UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2007.
|| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file number 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
incorporation or organization) Identification No.)
200 Lake Street, Suite 102, Peabody MA 01960
(Address of principal executive offices) (Zip Code)
978-536-2777
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes _X No___
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer __Accelerated filer____Non accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____ No_X__
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares outstanding of each class of common equity, as of October 30,
2007:
Class A Common Stock 19,349,820
Class B Common Stock 775,760
1
PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets - September 30, 2007 (unaudited)
and June 30, 2007.
Condensed Consolidated Statements of Income (unaudited) - Three months
ended September 30, 2007 and September 30, 2006.
Condensed Consolidated Statements of Cash Flows (unaudited) - Three
months ended September 30, 2007 and September 30, 2006.
Notes to Unaudited Condensed Consolidated Financial Statements -
September 30, 2007
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Item 4T. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits
Signatures
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
ASSETS 2007 2007
____ ____
(unaudited)
Current assets:
Cash and cash equivalents $ 2,759,303 $ 3,395,173
Accounts receivable, net of allowance for
doubtful accounts of $2,878,902 at September
30, 2007 and $3,764,585 at June 30, 2007 6,694,412 6,524,387
Pharmaceutical receivables 1,723,159 1,942,268
Prepaid expenses 687,390 688,600
Other receivables and advances 960,527 868,628
Deferred income tax asset 1,596,796 2,015,000
___________ ____________
Total current assets 14,421,587 15,434,056
Accounts receivable, non-current 35,000 35,000
Other receivable 85,619 91,697
Property and equipment, net 2,371,375 2,121,191
Deferred financing costs, net of amortization
of $179,136 at September 30, 2007 and
$143,377 June 30, 2007 578,105 613,865
Customer relationships, net of amortization
of $410,000 at September 30, 2007 and
$380,000 at June 30, 2007 1,990,000 2,020,000
Goodwill 3,508,576 3,508,576
Other assets 3,305,609 3,465,356
___________ ____________
Total assets $26,295,871 $ 27,289,741
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,322,824 $ 1,261,841
Current maturities of long-term debt 1,120,110 1,134,300
Revolving credit note 562,496 1,518,742
Deferred revenue 270,492 433,301
Current portion of obligations under capital
leases 195,024 205,858
Accrued payroll, payroll taxes and benefits 1,744,386 1,631,693
Accrued expenses and other liabilities 1,458,130 1,702,772
___________ ____________
Total current liabilities 6,673,462 7,888,507
Long-term debt 623,455 831,387
Obligations under capital leases 187,612 226,706
Deferred tax liability 93,000 93,000
___________ ____________
Total liabilities 7,577,529 9,039,600
___________ ____________
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 19,622,076
shares issued at September 30, 2007 and
June 30, 2007, respectively 196,221 196,221
Class B common stock, $.01 par value, 2,000,000
shares authorized, 775,760 issued and
outstanding at September 30, 2007 and June 30,
2007, respectively, each convertible into one
share of Class A common stock 7,758 7,758
Additional paid-in capital 26,875,513 26,812,808
Treasury stock, 349,098 shares of Class A common
stock at September 30, 2007 and 199,098 at
June 30, 2007, at cost (586,215) (191,700)
Accumulated deficit (7,774,935) (8,574,946)
___________ ____________
Total stockholders' equity 18,718,342 18,250,141
Total liabilities and stockholders' equity $26,295,871 $27,289,741
=========== ===========
See Notes to Condensed Consolidated Financial Statements
3
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
2007 2006
____ ____
Revenues:
Patient care, net $10,143,435 $ 7,876,432
Pharmaceutical studies 1,420,965 1,051,383
Contract support services 1,139,766 1,134,391
___________ ___________
Total revenues 12,704,166 10,062,206
__________ ___________
Operating expenses:
Patient care expenses 5,296,074 4,054,966
Patient care expenses, pharmaceutical 609,792 486,937
Cost of contract support services 802,648 838,555
Provision for doubtful accounts 422,226 452,525
Administrative expenses 3,609,936 2,996,141
Administrative expenses, pharmaceutical 571,856 679,108
__________ ___________
Total operating expenses 11,312,532 9,508,232
__________ ___________
Income from operations 1,391,634 553,974
__________ ___________
Other income (expense):
Interest income 32,535 32,849
Other income (expense) 14,099 (943)
Interest expense (131,381) (119,830)
__________ ___________
Total other expenses, net (84,747) (87,924)
__________ ___________
Income before provision for taxes 1,306,887 466,050
Provision for income taxes 506,876 182,767
__________ ___________
Net income $ 800,011 $ 283,283
========== ===========
Basic net income per common share $ 0.04 $ 0.02
========== ===========
Basic weighted average number of shares
outstanding 20,136,781 18,514,142
========== ==========
Diluted net income per common share $ 0.04 $ 0.01
============ ===========
Diluted weighted average number of shares
outstanding 20,601,828 19,296,638
========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
September 30
2007 2006
____ ____
Cash flows from operating activities:
Net income $ 800,011 $ 283,283
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 240,087 170,591
Non-cash interest expense 38,480 16,489
Deferred income tax expense 418,204 149,232
Non-cash stock-based compensation 62,705 70,781
Change in allowance for doubtful accounts 422,226 452,525
Changes in:
Accounts receivable (458,963) (813,640)
Prepaid expenses and other current assets 1,210 (457,819)
Other assets (2,712) (1,188)
Accounts payable 60,983 321,860
Accrued expenses and other liabilities (294,758) (100,690)
__________ _________
Net cash provided by operating activities 1,287,473 91,424
__________ _________
Cash flows from investing activities:
Acquisition of property and equipment (270,897) (152,959)
Construction in Progress (26,919) --
__________ _________
Net cash used in investing activities (297,816) (152,959)
__________ _________
Cash flows from financing activities:
Revolving debt, net (956,246) 174,563
Principal payments on long-term debt (274,766) (223,088)
Proceeds from issuance of common stock, net -- 64,365
Purchase of treasury stock (394,515) --
__________ _________
Net cash provided by financing activities (1,625,527) 15,840
Net decrease in cash and cash equivalents (635,870) (45,695)
Beginning cash and cash equivalents 3,395,173 1,820,105
__________ _________
Ending cash and cash equivalents $2,759,303 $1,774,410
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 78,141 $ 171,548
Income taxes 256,094 116,384
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in cashless exercise
of warrants $ -- $ 30
Obligations under capital leases -- 104,497
See Notes to Condensed Consolidated Financial Statements.
5
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2007
Note A - The Company
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 ten 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,
three 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.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended
September 30, 2007 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2008. The accompanying financial
statements should be read in conjunction with the June 30, 2007 consolidated
financial statements and footnotes thereto included in the Company's 10-K filed
on September 28, 2007 and 10-K/A filed on October 5, 2007.
Estimates and assumptions
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Such estimates include patient care billing rates, realizability of
receivables from third-party payors, rates for Medicare and Medicaid and the
realization of deferred tax benefits represent a significant portion of the
estimates made by management.
6
Revenue Recognition
The Company bills for its behavioral healthcare services at its inpatient
and outpatient facilities using different software platforms for each type of
service; however, in all cases the charges are contractually adjusted at the
time of billing using adjustment factors based on agreements or contracts with
the insurance carriers and the specific plans held by the individuals. This
method may still require additional adjustment based on ancillary services
provided and deductibles and copays due from the individuals which are estimated
at the time of admission based on information received from the individual.
Adjustments to these estimates are recognized as adjustments to revenue during
the period identified, usually when payment is received.
The Company's policy is to collect estimated co-payments and deductibles at
the time of admission. Payments are made by way of cash, check or credit card.
If the patient does not have sufficient resources to pay the estimated
co-payment in advance, the Company's policy is to allow payment to be made in
three installments- one third due upon admission, one third due upon discharge
and the balance due 30 days after discharge. At times the patient is not
physically or mentally stable enough to comprehend or agree to any financial
arrangement. In this case the Company will make arrangements with the patient
once his or her condition is stabilized. At times, this situation will require
the Company to extend payment arrangements beyond the three payment method
previously outlined. Whenever extended payment arrangements are made, the
patient, or the individual who is financially responsible for the patient, is
required to sign a promissory note to the Company, which includes interest on
the balance due.
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and accepted
based on study criteria and billable units of service are provided. Where a
contract requires completion of the study by the patient, no revenue is
recognized until the patient completes the study program. All revenues and
receivables from our research division are derived from pharmaceutical companies
with no related bad debt allowance.
Contract support service revenue is a result of fixed fee contracts to
provide telephone support. Revenue for these services is recognized ratably over
the service period. All revenues and receivables from our contract services
division are based on a prorated monthly allocation of the total contract amount
and usually paid within 30 days of the end of the month.
The Company's days sales outstanding ("DSO") are significantly different
for each type of service and each facility based on the payors for each service.
Overall, the DSO for the combined operations of the Company were 67 days for the
three months ended September 30, 2007 and 56 days the fiscal year ended June 30,
2007. The table below shows the DSO by segment for the same periods.
Period Treatment Pharmaceutical Contract
End Services Services Services
______ _________ ______________ ________
09/30/2007 60 110 50
06/30/2007 66 155 41
Changes in the Pharmaceutical Services DSO's are volatile as they are
related to the irregular starts and stops of studies and the type of studies
being conducted. Contract Services DSO's fluctuate dramatically by the delay in
payment of a few days for any of our large contracts.
Note C- Stock Based Compensation
The Company has three active stock plans: a stock option plan, an employee
stock purchase plan and a non-employee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 1,300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
of the Board of Directors has the authority to select the optionees and
determine the terms of the options including: (i) the number of shares, (ii)
option exercise terms, (iii) the exercise or purchase price (which in the case
of an incentive stock option will not be less than the market price of the Class
A common stock as of the date of grant), (iv) type and duration of transfer or
other restrictions and (v) the time and form of payment for restricted stock
upon exercise of options.
7
The employee stock purchase plan provides for the purchase of Class A
common stock at 85 percent of the fair market value at specific dates, to
encourage stock ownership by all eligible employees. A maximum of 500,000 shares
may be issued under this plan.
The non-employee director's stock option plan provides for the grant of
nonstatutory stock options automatically at the time of each annual meeting of
the Board. Under the plan a maximum of 350,000 shares may be issued. Each
outside director is granted an option to purchase 20,000 shares of Class A
common stock annually at fair market value on the date of grant, vesting 25%
immediately and 25% on each of the first three anniversaries of the grant and
expiring ten years from the grant date.
The Company issues stock options to its employees and directors and
provides employees the right to purchase stock pursuant to stockholder approved
stock option and stock purchase plans. The Company follows the provisions of
SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), using the
Statement's modified prospective application method.
Under the provisions of SFAS No. 123R, the Company recognizes the fair
value of stock compensation in net income, over the requisite service period of
the individual grantees, which generally equals the vesting period. All of the
Company's stock compensation is accounted for as an equity instrument and there
have been no liability awards granted. Any income tax benefit related to stock
compensation will be shown under the financing section of the Cash Flow
Statement. Based on the Company's historical voluntary turnover rates for
individuals in the positions who received options in the period, there was no
forfeiture rate assessed. It is assumed these options will remain outstanding
for the full term of issue. Under the true-up provisions of SFAS 123R, a
recovery of prior expense will be recorded if the actual forfeiture is higher
than estimated.
Under the provisions of SFAS 123R, the Company recorded $55,305 and $70,781
of stock-based compensation on its consolidated condensed statement of
operations for the three months ended September 30, 2007 and 2006, respectively,
which is included in administrative expenses as follows:
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
Director compensation $ 17.944 $ --
Employee compensation 37,361 70,781
__________ _________
Total $ 55,305 $ 70,781
========== ==========
The Company had the following activity in its stock option plans for the
three months ended September 30, 2007:
Number Weighted-Average Intrinsic Value
Of Exercise Price At
Shares Per Share September 30, 2007
______ ________________ __________________
Balance - June 30, 2007 1,096,000 $1.76
Granted -- $ --
Exercised -- $ --
Expired -- $ --
Balance - September 30, 2007 1,096,000 $1.76 $ 1,188,207
_________ _____ ___________
Exercisable 843,500 $1.53 $ 1,089,607
========= ===== ===========
No options were exercised during the three-months ended September 30, 2007.
The following summarizes the activity of the Company's stock options that
have not vested for the three months ended September 30, 2007.
8
Number Weighted-
of Average
Shares Fair Value
Nonvested at July 1, 2007 304,374 $1.33
Granted 0 --
Expired 0 --
Vested 51,874 $1.22
______ _____
Nonvested at September 30, 2007 252,500 $1.35
======= =======
The compensation cost related to the fair value of these shares of $341,138
will be recognized when these options vest over the next three years.
Note D- Reclassifications
Certain September 30, 2006 amounts have been reclassified to be consistent
with the September 30, 2007 presentation.
Note E - Business Segment Information
The Company's behavioral health treatment services have similar economic
characteristics, services, patients and clients. Accordingly, all behavioral
health treatment services are reported on an aggregate basis under one segment.
The Company's segments are more fully described in Note A above. Residual income
and expenses from closed facilities are included in the administrative services
segment. The following summarizes the Company's segment data:
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
For the three months ended:
September 30, 2007
Revenues - external
customers $10,143,435 $1,420,965 $1,139,766 $ -- $ -- $12,704,166
Revenues - intersegment 86,900 -- -- 1,044,600 (1,131,500) --
Segment net income (loss) 1,495,318 176,216 303,463 (1,174,986) -- 800,011
Capital Expenditures 224,089 11,467 2,800 59,462 -- 297,818
Depreciation
& Amortization 128,208 40,519 28,574 42,786 -- 240,087
Interest Expense 64,107 17,482 1,144 48,648 -- 131,381
Income tax expense 390,295 45,619 35,481 35,481 -- 506,876
Identifiable assets 11,138,683 6,486,105 882,575 7,788,508 -- 26,295,871
Goodwill and Intangible
Assets 969,099 4,529,477 -- -- -- 5,498,576
9
Note E - Business Segment Information (continued)
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
September 30, 2006
Revenues - external
customers $ 7,876,432 $1,051,383 $1,134,391 $ -- $ -- $10,062,206
Revenues - intersegment 4,500 -- 21,640 924,000 (950,140) --
Segment net income (loss) 1,073,638 (126,767) 255,565 (919,153) -- 283,283
Capital Expenditures 105,468 21,268 1,565 21,268 -- 149,569
Depreciation & Amortization 88,764 37,367 13,444 11,309 -- 150,884
Interest Expense 87,397 16,605 1,278 14,550 -- 119,830
Income tax expense 138,498 -- 40,343 3,926 -- 182,767
Identifiable assets 11,163,908 5,594,180 1,006,661 4,932,299 -- 22,697,048
Goodwill and Intangible
Assets 969,099 3,805,544 -- -- -- 4,774,643
Note F - 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. The Company adopted FIN 48 on July 1, 2007. As a result of the
implementation of FIN 48, we recognized no material adjustment in the liability
for unrecognized tax benefits.
We recognize interest and penalties related to uncertain tax positions in
general and administrative expense. As of September 30, 2007, we have not
recorded any provisions for accrued interest and penalties related to uncertain
tax positions. The adoption of FIN 48 did not have a material impact on our
financial reporting or our disclosure requirements.
Tax years 2000-2006 remain open to examination by the major taxing
authorities to which we are subject.
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.
10
Note G - 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 three months ended September
30, 2007 and 2006 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:
Three months ended September 30,
2007 2006
_______________________________
Weighted average shares outstanding -
basic 20,136,781 18,514,142
Employee stock options 444,603 430,050
Warrants 20,444 352,446
__________ __________
Weighted average shares outstanding -
fully diluted 20,601,828 19,296,638
========== ==========
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
In addition to historical information, this report contains statements
relating to future events or our future results. These statements are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as
amended (the "Exchange Act") and are subject to the Safe Harbor provisions
created by the statute. Generally words such as "may", "will", "should",
"could", "anticipate", "expect", "intend", "estimate", "plan", "continue", and
"believe" or the negative of or other variation on these and other similar
expressions identify forward-looking statements. These forward-looking
statements are made only as of the date of this report. We do not undertake to
update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise. Forward-looking statements are based on
current expectations and involve risks and uncertainties and our future results
could differ significantly from those expressed or implied by our
forward-looking statements.
Overview
The Company presently provides behavioral health care services through two
substance abuse treatment centers, a psychiatric hospital, a residential
treatment facility and eight outpatient psychiatric centers (collectively called
"treatment facilities"). The Company's revenue for providing behavioral health
services through these facilities is derived from contracts with managed care
companies, Medicare, Medicaid, state agencies, railroads, gaming industry
corporations and individual clients. The profitability of the Company is largely
dependent on the level of patient census and the payor mix at these treatment
facilities. Patient census is measured by the number of days a client remains
overnight at an inpatient facility or the number of visits or encounters with
clients at outpatient clinics. Payor mix is determined by the source of payment
to be received for each client being provided billable services. The Company's
administrative expenses do not vary greatly as a percentage of total revenue but
the percentage tends to decrease slightly as revenue increases. The Company's
internet operation, Behavioral Health Online, Inc., continues to provide
behavioral health information through its web site at Wellplace.com but its
primary function is Internet technology support for the subsidiaries and their
contracts. As such, the expenses related to Behavioral Health Online, Inc. are
included as corporate expenses. The Company's research division, Pivotal
Research Centers, Inc., contracts with major manufacturers of pharmaceuticals to
assist in the study of the effects of certain pharmaceuticals in the treatment
of specific illnesses through its clinics in Utah 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
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.
12
Revenue recognition and accounts receivable:
Patient care revenues and accounts receivable are recorded at established
billing rates or at the amount realizable under agreements with third-party
payors, including Medicaid and Medicare. Revenues under third-party payor
agreements are subject to examination and contractual adjustment, and amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
provided and subsequent settlements are recorded in operations in the year of
settlement. Amounts due as a result of cost report settlements is recorded and
listed separately on the consolidated balance sheets as "Other receivables". The
provision for contractual allowances is deducted directly from revenue and the
net revenue amount is recorded as accounts receivable. The allowance for
doubtful accounts does not include the contractual allowances.
The Company currently has two "at-risk" contracts. The contracts call for
the Company to provide for all of the inpatient and outpatient behavioral health
needs of the insurance carrier's enrollees in Nevada for a fixed monthly fee per
member per month. Revenues are recorded monthly based on this formula and the
expenses related to providing the services under these contracts are recorded as
incurred. The Company provides most of the outpatient care directly and, through
utilization review, monitors closely, and pre-approves all inpatient and
outpatient services not provided directly. The 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 the quarter ended September 30, 2007 for
revenue booked in prior years resulted in an decrease in net revenue of
approximately $30,914. Net contractual adjustments recorded in fiscal 2007 for
revenue booked in prior years resulted in an increase in net revenue for the
year of approximately $26,430.
During the fiscal year ended June 30, 2007, a Medicare cost report
settlement of $255,600 was received. No cost report settlements were received or
recorded during the three months ended September 30, 2007.
Our accounts receivable systems are capable of providing an aging based on
responsible party or payor. This information is critical in estimating our
required allowance for bad debts. Below is revenue by payor and the accounts
receivable aging information as of September 30, 2007, 2006 and June 30, 2007,
for our treatment services segment.
Net Revenue by Payor (in thousands)
For the Three For the Three For the Twelve
Months Ended Months Ended Months Ended
September 30, 2007 September 30, 2006 June 30, 2007
Amount Percentage Amount Percentage Amount Percentage
______ __________ ______ __________ ______ __________
Private Pay $ 468 5% $ 340 4% $ 1,632 5%
Commercial 6,742 66% 4,881 62% 23,477 65%
Medicare * 373 4% 359 5% 1,379 4%
Medicaid 2,560 25% 2,296 29% 9,535 26%
Net Revenue $10,143 $7,876 $36,023
* includes Medicare settlement revenue as noted above
13
Accounts Receivable Aging (Net of allowance for bad debts- in thousands)
Quarter Ended September 30, 2007
Over Over Over Over Over Over Over
Payor Current 30 60 90 120 150 270 360 Total
_____________________________________________________________________________________
Private Pay $ 79 $ 164 $156 $ 67 $132 $554 $ 59 $ 50 $1,261
Commercial 1,763 1,053 652 154 81 114 26 93 3,936
Medicare 113 5 14 - 8 12 -- -- 152
Medicaid 1,048 133 74 46 22 57 -- -- 1,380
______ ______ _____ ____ ____ ____ _____ ____ ______
Total $3,003 $1,355 $896 $267 $243 $737 $ 85 $143 $6,729
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
====== ====== ==== ==== ==== ==== ==== ==== ======
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. Revenues and receivables from our contract services division
are based on a prorated monthly allocation of the total contract amount and
usually paid within 30 days of the end of the month.
Allowance for doubtful accounts:
The provision for bad debts is calculated based on a percentage of each
aged accounts receivable category beginning at 0-5% on current accounts and
increasing incrementally for each additional 30 days the account remains
outstanding until the account is over 360 days outstanding, at which time the
provision is 80-100% of the outstanding balance. These percentages vary by
facility based on each facility's experience in and expectations for collecting
older receivables. The Company compares this required reserve amount to the
current "Allowance for doubtful accounts" to determine the required bad debt
expense for the period. This method of determining the required "Allowance for
doubtful accounts" has historically resulted in an allowance for doubtful
accounts of 20% or greater of the total outstanding receivables balance.
Income Taxes:
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. There has been no valuation allowance
provided on the Company's deferred tax assets since the fourth quarter of fiscal
year ended June 30, 2006.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are initially created as a result of
business combinations or acquisitions. The values the Company records for
goodwill and other intangible assets are reviewed by the Company, at least
annually, and represent fair values. Such valuations require the Company to
14
provide significant estimates and assumptions, which are derived from
information obtained from the management of the acquired businesses and the
Company's business plans for the acquired businesses. Critical estimates and
assumptions used in the initial valuation of goodwill and other intangible
assets include, but are not limited to: (i) future expected cash flows from
services to be provided, customer contracts and relationships, and (ii) the
acquired market position. These estimates and assumptions may be incomplete or
inaccurate because unanticipated events and circumstances may occur. If
estimates and assumptions used to initially value goodwill and intangible assets
prove to be inaccurate, ongoing reviews of the carrying values of such goodwill
and intangible assets may indicate impairment which will require the Company to
record an impairment charge in the period in which the Company identifies the
impairment.
Results of Operations
The following table illustrates our consolidated results of operations for
the quarters ended September 30, 2007 and 2006 (in thousands):
2007 2006
____ ____
(in thousands)
Statements of Operations Data:
Amount % Amount %
Revenue $12,704 100.0% $10,062 100.0%-
Cost and Expenses:
Patient care expenses 5,906 46.5% 4,442 44.2%
Contract expenses 803 6.3% 839 8.3%
Administrative expenses 4,182 32.9% 3,774 37.5%
Provision for bad debts 422 3.3% 453 4.5%
Interest expense 131 1.0% 120 1.2%
Other (income) expenses, net (47) -0.4% (32) -0.3%
_______ _____ ______ ______
Total expenses 11,397 89.7% 9,596 95.4%
_______ _____ ______ ______
Income before income taxes 1,307 10.3% 466 4.6%
Provision for income taxes 507 4.0% 183 1.8%
_______ _____ ______ ______
Net income $ 800 6.3% $ 283 2.8%
======= ===== ======= ======
Results of Operations
Total net revenue from operations increased 26.3% to $12,704,166 for the
three months ended September 30, 2007 from $10,062,206 for the three months
ended September 30, 2006.
Net patient care revenue increased 28.8% to $10,143,435 for the three
months ended September 30, 2007 from $7,876,432 for the three months ended
September 30, 2006. This increase in revenue is due primarily to the new
capitated contract signed by the Company in January 2007 and a 5.5% increase in
census at our inpatient facilities.
Two key indicators of profitability of inpatient facilities are patient
days, or census, and payor mix. Patient days is the product of the number of
patients times length of stay. Increases in the number of patient days result in
higher census, which coupled with a more favorable payor mix (more patients with
higher paying insurance contracts or paying privately) will usually result in
higher profitability. Therefore, patient census and payor mix are monitored very
closely.
Revenue from pharmaceutical studies increased 35.2% to $1,420,965 for the
three months ended September 30, 2007 from $1,051,383 for the three months ended
September 30, 2006. This increase is due to the start of a large study in the
last quarter of fiscal 2007 after being delayed for a significant period. The
cyclical nature of the pharmaceutical research business, where the size and
number of clinical trial starts and stops changes daily, makes revenue
projections difficult and revenues vary greatly from period to period.
Contract support services revenue provided by Wellplace remained relatively
stable at $1,139,766 for the three months ended September 30, 2007 compared to
15
$1,134,391 for the three months ended September 30, 2006. The Company expects to
increase this revenue through new contracts for EAP (Employee Assistance
Programs) and Smoking Cessation programs.
Patient care expenses in our treatment centers increased 30.6% to
$5,296,074 for the three months ended September 30, 2007 from $4,054,966 for the
three months ended September 30, 2006. This increase in expenses is due to the
new capitated contract mentioned above with the majority of the increases in
expenses directly related to the patient care expenses related to the contract
such as payroll, taxes, consultant services and contract expenses which includes
payment for bed days under the contract. There were also some increases in other
hospital related expenses such as food and pharmacy as a result of the higher
census.
Patient care expenses related to our pharmaceutical or research division
increased 25.2% to $609,792 for the three months ended September 30, 2007 from
$486,937 for the three months ended September 30, 2006. This increase is due to
the increase in the number of studies and study participants.
Contract support services expenses decreased 4.3% to $802,648 for the three
months ended September 30, 2007 from $838,555 for the three months ended
September 30, 2006. This decrease is marginal and is a result of designed
efficiencies in operating our older contracts. We don't anticipate this trend to
continue as we expect it will fluctuate with new contracts.
Administrative expenses increased 20.5% to $3,609,936 for the quarter ended
September 30, 2007 from $2,996,141 for the quarter ended September 30, 2006.
These changes are a result of the increased administrative payroll and employee
benefits related to new capitated contract and the increase in staff as we ramp
up for the opening of the Seven Hills Hospital. Administrative payroll increased
19.1%. In addition depreciation increased 61.2% as we began using the Meditech
software and related equipment in the current quarter. Rent expense increased
41.2% due to the additional offices opened to service the clients covered by the
new capitated contract. Utilities increased approximately 25.9% which was also
related to the opening of the new offices.
Administrative expenses related to the research division decreased 15.8% to
$571,856 for the three months ended September 30, 2007 from $679,108 for the
three months ended September 30, 2006. This is the result of the closing of the
Michigan office in October of last year.
Provision for doubtful accounts decreased 6.7% to $422,226 for the three
months ended September 30, 2007 from $452,525 for the three months ended
September 30, 2006. The Company's policy is to maintain reserves based on the
age of its receivables. This decrease in the provision for doubtful accounts is
largely attributable to the change in age of the receivables.
Interest income remained relatively stable at $32,535 for the three months
ended September 30, 2007 from $32,849 for the three months ended September 30,
2006. This slight decrease is a result of changes in the overall interest rate
on our investment accounts.
Other income / expense changed to an income of $14,099 for the three months
ended September 30, 2007 from an expense of $943 for the three months ended
September 30, 2006. This change is due to the processing of an insurance
settlement of $10,000 in the quarter.
Interest expense increased 9.6% to $131,381 for the three months ended
September 30, 2007 from $119,830 for the three months ended September 30, 2006.
This increase is primarily the result of the treatment of the new warrant issued
when the Company's long term debt was restructured as interest expense.
The Company's provision for income taxes of $506,876 for the three month
period ended September 30, 2007 is based on an estimated combined tax rate of
approximately 39% for both Federal and State taxes based on Company earnings
projections. If this estimate is found to be high or low, adjustments will be
made in the period of the determination. This will most likely be at year end
when tax estimates can be more accurately made.
Liquidity and Capital Resources
The Company`s net cash provided by operating activities was $1,287,473 for
the three months ended September 30, 2007 compared to $91,424 for the three
months ended September 30, 2006. Cash flow provided by operations in the three
months ended September 30, 2007 consists of net income of $800,011 plus
depreciation and amortization of $240,087, non-cash interest expense $38,480,
non-cash equity based charges of $62,705, an increase in net accounts payable of
16
$60,983, a decrease in deferred tax expense of $418,204, a decrease in prepaid
expenses of $1,210 and a decrease in net receivables of $36,737 less cash used
for an increase in other assets of $2,712 and a decrease in accrued expenses of
$294,758.
Cash used in investing activities in the three months ended September 30,
2007 consisted of $297,816 in capital expenditures including construction in
progress, compared to $152,959 in capital expenditures during the same period
last year.
Cash used in financing activities of $1,625,527 in the three months ended
September 30, 2007 was the result of the purchase of 150,000 shares of treasury
stock and a decrease in the Company's revolving credit line of $956,246 and
repayment of $274,766 on the Company's long-term debt.
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. As of September 30, 2007, accounts
receivable from patient care, net of allowance for doubtful accounts, increased
3% to $6,729,412 from $6,559,387 on June 30, 2007. This minimal increase is a
result of increased revenue. The Company monitors increases in accounts
receivable closely and, based on the aging of the receivables outstanding, is
confident that the increase is not indicative of a payor problem. Over the
years, we have increased staff, standardized some procedures for determining
insurance eligibility and collecting receivables and established a more
aggressive collection policy. The increased staff has allowed the Company to
concentrate on current accounts receivable and resolve any issues before they
become uncollectible. The Company's collection policy calls for earlier contact
with insurance carriers with regard to payment, use of fax and registered mail
to follow-up or resubmit claims and earlier employment of collection agencies to
assist in the collection process. Our collectors will also seek assistance
through every legal means, including the State Insurance Commissioner's office,
when appropriate, to collect claims. The Company has begun the process of
changing its software related to the recording, billing and collecting of
Accounts Receivable. The first facility went live on the system July 1, 2007.
Three additional facilities converted on October 1, 2007. This system will
assist staff in the timely billing and collection of receivables. At the same
time, the Company continues to closely monitor reserves for bad debt based on
potential insurance denials and past difficulty in collections.
Contractual Obligations
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes as of September 30, 2007 are
as follows (in thousands):
YEAR ENDING
September 30, TERM NOTES CAPITAL LEASES * OPERATING
Principal Interest Principal Interest LEASES TOTAL**
_______________________________________________________________________________
2008 $1,120 $ 23 $ 195 $36 $2,103 $3,477
2009 430 19 162 22 2,066 2,699
2010 50 15 20 12 1,510 1,607
2011 47 11 6 4 582 650
2012 52 6 -- -- 252 310
2013 44 2 -- -- 193 239
Thereafter -- -- -- -- -- --
______ ___ ______ ___ ______ ______
Total $1,743 $ 76 $ 383 $74 $6,706 $8,982
* 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
$562,496. This amount represents an accounts receivable funding described below
and is shown as a current note payable in the accompanying Financial Statements.
In addition to the above, the Company is also subject to three contingent
notes with a total face value of $2,500,000 as part of the Pivotal acquisition.
Of these notes, 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 $367,591 which
represents the earn-out for the Pivotal acquisition through December 31, 2005
net of payments made through September 30, 2007. Additional 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
17
of $608,168. 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 $182,828 is included
in the schedule above.
In October 2004, the Company entered into a revolving credit, term loan and
security agreement with CapitalSource Finance, LLC to replace the Company's
primary lender and provide additional liquidity. Each of the Company's material
subsidiaries, other than Pivotal Research Centers, Inc, is a co-borrower under
the agreement. 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 $287,143 at September 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 September 30, 2007 the Company had $2,562,857 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 September 30, 2007
was $562,496. For additional information regarding this transaction, see the
Company's current report on form 8-K filed with the Securities and Exchange
Commission on October 22, 2004. The balance outstanding as of September 30, 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 22.24%.
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.
Litigation
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The market price of our common stock could be volatile and fluctuate
significantly in response to various factors, including:
o Differences in actual and estimated earnings and cash flows;
o Operating results differing from analysts' estimates;
o Changes in analysts' earnings estimates;
o Quarter-to-quarter variations in operating results;
o Changes in market conditions in the behavioral health care industry;
o Changes in market conditions in the research industry;
o Changes in general economic conditions; and
o Fluctuations in securities markets in general.
18
Financial Risk
o Our interest expense is sensitive to changes in the general level of
interest rates. With respect to our interest-bearing liabilities, all
of our long-term debt outstanding is subject to rates at prime plus
.25% and prime plus .75%, which makes interest expense increase with
changes in the prime rate. On this debt, each 25 basis point increase
in the prime rate will affect an annual increase in interest expense
of approximately $5,850.
o Failure to meet targeted revenue projections could cause us to be out
of compliance with covenants in our debt agreements requiring a waiver
from our lender. A waiver of the covenants may require our lender to
perform additional audit procedures to assure the stability of their
security which could require additional fees.
Operating Risk
o Aging of accounts receivables could result in our inability to collect
receivables. As our accounts receivable age and become uncollectible
our cash flow is negatively impacted. Our accounts receivable from
patient accounts (net of allowance for bad debts) were $6,729,472 at
September 30, 2007, $6,559,387 at June 30, 2007 and $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, standard 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 conservative reserve policy,
allowing greater amounts of reserves as accounts age from the date of
billing. If the amount of receivables, which eventually become
uncollectible, exceeds such reserves, we could be materially adversely
affected. The following chart represents our Accounts Receivable and
Allowance for Doubtful Accounts at September 30, 2007 and June 30,
2007, respectively, and Bad Debt Expense for the quarter ended
September 30, 2007 and the year ended June 30, 2007:
Accounts Allowance for Bad Debt
Receivable doubtful accounts Expense
__________ _________________ _________
September 30, 2007 $9,608,314 $ 2,878,902 $ 422,226
June 30, 2007 10,323,972 3,764,585 1,933,499
o The Company relies on contracts with more than ten clients to maintain
patient census at its inpatient facilities and the loss of any of such
contracts would impact our ability to meet our fixed costs. We have
entered into relationships with large employers, health care
institutions and labor unions to provide treatment for psychiatric
disorders, chemical dependency and substance abuse in conjunction with
employer-sponsored employee assistance programs. The employees of such
institutions may be referred to us for treatment, the cost of which is
reimbursed on a per diem or per capita basis. Approximately 30% of our
total revenue is derived from these clients. No one of these large
employers, health care institutions or labor unions individually
accounts for 10% or more of our consolidated revenues, but the loss of
any of these clients would require us to expend considerable effort to
replace patient referrals and would result in revenue losses and
attendant loss in income.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified within the
SEC's Rules and Forms and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management was necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As reported in the Company's 10-K for the year ended June 30, 2007, during
the preparation of the financial statements to be included in the 2007 Form
10-K, a material weakness in internal control over financial reporting was
19
identified relating to timely reconciliation of certain balance sheet items,
primarily cash, accrued expenses and other accounts receivable, resulting from
staffing turnover in the accounting area. As a result, the Chief Executive
Officer and Chief Financial Officer concluded that, as of June 30, 2007, the
Company's disclosure controls and procedures were ineffective due solely to, and
only to the extent of, the identified material weakness. During the current
quarter the Company put into effect the comprehensive plan to remediate the
material weakness which, based on the monthly review of account reconciliations,
has been determined to be an effective method to assure timely reconciliation
and adequate control over financial reporting.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures to meet the
criteria referred to above. Based on the foregoing, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective.
Change in Internal Controls
There were no changes in our internal controls or in other factors that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
20
PART II OTHER INFORMATION
Item 6. Exhibits
Exhibit List
Exhibit No. Description
10.49 Change-in-control supplemental benefit plan for certain executive
employees.
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.
21
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHC, Inc.
Registrant
Date: November 9, 2007 /s/ Bruce A. Shear
___________________
Bruce A. Shear
President
Chief Executive Officer
Date: November 9, 2007 /s/ Paula C. Wurts
___________________
Paula C. Wurts
Treasurer
Chief Financial Officer
22