract and retain talented and experienced executives necessary to
achieve our strategic objectives in the highly competitive industry in
which we compete;
o to motivate and reward executives whose knowledge, skills and
performance are critical to our success;
o to align the interest of our executives and stockholders by motivating
executives to increase stockholder value by increasing our Company's
long-term profitability;
o to provide a competitive compensation package in which a significant
portion of total compensation is determined by Company and individual
results and the creation of stockholder value; and,
o to foster a shared commitment among executives by coordinating their
Company and individual goals.
Role of the Compensation Committee
Our Compensation Committee oversees all aspects of executive compensation.
The committee plays a critical role in establishing our compensation philosophy
and in setting and amending elements of the compensation package offered to our
named executive officers.
The members of our Compensation Committee during fiscal 2007 were Donald
Robar and William Grieco. Each current member of our Compensation Committee is
an independent, non-employee director. During fiscal 2007, the Compensation
Committee met one time.
On an annual basis, or in the case of promotion or hiring of an executive
officer, the Compensation Committee reviews and makes recommendations to the
Board of Directors regarding the compensation package to be provided to our
named executive officers. On an annual basis, the Compensation Committee
undertakes a review of the base salary and bonus targets of each of our named
57
executive officers and evaluates their respective compensation based on the
committee's overall evaluation of their performance toward the achievement of
our financial, strategic and other goals, with consideration given to each
executive officer's length of service and to comparative executive compensation
data. Based on its review, from time to time the Compensation Committee has
increased the salary and/or potential bonus amounts for our executive officers.
COMPENSATION COMMITTEE REPORT
The compensation committee report below is not "soliciting material," is
not deemed "filed" with the Securities and Exchange Commission and is not
incorporated by reference in any of our filings under the Securities Act of 1933
as amended, or the Securities Exchange Act of 1934, as amended, whether made
before or after this filing and irrespective of any general language to the
contrary.
The Compensation Committee comprised solely of independent directors,
reviewed and discussed the above Compensation Discussion and Analysis with
management. Based on this review and discussions, the committee recommended to
the Board of Directors, and the Board has approved, the inclusion of the
Compensation Discussion and Analysis in the Company's annual report on Form
10-K.
Compensation Committee
______________________
Donald E. Robar
William F. Grieco
Elements of Executive Compensation
Compensation for our named executive officers generally consists of the
following elements: o base salary; o cash bonuses; o stock-based awards; o
health, dental and life insurance and disability and retirement plans; and o
severance and change-in-control arrangements.
The Company does not have a policy or target for allocating compensation
between long-term and short-term compensation. Instead the Compensation
Committee determines subjectively what it believes to be the appropriate level
and mix of various compensation components. The Compensation Committee's
objective in allocating between annual and long-term compensation is to ensure
adequate base compensation to attract and retain personnel, while providing
incentives to maximize long-term value for our Company and its stockholders.
Base Salary
Salary for our executives is generally set by reviewing compensation levels
for comparable positions in the market and the historical compensation levels of
our executives. Salaries may then be adjusted from time to time, based upon
market changes, actual corporate and individual performance and changes in
responsibilities.
Bonuses
Bonuses are based on actual corporate and individual performances compared
to targeted performance criteria and various subjective performance criteria.
Targeted financial performance for the Company is set annually by the
compensation committee for each fiscal quarter. In considering bonuses the
Compensation Committee does not rely on a formula that assigns a pre-determined
value to each of the criteria, but instead evaluates each executive officer's
contribution in light of all relevant criteria. Individual performance targets
are used less frequently but may include completion of specific projects. There
were no individual performance targets specified in the prior or current fiscal
years meetings of the compensation committee.
58
Stock Based Awards
Compensation for executive officers also includes the long-term incentives
afforded by stock options and other equity-based awards. Our stock option
program is designed to align the long-term interests of our employees and our
stockholders and assist in the retention of executives. The size of stock-based
awards is generally intended to reflect the executive's position and the
executive's expected contributions. Although some awards may be provided as part
of the hiring agreement of new executives, in general these stock-based awards
follow the same benchmarks as the executive bonus element of the named
executive's compensation. Options are generally granted with installment-vesting
over a period of three years.
Because of the direct relationship between the value of an option and the
market price of our common stock, the compensation committee believes that stock
options are an effective method of motivating the named executive officers to
manage our Company in a manner that is consistent with the interests of our
Company and our Stockholders.
In addition the named executives are also eligible to participate in the
Company's Employee Stock purchase plan as long as all other criteria of the plan
are met.
Insurance and Other Employee Benefits
We maintain insurance benefits for all employees that include health,
dental and life insurance. The company bears one hundred percent of the cost of
these benefits for the named executives. In addition the company provides a
company vehicle or an auto allowance, additional supplemental life insurance and
other supplemental taxable fringe benefits for the named executive officers. In
addition, the company provides a disability pool for the named executives based
on the number of years of service. The number of days of pay under the
disability plan increases incrementally until it reaches a maximum accrual of
730 days. This disability pool has no cash value and is not payable upon
termination of employment. The Company also provides an Executive Retirement
plan, which allows for the use of the accrued disability plan bank to be
distributed as an annuity over a four year period at the named executive's
retirement providing the minimum term of employment of twenty years of service
has been met. For the fiscal year ended June 30, 2007, no accrual has been made
for this retirement plan as each of the named executives have waived their right
to the retirement plan based on the Company's financial position at the time
that the plan was approved.
Severance and Change-in-Control Arrangement
The Company has not entered into any severance agreements with any of the
named executive officers; however, compensation for the named executive officers
does include change-in-control arrangements. These arrangements, like other
elements of executive compensation, are structured with regard to practices at
comparable companies for similarly situated officers and in a manner we believe
is likely to attract and retain high quality executive talent. The plan calls
for the named executive officers, in the event of a change in control, to
receive payment of their average annual salary for the past five years times a
multiplier based on their number of years of service in the position at the
effective date as shown below.
Name and position Multiplier
_________________ __________
Bruce A. Shear, Chief Executive Officer 2.99
Robert H. Boswell, Senior Vice President 2.00
Paula C. Wurts, Chief Financial Officer 2.00
Changes in Executive Compensation for Fiscal 2007
In September 2006, the Compensation Committee met to discuss the
compensation of the named executive officers. The meeting resulted in a proposal
to the Board of Directors to increase the base salary of the named executive
officers and change the net earnings targets for the named executive officers to
earn cash and stock based compensation for each quarter of fiscal 2007. The
Board of Directors accepted the proposals of the Committee and salary increase
59
were affected and bonus and stock-based compensation targets were set. The named
executive officers met the bonus and stock-based compensation targets in the
fourth fiscal quarter of 2007.
Accounting for Executive Compensation
We account for equity based compensation paid to our employees under the
rules of Statement of Financial Accounting Standards No. 123R (SFAS 123R), which
requires us to measure and record an expense over the service period of the
award. Accounting rules also require us to record cash compensation as an
expense at the time the obligation is incurred.
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.
Three executive officers of the Company received compensation in the 2007
fiscal year, which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 2007, 2006 and 2005:
Summary Compensation Table
Name and
Principal Option All Other
Position Year Salary Bonus Awards Compensation Total
($) ($) ($) ($) ($)
(a) (b) (c) (d) (f) (i) (j)
Bruce A. Shear 2007 $420,957 $40,000 $38,013 $21,833(1) $520,803
President and Chief 2006 $393,515 $70,000 $124,800 $27,458(2) $615,773
Executive Officer 2005 $383,965 $45,000 $37,050 $62,498(3) $528,513
Robert H. Boswell 2007 $196,538 $20,000 $11,778 $14,901(4) $243,217
Senior Vice President 2006 $176,878 $40,000 $33,488 $14,701(5) $265,067
2005 $164,590 $10,000 $15,750 $29,016(6) $219,356
Paula C. Wurts 2007 $170,231 $20,000 $11,481 $76,563(7) $278,275
Chief Financial Officer, 2006 $152,878 $35,000 $32,300 $15,029(8) $235,207
Treasurer and Clerk 2005 $140,586 $10,000 $15,750 $35,009(9) $201,345
* The named executive officers did not forfeit any stock options during
any of the fiscal years presented. For information regarding the
assumptions used to value these stock options, see "Note A THE COMPANY
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Stock-based
compensation" in the financial statements included in this report.
(1) This amount represents $9,019 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear,
$9,152 in premiums paid by the Company with respect to life and
disability insurance for the benefit of Mr. Shear and $3,662 personal
use of a Company car held by Mr. Shear.
(2) 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.
60
(3) 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.
(4) This amount represents a $6,000 automobile allowance, $8,001
contributed by the Company to the Company's Executive Employee Benefit
Plan on behalf of Mr. Boswell and $900 in benefit derived from the
purchase of shares through the employee stock purchase plan
(5) 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.
(6) 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.
(7) This amount represents a $4,800 automobile allowance, $9,505
contributed by the Company to the Company's Executive Employee Benefit
Plan on behalf of Ms. Wurts, $218 in benefit derived from the purchase
of shares through the employee stock purchase plan and $62,040
realized on the exercise of options.
(8) 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.
(9) 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.
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
$2,000. In addition, Directors of the Company are entitled to receive certain
stock option grants under the Company's Non-Employee Director Stock Option Plan
(the "Director Plan"). The following table presents Director compensation for
the fiscal year ended June 30, 2007.
DIRECTOR COMPENSATION
Fees Earned
or Paid Option All Other
Name in Cash Awards Compensation Total
____ ___________ ______ ____________ ______
($) ($) ($) ($)
(a) (b) (d) (g) (h)
Donald Robar $27,000 $22,525 $ -- $49,525
William Grieco $27,000 $22,525 % -- $49,525
David Dangerfield $27,000 $22,525 % -- $49,525
Howard W. Phillips* $ -- $16,550 $42,470 $50,020
78
* Mr. Phillips is an employee of the Company, serving as a Public Relations
Specialist. Other than his salary as an employee he receives no additional
compensation as a director.
61
As of June 30, 2007 each member of the Board of Directors had the following
options outstanding: Donald Robar, 117,500 (87,500 vested); William Grieco,
117,500 (87,500 vested); David Dangerfield, 50,000 (20,000 vested); and, Howard
Phillips, 117,500 (87,500 vested).
Compensation Committee Interlocks and Insider Participation
During fiscal 2007 the Compensation Committee consisted of Mr. Donald Robar
and Mr. William Grieco, neither of which was an officer or employee of the
Company during the 2007 fiscal year. Mr. Robar served as the Company's Treasurer
from February 1996 until April 2000. During the 2007 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 195,000 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, 2007, the Company issued additional
options to purchase 177,500 shares of Class A Common Stock under the 2003 Stock
Plan at a price per share ranging from $2.06 to $3.35. 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.
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 was to 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.
A total of 157,034 shares of Class A Common Stock were issued under the
1995 plan before it's expiration and 10,855 shares have been issued under the
2005 plan. Thirteen employees are participating in the current offering period
under the new plan, which began on February 1, 2007 and will end on January 31,
2008.
62
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, 2007, 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. 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. As of June 30, 2007, 160,000 options have been issued under the plan.
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.
Options Exercised
During the fiscal year ended June 30, 2007, a total of 241,687 options were
exercised under the plans, of which 41,000 options were exercised at prices
ranging from $0.22 to $0.45, 152,000 options were exercised at prices ranging
from $0.55 to $0.81, 42,000 options were exercised at prices ranging from $1.03
to $1.48 and 6,687 options were exercised at prices ranging from $2.01 to 2.53.
The following table provides information about options granted to the named
executive officers during fiscal 2007 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
GRANTS OF PLAN-BASED AWARDS
____________________________
All Other Option Exercise or Grant Date
Awards Number of Base Price Fair Value of
Name Grant Date Securities of Option Stock and
Underlying Awards Option
Options ($/Share)* Awards
______ __________ _________________ ____________ ___________
(#)
(a) (b) (j) (k) (l)
Bruce A. Shear 10/31/2006 15,000 $2.06 $16,350
Robert H. Boswell 10/31/2006 7,500 $2.06 $ 8,175
Paula C. Wurts 10/31/2006 7,500 $2.06 $ 8,175
These options were issued under the Executive bonus plan based on the
Company's performance in fiscal 2006. 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 4.60%
Expected dividend yield 0.0%
Expected lives 5
Expected volatility 48.0%
63
The following table provides information about options outstanding, held by
the named executive officers at the end of fiscal 2007.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Number of Number of
Securities Securities
Underlying Underlying Option
Unexercised Unexercised Exercise Option
Options Options Price Expiration Date
Name Exerciseable Unexerciseable
# # $
____ ____________ ______________ _______ ________________
(a) (b) (c) (e) (f)
Bruce A. Shear 40,000 -- $0.75 09/30/2007
15,000 -- $0.69 01/06/2008
15,000 -- $1.37 11/04/2009
15,000 -- $1.21 11/04/2009
15,000 -- $2.38 06/16/2010
7,500 7,500 $2.68 09/20/2010
37,500 37,500 $2.68 09/20/2010
11,250 3,750 $2.20 05/22/2011
3,750 11,250 $2.06 10/31/2011
Robert H. Boswell 25,000 -- $0.75 09/30/2007
25,000 -- $1.41 12/21/2009
10,000 10,000 $2.73 09/22/2010
625 625 $1.95 02/16/2011
5,625 1,875 $2.20 05/22/2011
1,875 5,625 $2.06 10/31/2011
Paula C. Wurts 25,000 -- $0.75 09/30/2007
25,000 -- $1.41 12/21/2009
10,000 10,000 $2.73 09/22/2010
5,625 1,875 $2.20 05/22/2011
1,875 5,625 $2.06 10/31/2011
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 $27,025 in the fiscal years ended June 30,
2006 and 2005, respectively. No charge was made for these repriced options in
the fiscal year ended June 30, 2007.
64
OPTIONS EXERCISED AND STOCK VESTED
The following table provides information about options exercised, held by
the named executive officers during the fiscal year ended June 30, 2007.
Option Awards
Number of Value
Shares Realized
Acquired on On
Name Exercise Exercise
(#) ($)
(a) (b) (c)
Bruce A. Shear 20,000 $51,000
Robert H. Boswell 25,000 59,625
Paula C. Wurts 25,000 69,250
65
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 Reports of Independent Registered Public
Accounting Firms F-2 - F-3
o Consolidated balance sheets F-4
o Consolidated statements of income 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-31
2) Financial Statement Schedules: All schedules are included in the
Consolidated financial statements and footnotes thereto.
(b) The following exhibits are filed as part of or furnished with this Form
10-K/A as applicable: Exhibits
Exhibit No. Description
*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. * 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
66
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 4, 2007 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 4, 2007
_________________________ Executive Officer and
Bruce A. Shear Director (principal
executive officer)
/s/ PAULA C. WURTS Chief Financial Officer, October 4, 2007
_________________________ Treasurer and Clerk
Paula C. Wurts (principal financial
and accounting officer)
/s/ DONALD E. ROBAR Director October 4, 2007
_________________________
Donald E. Robar
/s/ HOWARD PHILLIPS irector October 4, 2007
_________________________
Howard Phillips
/s/WILLIAM F. GRIECO Director October 4, 2007
_________________________
William F. Grieco
/S/ DAVID E. DANGERFIELD Director October 4, 2007
_________________________
David E. Dangerfield
67