PHC, INC.
200 Lake Street, Suite 102
Peabody, MA 01960
March 20, 2006
Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 6010
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jim B. Rosenberg
Senior Assistant Chief Accountant
RE: PHC, Inc.
Form 10-K for Fiscal Year Ended June 30, 2005
Filed September 28, 2005
File No. 000-22916
Dear Mr. Rosenberg:
We have reviewed your comment letter dated February 14, 2006 and
acknowledge that:
The company is responsible for the adequacy and accuracy of the disclosure
in the filings;
Staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
filing; and
The company may not assert staff comments as a defense in any preceding
initiated by the Commission or any person under the federal securities laws
of the United States.
The following responses have been keyed to your comment letter to
facilitate your review.
Item 1: Description of Business, page 2
Comment 1. We believe your disclosures regarding revenues could be
improved. Please provide us the following information in a disclosure-type
format:
a. Whether your billing system generates contractual adjustments based on
fee schedules of patient's insurance plan for each patient encountered
or if an estimate of contractual allowances is made. If an estimate is
made, state what factors are considered in determining the estimate.
b. Your policy for collecting co-payments.
c. Your day's sales outstanding for each period presented. Discuss the
reasons for significant changes from the prior period.
Response 1
a. 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. We currently disclose this information in a
similar manner, as part of our "Critical Accounting Policies" "Revenue
recognition and accounts receivable" in Item 7. of our Annual Report
on Form 10-K. We will include similar language in the Description of
Business in future filings.
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b. 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 individual, is required to sign a
promissory note to the Company, which includes interest on the balance
due.
c. 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 was 84 days for the fiscal year ended June 30, 2004 and
90 days for the fiscal year ended June 30, 2005. This increase is
related to the expansion of our research business through the
acquisition of Pivotal and the high DSO associated with research
receivables. The decrease in the receivables DSO's in 2005 was
partially offset by the receipt of the Michigan call center payment
after year end which increase nearly doubled the Contract Services
DSO's.
d. DSO's for each year for each business segment are as follows:
Fiscal Treatment Pharmaceutical Contract
Year End Services Services Services
__________ _________ ______________ ________
06/30/2004 85 161 34
06/30/2005 89 114 62
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies, pages 19-20
Comment 2. We believe that your disclosures as it relates to contractual
adjustments and receivables could be improved. Please provide us the
following information in disclosure-type format:
For each period presented, the amount of changes in estimates of prior
period contractual adjustments that you recorded during the current
period. For example for fiscal 2005, this amount would represent the
amount of the difference between estimates of contractual adjustments
for services provided in fiscal 2004 and the amount of the new
estimate or settlement amount that was recorded during fiscal 2005.
Quantify the reasonably possible effects that a change in estimate of
unsettled amounts from third party payors as of the latest balance
sheet date could have on financial position and operations.
Provide in a comparative tabular format, the payor mix concentrations
and related aging of accounts receivable. The aging schedule may be
based on management's own reporting criteria (i.e. unbilled, less than
30 days, 30 to 60 days etc.) or some other reasonable presentation. At
a minimum the information should indicate the past due amounts and a
breakdown by payor classification (i.e. Medicare, Medicaid, Managed
care and other, and Self-pay). We would expect Self-pay to be
separately classified from any other grouping. If your billing system
does not have the capacity to provide an aging schedule of your
receivables, discuss that fact and clarify how this affects your
ability to estimate your allowance for bad debts.
If you have amounts that are pending approval from third party payors
(i.e. Medicaid Pending), provide the balances of such amounts, where
they have been classified in your aging buckets, and what
payor-classification they have been grouped with. If amounts are
classified outside of self-pay, explain why this classification is
appropriate and provide the historical percentage of amounts that get
reclassified into self-pay.
Response 2.
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
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payment is received in accordance with the AICPA "Audit and Accounting
Guide for Health Care Organizations." Net contractual adjustments
adjusted in fiscal 2004 for revenue booked in prior years resulted in
an increase in net revenue of $217,958. Net contractual adjustments
adjusted in fiscal 2005 for revenue booked in prior years resulted in
an increase in net revenue of $371,740. During the fiscal year ended
June 30, 2004, a Medicare cost report settlement of approximately
$172,000 was received. No cost report settlements were received during
the fiscal year ended June 30, 2005. For the fiscal years ended June
30, 2004 and 2005, no third party cost report settlements were
expected or recorded. It is not anticipated that any future
adjustments will be required. 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, 2004 and June 30, 2005 for our treatment
services segment. All revenues and receivables from our research
division are derived from pharmaceutical companies with no related bad
debt allowance. 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.
Net Revenue by Payor (in thousands)
For the Twelve Months Ended
06/30/2004 06/30/2005
Amount Percent Amount Percent
_______ _______ ______ _______
Private Pay $ 1,132 5% $ 1,212 5%
Commercial 15,414 69% 17,608 67%
Medicare 1,381 6% 999 4%
Medicaid 4,491 20% 6,268 24%
_______ _______ ______ _______
Net Revenue $22,418 $26,087
======== ========
Accounts Receivable Aging (Net of allowance for bad debts- in thousands)
Fiscal Year Ended June 30, 2004
Over Over Over Over Over Over Over
Payor Current 30 60 90 120 150 270 360 Total
_______________________________________________________________________________
Private Pay $ 135 $ 88 $ 77 $ 69 $ 55 $ 36 $137 $105 $ 702
Commercial 1,333 604 288 164 187 79 308 376 3,339
Medicare 59 11 6 -- 3 -- 4 -- 83
Medicaid 462 327 109 34 45 24 114 20 1,135
______ ______ ____ ____ ____ ____ ____ ____ ______
Total $1,989 $1,030 $480 $266 $291 $140 $562 $503 $5,261
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
Amounts pending approval from Medicare or Medicaid, as with all other third
party payors, are maintained on the receivables aging based on the
discharge of the patient, while appeals are made for payment. If accounts
remain unpaid, when all levels of appeal have been exhausted accounts are
written off.
As indicated to Commission staff attorney, Todd Sherman, on February 22nd,
some of the information the staff has requested is not available, or would not
be helpful if provided in the requested format. We have attempted to present the
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requested information in a format that we believe most accurately conforms to
our current receivables system.
Contractual Obligations, page 26
Comment 3. Please tell us why it appears scheduled interest payments on
long-term debt are excluded from the table even though interest expense would
appear to be payable under the contractual terms of the long-term debt.
Response 3. Payments on long term debt in the schedule are presented as
principal only to conform to the balance sheet and footnote presentation.
An estimate of potential required interest repayment will be included as a
separate column in future filings.
Item 7A. Quantitative and Qualitative Disclosures
Comment 4. It appears that quantitative disclosures on your interest rate
risk are required using one of the three disclosure alternatives in Rule 305(a)
of Regulation S-K. Please provide this information in a disclosure-type format
or tell us why these disclosures were omitted.
Response 4. All long term debt of the Company is subject to adjustment
based on the prime interest rate. This is the only financial market risk of
the Company. In the most recent 10-Q, the Company noted the effect of an
increase in the prime rate on the interest expense of the Company as
follows: "On the term loan and the revolving credit note, each 25 basis
point increase in the prime rate will affect an annual increase in interest
expense of approximately $8,700." Since this is the only interest expense
exposure the Company has, we believe the disclosure provided informs the
reader of the financial risk to which we are exposed. We will continue to
provide this disclosure in future filings.
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Operations, F-4
Comment 5. Please tell us your revenue recognition policy for
pharmaceutical study revenue, the nature of billable units of service provided,
and how the billable units of service are measured under the terms of your
agreements. Demonstrate for us how your policy complies with GAAP.
Response 5. 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
have been provided. Each study calls for a participant to complete a
specific number of visits in order to validate the study. While some
studies require all visits to be complete before any services can be
billed, most studies will allow billing for each visit once the participant
is randomized, or identified as a meeting all study criteria, even if the
participant does not complete the study. Where a contract requires
completion of the study by the patient, no revenue is recognized until the
patient completes the study program.
Notes to Consolidated Financial Statements
Note A - The Company and Summary of Significant Accounting Policies, page F-8
Goodwill and other intangible assets, page F-11
Comment 6. Please explain to me why the straight-line method of
amortization for the customer relationships acquired reflects the pattern in
which the economic benefits of the intangible asset is consumed. Tell us why an
accelerated method of amortization does not result in an appropriate and
systematic allocation of the intangible's cost to the periods.
Response 6. Customer relationships acquired in the acquisition of Pivotal
are used to acquire new studies on an ongoing basis. There is no true
"consumption" of the relationship that can be defined therefore the Company
believes the straight line method of amortization would best reflect the
use of the intangible asset.
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Please contact me with any additional comments you may have.
Sincerely,
PHC, Inc.
/s/ Paula C. Wurts
Paula C. Wurts
Chief Financial Officer
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