U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended June 30, 2004 [ ] Transition report under section
13 or 15(d) of the Securities Exchange Act of 1934 for the transition period
from to
Commission file number: 0-22916
PHC, INC.
(Name of small business issuer 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)
Issuer's telephone number: (978) 536-2777
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.
No Disclosure X
The issuer's revenues for the fiscal year ended June 30, 2004 were $26,648,845.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of July 28, 2004, was $18,337,590.88. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At July 28, 2004, 16,576,712 shares of the issuer's Class A Common Stock and
776,991 shares of the issuer's Class B Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Our Company is a national healthcare company, which, through wholly owned
subsidiaries, provides psychiatric services to individuals who have behavioral
health disorders including alcohol and drug dependency and to individuals in the
gaming and transportation industries. Our subsidiaries operate substance abuse
treatment facilities in Utah and Virginia, three outpatient psychiatric
facilities in Michigan, two outpatient psychiatric facilities in Nevada and an
inpatient psychiatric facility in Michigan. We provide management,
administrative and help line services through contracts with major railroads, a
smoking cessation contract with the State of Kansas and a call center contract
with Wayne County, Michigan. Through another subsidiary, we conduct studies on
the effects of psychiatric pharmaceuticals on a controlled population through
contracts with the manufacturers of these pharmaceuticals. We recently expanded
our operations related to pharmaceutical studies through the acquisition of
Pivotal Research Centers, LLC. We also operate a website, Wellplace.com, which
provides education, training and products for the behavioral health professional
and internet support services to all of our subsidiaries.
Our Company provides behavioral health services and products through
inpatient and outpatient facilities and online to behavioral health
professionals. Our substance abuse facilities provide specialized treatment
services to patients who typically have poor recovery prognoses and who are
prone to relapse. These services are offered in small specialty care facilities,
which permit us to provide our clients with efficient and customized treatment
without the significant costs associated with the management and operation of
general acute care hospitals. We tailor these programs and services to
"safety-sensitive" industries and concentrate our marketing efforts on the
transportation, oil and gas exploration, heavy equipment, manufacturing, law
enforcement, gaming and health services industries. Our psychiatric facility
provides inpatient psychiatric care and intensive outpatient treatment, referred
to as partial hospitalization, to children, adolescents and adults. Our
outpatient mental health clinics provide services to employees of major
employers, as well as to managed care, Medicare and Medicaid clients. The
psychiatric services are offered in a larger, more traditional setting than
PHC's substance abuse facilities, enabling PHC to take advantage of economies of
scale to provide cost-effective treatment alternatives.
The Company treats employees who have been referred for treatment as a
result of compliance with Subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as the Drug Free Workplace Act), which requires employers who
are Federal contractors or Federal grant recipients to establish drug-free
awareness programs which, among other things, inform employees about available
drug counseling, rehabilitation and employee assistance programs. We also
provide treatment under the Department of Transportation implemented
regulations, which broaden the coverage and scope of alcohol and drug testing
for employees in "safety sensitive" positions in the transportation industry.
The Company was incorporated in 1976 and is a Massachusetts corporation.
Our corporate offices are located at 200 Lake Street, Suite 102, Peabody, MA
01960 and our telephone number is (978) 536-2777. As used herein, our Company
refers to and includes the Company and each of its subsidiaries through which
substantially all of our business and operations are conducted.
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PSYCHIATRIC SERVICES INDUSTRY
Substance Abuse Facilities
Industry Background
The demand for substance abuse treatment services increased rapidly in the
last decade. The Company believes that the increased demand is related to
clinical advances in the treatment of substance abuse, greater societal
willingness to acknowledge the underlying problems as treatable illnesses,
improved health insurance coverage for addictive disorders and chemical
dependencies and governmental regulation which requires certain employers to
provide information to employees about drug counseling and employee assistance
programs.
To contain costs associated with behavioral health issues in the 1980s,
many private payors instituted managed care programs for reimbursement, which
included pre-admission certification, case management or utilization review and
limits on financial coverage or length of stay. These cost containment measures
have encouraged outpatient care for behavioral problems, resulting in a
shortening of the length of stay and revenue per day in inpatient chemical abuse
facilities. The Company believes that it has addressed these cost containment
measures by specializing in treating relapse-prone patients with poor prognoses
who have failed in other treatment settings. These patients require longer
lengths of stay and come from a wide geographic area. The Company continues to
develop alternatives to inpatient care including partial day and evening
programs in addition to onsite and offsite outpatient programs.
The Company believes that because of the apparent unmet need for certain
clinical and medical services, its strategy has been successful despite national
trends towards outpatient treatment, shorter inpatient stays and rigorous
scrutiny by managed care organizations.
Company Operations
The Company has been able to secure insurance reimbursement for longer-term
inpatient treatment as a result of its success with poor prognosis patients. The
Company's two substance abuse facilities work together to refer patients to the
center that best meets the patient's clinical and medical needs. Each facility
caters to a slightly different patient population including high-risk,
relapse-prone chronic alcoholics, drug addicts, Native Americans and dual
diagnosis patients (those suffering from both substance abuse and psychiatric
disorders). The Company concentrates on providing services to insurers, managed
care networks and health maintenance organizations for both adults and
adolescents. The Company's clinicians often work directly with managers of
employee assistance programs to select the best treatment facility possible for
their clients.
Each of the Company's facilities operates a case management program for
each patient including a clinical and financial evaluation of a patient's
circumstances to determine the most cost-effective modality of care from among
outpatient treatment, detoxification, inpatient, day care, specialized relapse
treatment and others. In addition to any care provided at one of the Company's
facilities, the case management program for each patient includes aftercare.
Aftercare may be provided through the outpatient services provided by a
facility. Alternatively, the Company may arrange for outpatient aftercare, as
well as family and mental health services, through its numerous affiliations
with clinicians located across the country once the patient is discharged.
In general, the Company does not accept patients who do not have either
insurance coverage or adequate financial resources to pay for treatment. Each of
the Company's substance abuse facilities does, however, provide treatment free
of charge to a small number of patients each year who are unable to pay for
treatment, but who meet certain clinical criteria and who are believed by the
Company to have the requisite degree of motivation for treatment to be
successful. In addition, the Company provides follow-up treatment free of charge
to relapse patients who satisfy certain criteria. The number of patient days
attributable to all patients who receive treatment free of charge in any given
fiscal year is less than 5%.
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The Company believes that it has benefited from an increased awareness of
the need to make substance abuse treatment services accessible to the nation's
workforce. For example, Subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as The Drug Free Workplace Act), requires employers who are
Federal contractors or Federal grant recipients to establish drug free awareness
programs to inform employees about available drug counseling, rehabilitation and
employee assistance programs and the consequences of drug abuse violations. In
response to the Drug Free Workplace Act, many companies, including many major
national corporations and transportation companies, have adopted policies that
provide for treatment options as an alternative to termination of employment.
Although the Company does not directly provide federally approved mandated
drug testing, the Company treats employees who have been referred to the Company
as a result of compliance with the Drug Free Workplace Act, particularly from
companies that are part of the gaming industry as well as safety sensitive
industries such as railroads, airlines, trucking firms, oil and gas exploration
companies, heavy equipment companies, manufacturing companies and health
services.
HIGHLAND RIDGE - Highland Ridge is a 41-bed, freestanding alcohol and drug
treatment hospital, which the Company has been operating since 1984. The
hospital increased its bed capacity to 41 from 32 in November 2003. It is the
oldest facility dedicated to substance abuse in Utah. Highland Ridge is
accredited by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO") and is licensed by the Utah Department of Health. Highland Ridge is
recognized nationally for its excellence in treating substance abuse disorders.
Most patients are from Utah and surrounding states. Individuals typically
access Highland Ridge's services through professional referrals, family members,
employers, employee assistance programs or contracts between the Company and
health maintenance organizations located in Utah.
Highland Ridge was the first private for-profit hospital to address
specifically the special needs of chemically dependent women in Salt Lake
County. In addition, Highland Ridge has contracted with Salt Lake County to
provide medical detoxification services targeted to women. The hospital also
operates a specialized continuing care support group to address the unique needs
of women and minorities.
A pre-admission evaluation, which involves an evaluation of psychological,
cognitive and situational factors, is completed for each prospective patient. In
addition, each prospective patient is given a physical examination upon
admission. Diagnostic tools, including those developed by the American
Psychological Association, the American Society of Addiction Medicine and the
Substance Abuse Subtle Screening Inventory are used to develop an individualized
treatment plan for each client. The treatment regimen involves an
interdisciplinary team which integrates the twelve-step principles of self-help
organizations, medical detoxification, individual and group counseling, family
therapy, psychological assessment, psychiatric support, stress management,
dietary planning, vocational counseling and pastoral support. Highland Ridge
also offers extensive aftercare assistance at programs strategically located in
areas of client concentration throughout the United States. Highland Ridge
maintains a comprehensive array of professional affiliations to meet the needs
of discharged patients and other individuals not admitted to the hospital for
treatment.
Highland Ridge periodically conducts or participates in research projects.
Highland Ridge was the site of a research project conducted by the University of
Utah Medical School. The research explored the relationship between individual
motivation and treatment outcomes. The research was regulated and reviewed by
the Human Subjects Review Board of the University of Utah and was subject to
federal standards that delineated the nature and scope of research involving
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human subjects. Highland Ridge benefited from this research by expanding its
professional relationships within the medical school community and by applying
the findings of the research to improve the quality of services the Company
delivers. In the past, Highland Ridge has also contracted with a major
pharmaceutical manufacturer to participate in a research study in cooperation
with a local nursing home. In the future all pharmaceutical research will be
provided through our newest subsidiary, Pivotal Research Centers, Inc.
MOUNT REGIS - Mount Regis is a 26-bed, freestanding alcohol and drug
treatment center located in Salem, Virginia, near Roanoke. The Company acquired
the center in 1987. It is the oldest of its kind in the Roanoke Valley. Mount
Regis is accredited by the JCAHO and licensed by the Department of Mental
Health, Mental Retardation and Substance Abuse Services of the Commonwealth of
Virginia. In addition, Mount Regis operates Changes, an outpatient clinic, at
its Salem, Virginia location. The Changes clinic provides structured intensive
outpatient treatment for patients who have been discharged from Mount Regis and
for patients who do not need the formal structure of a residential treatment
program. The program is licensed by the Commonwealth of Virginia and approved
for reimbursement by major insurance carriers.
Mount Regis Center's programs are sensitive to the needs of women and
minorities. The majority of Mount Regis clients are from Virginia and
surrounding states. In addition, because of its relatively close proximity and
accessibility to New York, Mount Regis has been able to attract an increasing
number of referrals from New York-based labor unions. Mount Regis has
established programs that allow the Company to better treat dual diagnosis
patients (those suffering from both substance abuse and psychiatric disorders),
cocaine addiction and relapse-prone patients. The multi-disciplinary case
management, aftercare and family programs are key to the prevention of relapse.
General Psychiatric Facilities
Introduction
The Company believes that its proven ability to provide high quality,
cost-effective care in the treatment of substance abuse has enabled it to grow
in the related behavioral health field of psychiatric treatment. The Company's
main advantage is its ability to provide an integrated delivery system of
inpatient and outpatient care. As a result of integration, the Company is better
able to manage and track patients.
The Company offers inpatient and partial hospitalization psychiatry
services through Harbor Oaks Hospital. The Company also currently operates five
outpatient psychiatric facilities.
The Company's philosophy at these facilities is to provide the most
appropriate and efficacious care with the least restrictive modality of care. An
attending physician and a case manager with continuing oversight of the patient
as the patient receives care in different locations or programs handle case
management. The integrated delivery system allows for better patient tracking
and follow-up, and fewer repeat procedures and therapeutic or diagnostic errors.
Qualified, dedicated staff members take a full history on each new patient and
through test and evaluation procedures they provide a thorough diagnostic
write-up of the patient's condition. In addition a physician does a complete
physical examination for each new patient. This information allows the
caregivers to determine which treatment alternative is best suited for the
patient and to design an individualized recovery program for the patient.
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Managed health care organizations, state agencies, physicians and patients
themselves refer patients to our facilities. These facilities have a patient
population ranging from children as young as 5 years of age to senior citizens.
Compared to the substance abuse facilities, the psychiatric facilities treat a
larger percentage of female patients.
HARBOR OAKS - The Company acquired Harbor Oaks Hospital, a 64-bed psychiatric
hospital located in New Baltimore, Michigan, approximately 20 miles northeast of
Detroit, in September 1994. Harbor Oaks Hospital is licensed by the Michigan
Department of Commerce, Medicare certified and accredited by JCAHO. Harbor Oaks
provides inpatient psychiatric care, partial hospitalization and outpatient
treatment to children, adolescents and adults. Harbor Oaks Hospital has serviced
clients from Macomb, Oakland and St. Clair Counties and has expanded its
coverage area to include Wayne, Sanilac and Livingston Counties.
Harbor Oaks has become a primary provider for Medicaid patients from Wayne,
Macomb and St. Clair counties. Utilization of a short-term crisis management
model in conjunction with strong case management has allowed Harbor Oaks to
successfully enter this segment of the market. Reimbursement for these services
is comparable to traditional managed care payors. Given the current climate of
public sector treatment availability, Harbor Oaks anticipates continued growth
in this sector of the business.
On February 10, 1997, Harbor Oaks Hospital opened an 8-bed residential unit
serving adolescents with a substance abuse problem and a co-existing mental
disorder who have been adjudicated to have committed criminal acts and who have
been referred or required to undergo psychiatric treatment by a court or family
service agency. The patients in the program range from 13 to 18 years of age.
The program provides patients with educational and recreational activities and
adult life functioning skills as well as treatment. Typically, a patient is
admitted to the unit for an initial period of 30 days to six months. A case
review is done for any patient still in the program at six months, and each
subsequent six-month period thereafter, to determine if additional treatment is
required. State authorization allowed the Company to increase the number of beds
in the adjudicated residential unit to twelve on May 1, 1998 and twenty on June
26, 1998.
HARMONY HEALTHCARE - Harmony Healthcare, which consists of two psychiatric
clinics in Nevada, provides outpatient psychiatric care to children, adolescents
and adults in the local area. Harmony also operates employee assistance programs
for railroads, health care companies and several large gaming companies
including Boyd Gaming Corporation, the MGM Grand and the Venetian with a rapid
response program to provide immediate assistance 24 hours a day. Harmony also
provides outpatient psychiatric care and inpatient psychiatric case management
through a capitated rate behavioral health carve-out with Pacific Care
Insurance.
NORTH POINT-PIONEER, INC. - NPP consists of three psychiatric clinics in
Michigan. The clinics provide outpatient psychiatric and substance abuse
treatment to children, adolescents and adults operating under the name Pioneer
Counseling Center. The three clinics are located in close proximity to the
Harbor Oaks facility, which allows for more efficient integration of inpatient
and outpatient services and provides for a larger coverage area and the ability
to share personnel which results in cost savings.
Call Center Operations
WELLPLACE, INC. - In the spring of 1994, the Company began to operate a crisis
hotline service under contract with a major transportation client. The hotline,
Wellplace, formerly known as Pioneer Development Support Services, or PDS2,
shown as contract support services on the accompanying statement of operations,
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is a national, 24-hour telephone service, which supplements the services
provided by the client's Employee Assistance Programs. The services provided
include information, crisis intervention, critical incidents coordination,
employee counselor support, client monitoring, case management and health
promotion. The hotline is staffed by counselors who refer callers to the
appropriate professional resources for assistance with personal problems. Four
major transportation companies subscribed to these services as of June 30, 2004.
Wellplace also contracts with Wayne County Michigan to operate its call center.
This call center is located in downtown Detroit, Michigan. Wellplaces' primary
focus is now placed on growing its operations to take advantage of current
opportunities and capitalize on the economies of scale in providing similar
services to other companies and government units. Wellplace operated the smoking
cessation quitline for the State of Nebraska until the contract expiration in
May 2004. Wellplace currently operates the smoking cessation quitline for the
State of Kansas under a similar contract. This operation is physically located
in Highland Ridge Hospital, but a staff dedicated to Wellplace provides the
services from a separate designated area of the Hospital.
Research Operations
PIVOTAL RESEARCH CENTERS, INC. - (formerly PIONEER PHARMACEUTICAL RESEARCH, INC.
- - PPR) works with major manufacturers of psychiatric pharmaceuticals to assist
in the study of the effects of certain pharmaceuticals in the treatment of
specific mental illness. We recently expanded our operations related to
pharmaceutical studies through the acquisition of 100% of the membership
interest in Pivotal Research Centers, LLC. Pivotal performs all phases of
clinical research for Phase I-IV drugs under development through two dedicated
research sites, including one of the largest single psychiatric sites in the
country. Pivotal currently has 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. With a current
client base including AstraZeneca, Bristol Meyers Squibb, Cephalon, Forest,
GlaxoSmithKline, Lilly, Merck, Mylan, Novartis, Organon, Sepracor and Wyeth, the
Company currently has protocols in Alzheimer's disease, ADHD, Diabetes Type II,
Generalized Anxiety Disorder, Insomnia, Major Depressive Disorder, Obesity,
Pain, Parkinson's Disease, and Shift Work Sleep Disorder. Although our other
facilities may still provide study patients, all future studies will be
supervised by our research arm, Pivotal Research Centers, Inc.
Internet Operations
BEHAVIORAL HEALTH ONLINE, INC. - Behavioral Health Online designs, develops and
maintains the Company's web site, Wellplace.com, in addition to providing
Internet support services and maintaining the web sites of all of the other
subsidiaries of the Company. The Company's web sites provide behavioral health
professionals with the educational tools required to keep them abreast of
behavioral health breakthroughs and keeps individuals informed of current issues
in behavioral health of interest to them.
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Operating Statistics
The following table reflects selected financial and statistical information
for all psychiatric services.
Year Ended June 30,
2004 2003
_____________________________________
Inpatient
Net patient service revenues $ 14,845,163 $ 14,430,069
Net revenues per patient day (1) $ 414 $ 417
Average occupancy rate (2) 76.7% 77.7%
Total number of licensed beds
at end of period 130 122
Source of Revenues:
Private (3) 61.62% 62.20%
Government (4) 38.38% 37.80%
Partial Hospitalization
and Outpatient
Net Revenues:
Individual $ 5,647,752 $ 4,865,392
Contract $ 1,925,440 $ 1,947,716
Sources of revenues:
Private 97.7% 98.0%
Government 2.3% 2.0%
Other Services:
Wellplace (5) $ 2,984,477 $1,649,374
Pharmaceutical Studies (6) $ 1,246,013 $ 940,772
(1) Net revenues per patient day equals net patient service revenues divided by
total patient days.
(2) Average occupancy rates were obtained by dividing the total number of
patient days in each period by the number of beds available in such period.
(3) Private pay percentage is the percentage of total patient revenue derived
from all payors other than Medicare and Medicaid.
(4) Government pay percentage is the percentage of total patient revenue
derived from the Medicare and Medicaid programs.
(5) Wellplace, formerly PDS2, Pioneer Development and Support Services,
provides clinical support, referrals management and professional services
for a number of the Company's national contracts and a smoking cessation
help line for the state of Kansas and operates the Wayne County Michigan
call center.
(6) Pharmaceutical Studies includes research studies of the Company prior to
the acquisition of 100% of the membership interest in Pivotal Research
Centers, LLC on April 30, 2004 and two months operations of the newly
acquired Pivotal Research Centers, LLC for the current year.
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Business Strategy
The Company's objective is to become the leading national provider of
behavioral health services.
The Company focuses its marketing efforts on "safety-sensitive" industries
such as transportation and medical. This focus results in customized outcome
oriented programs that the Company believes produce overall cost savings to the
patients and/or client organizations. The Company intends to leverage experience
gained from providing services to customers in certain industries that it
believes will enhance its selling efforts within these certain industries.
Marketing and Customers
The Company markets its substance abuse, inpatient and outpatient
psychiatric health services both locally and nationally, primarily to safety
sensitive industries, including transportation, oil and gas exploration, heavy
machinery and equipment, manufacturing and healthcare services. Additionally,
the Company markets its services in the gaming industry both in Nevada and
nationally and its help line services nationally.
The Company employs six individuals dedicated to marketing the Company's
facilities. Each facility performs marketing activities in its local region. The
Senior Vice President of the Company coordinates the Company's national
marketing efforts. In addition, employees at certain facilities perform local
marketing activities independent of the Senior Vice President. The Company, with
the support of its owned integrated outpatient systems and management services,
continues to pursue more at-risk contracts and outpatient, managed health care
fee-for-service contracts. "At risk" contracts require that the Company provide
all the clinically necessary behavioral health services for a group of people
for a set fee per person per month. The Company currently has one at risk
contract with a large insurance carrier, which requires the Company to provide
behavioral health services to all of its insured in the state of Nevada for a
fixed fee. This at risk contract represents less than 5% of the Company's total
gross revenues. In addition to providing excellent services and treatment
outcomes, the Company will continue to negotiate pricing policies to attract
patients for long-term intensive treatment which meet length of stay and
clinical requirements established by insurers, managed health care organizations
and the Company's internal professional standards.
The Company's integrated systems of comprehensive outpatient mental health
programs complement the Company's inpatient facilities. These outpatient
programs are strategically located in Nevada, Virginia, Michigan, and Utah. They
make it possible for the Company to offer wholly integrated, comprehensive,
mental health services for corporations and managed care organizations on an
at-risk or exclusive fee-for-service basis. Additionally, the Company operates
Wellplace located in the Highland Ridge facility in Salt Lake City, Utah and in
Detroit, Michigan. Wellplace provides clinical support, referrals, management
and professional services for a number of the Company's national contracts. It
gives the Company the capacity to provide a complete range of fully integrated
mental health services.
The Company provides services to employees of a variety of corporations
including: Boyd Gaming, Conrail, CSX, the IUE, MCC, MGM, Union Pacific Railroad,
Union Pacific Railroad Hospital Association, VBH, and others.
In addition to its direct patient care services; the Company maintains its
web site, Wellplace.com, which provides articles and information of interest to
the general public as well as the behavioral health professional. The Company's
internet company also provides the added benefit of web availability of
information for various EAP contracts held and serviced by those subsidiaries
providing direct treatment services.
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Competition
The Company's substance abuse programs compete nationally with other health
care providers, including general and chronic care hospitals, both non-profit
and for-profit, other substance abuse facilities and short-term detoxification
centers. Some competitors have substantially greater financial resources than
the Company. The Company believes, however, that it can compete successfully
with such institutions because of its success in treating poor-prognosis
patients. The Company will compete through its focus on such patients, its
willingness to negotiate appropriate rates and its capacity to build and service
corporate relationships.
The Company's psychiatric facilities and programs compete primarily within
the respective geographic area serviced by them. The Company competes with
private doctors, hospital-based clinics, hospital-based outpatient services and
other comparable facilities. The main reasons that the Company competes well are
its integrated delivery and dual diagnosis programming. Integrated delivery
provides for more efficient follow-up procedures and reductions in length of
stay. Dual diagnosis programming provides a niche service for clients with a
primary mental health and a secondary substance abuse diagnosis. The Company
developed its dual diagnosis service in response to demand from insurers,
employers and treatment facilities. The Company's internet company provides the
competitive edge for service information and delivery for our direct patient
care programs.
The Company's pharmaceutical research operations compete for studies with
other research companies located in the same areas as our research offices in
Arizona and Michigan.
Revenue Sources and Contracts
The Company has entered into relationships with numerous employers, labor
unions and third-party payors to provide services to their employees and members
for the treatment of substance abuse and psychiatric disorders. In addition, the
Company admits patients who seek treatment directly without the intervention of
third parties and whose insurance does not cover these conditions in
circumstances where the patient either has adequate financial resources to pay
for treatment directly or is eligible to receive free care at one of the
Company's facilities. The Company's psychiatric patients either have insurance
or pay at least a portion of treatment costs based on their ability to pay. Most
of our patients are covered by insurance. Free treatment provided each year
amounts to less than 5% of the Company's total patient days.
Each contract is negotiated separately, taking into account the insurance
coverage provided to employees and members, and, depending on such coverage, may
provide for differing amounts of compensation to the Company for different
subsets of employees and members. The charges may be capitated, or fixed with a
maximum charge per patient day, and, in the case of larger clients, frequently
result in a negotiated discount from the Company's published charges. The
Company believes that such discounts are appropriate as they are effective in
producing a larger volume of patient admissions. The Company treats non-contract
patients and bills them on the basis of the Company's standard per diem rates
and for any additional ancillary services provided to them by the Company.
Insurance companies and managed care organizations are entering into sole
source contracts with healthcare providers, which could limit our ability to
obtain patients. Private insurers, managed care organizations and, to a lesser
extent, Medicaid and Medicare, are beginning to carve-out specific services,
including mental health and substance abuse services, and establish small,
specialized networks of providers for such services at fixed reimbursement
rates. We are not aware of any lost business as a result of sole source
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contracts to date, as we have not been advised by any payor that we have been
eliminated as a provider from their system based on an exclusivity contract with
another provider. Continued growth in the use of carve-out systems could
materially adversely affect our business to the extent we are not selected to
participate in such smaller specialized networks or if the reimbursement rate is
not adequate to cover the cost of providing the service.
Quality Assurance and Utilization Review
The Company has established comprehensive quality assurance programs at all
of its facilities. These programs are designed to ensure that each facility
maintains standards that meet or exceed requirements imposed upon the Company
with the objective of providing high-quality specialized treatment services to
its patients. To this end, the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") surveys and accredits the Company's inpatient facilities
and the Company's outpatient facilities comply with the standards of National
Commission on Quality Assurance ("NCQA") although the facilities are not NCQA
certified. The Company's outpatient facilities in Michigan are certified by the
American Osteopathic Association ("AOA"), which is nationally recognized by all
payers as the measure of quality in outpatient treatment. The Company's
professional staff, including physicians, social workers, psychologists, nurses,
dietitians, therapists and counselors, must meet the minimum requirements of
licensure related to their specific discipline, in addition to each facility's
own internal quality assurance criteria. The Company participates in the
federally mandated National Practitioners Data Bank, which monitors professional
accreditation nationally.
In response to the increasing reliance of insurers and managed care
organizations upon utilization review methodologies, the Company has adopted a
comprehensive documentation policy to satisfy relevant reimbursement criteria.
Additionally, the Company has developed an internal case management system,
which provides assurance that services rendered to individual patients are
medically appropriate and reimbursable. Implementation of these internal
policies has been integral to the success of the Company's strategy of providing
services to relapse-prone, higher acuity patients.
Government Regulation
The Company's business and the development and operation of the Company's
facilities are subject to extensive federal, state and local government
regulation. In recent years, an increasing number of legislative proposals have
been introduced at both the national and state levels that would affect major
reforms of the health care system if adopted. Among the proposals under
consideration are reforms to increase the availability of group health
insurance, to increase reliance upon managed care, to bolster competition and to
require that all businesses offer health insurance coverage to their employees.
The Company cannot predict whether any such legislative proposals will be
adopted and, if adopted, what effect, if any, such proposals would have on the
Company's business.
In addition, both the Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions, all
of which may materially increase or decrease the rate of program payments to
health care facilities. Since 1983, Congress has consistently attempted to limit
the growth of federal spending under the Medicare and Medicaid programs and will
likely continue to do so. Additionally, congressional spending reductions for
the Medicaid program involving the issuance of block grants to states is likely
to hasten the reliance upon managed care as a potential savings mechanism of the
Medicaid program. As a result of this reform activity the Company can give no
assurance that payments under such programs will in the future remain at a level
comparable to the present level or be sufficient to cover the costs allocable to
such patients.
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Control of the healthcare industry exercised by federal, state and local
regulatory agencies can increase costs, establish maximum reimbursement levels
and limit expansion. Our Company and the health care industry are subject to
rapid regulatory change with respect to licensure and conduct of operations at
existing facilities, construction of new facilities, acquisition of existing
facilities, the addition of new services, compliance with physical plant safety
and land use requirements, implementation of certain capital expenditures,
reimbursement for services rendered and periodic government inspections.
Governmental budgetary restrictions have resulted in limited reimbursement rates
in the healthcare industry including our Company. As a result of these
restrictions we cannot be certain that payments under government programs will
remain at a level comparable to the present level or be sufficient to cover the
costs allocable to such patients. In addition, many states, including the State
of Michigan where the majority of our Medicaid Revenue is generated, are
considering reductions in state Medicaid budgets
Health Planning Requirements
Most of the states in which the Company operates have health planning
statutes which require that prior to the addition or construction of new beds,
the addition of new services, the acquisition of certain medical equipment or
certain capital expenditures in excess of defined levels, a state health
planning agency must determine that a need exists for such new or additional
beds, new services, equipment or capital expenditures. These state
determinations of need or certificate of need ("DoN") programs are designed to
enable states to participate in certain federal and state health related
programs and to avoid duplication of health services. DoN's typically are issued
for a specified maximum expenditure, must be implemented within a specified time
frame and often include elaborate compliance procedures for amendment or
modification, if needed.
Licensure and Certification
All of the Company's facilities must be licensed by state regulatory
authorities. The Company's Harbor Oaks facility is certified for participation
as a provider in the Medicare and Medicaid programs.
The Company's initial and continued licensure of its facilities, and
certification to participate in the Medicare and Medicaid programs, depends upon
many factors, including accommodations, equipment, services, patient care,
safety, personnel, physical environment, the existence of adequate policies,
procedures and controls and the regulatory process regarding the facility's
initial licensure. Federal, state and local agencies survey facilities on a
regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participating in
government programs. Such surveys include review of patient utilization and
inspection of standards of patient care. The Company has procedures in place to
ensure that its facilities are operated in compliance with all such standards
and conditions. To the extent these standards are not met, however, the license
of a facility could be restricted, suspended or revoked, or a facility could be
decertified from the Medicare or Medicaid programs.
Medicare Reimbursement
Currently, the only facility of the Company that receives Medicare
reimbursement is Harbor Oaks. For the fiscal year ended June 30, 2004, 14.70% of
revenues for Harbor Oaks were derived from Medicare programs.
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The Medicare program generally reimburses psychiatric facilities pursuant
to its prospective payment system ("PPS"), in which each facility receives an
interim payment of its allowable costs during the year which is later adjusted
to reflect actual allowable direct and indirect costs of services based upon the
submission of a cost report at the end of each year. However, current Medicare
payment policies allow certain psychiatric service providers an exemption from
PPS. In order for a facility to be eligible for exemption from PPS, the facility
must comply with numerous organizational and operational requirements.
PPS-exempt providers are cost reimbursed, receiving the lower of reasonable
costs or reasonable charges. The Medicare program fiscal intermediary pays a per
diem rate based upon prior year costs, which may be retroactively adjusted upon
the submission of annual cost reports.
Since the Harbor Oaks facility is currently PPS-exempt, it is not subject
to the cost-based reimbursement limitations of the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA") and regulations promulgated under the Act.
Generally, TEFRA limits the amount of reimbursement a facility may receive to a
target amount per discharge, adjusted annually for inflation. The facility's
reasonable Medicare operating costs divided by Medicare discharges, plus a per
diem allowance for capital costs during its base year of operations determines
the target amount. It is not possible to predict the ability of Harbor Oaks to
remain PPS-exempt or to anticipate the impact of TEFRA upon the reimbursement
received by Harbor Oaks in future periods.
In order to receive Medicare reimbursement, each participating facility
must meet the applicable conditions of participation set forth by the federal
government relating to the type of facility, its equipment, its personnel and
its standards of medical care, as well as compliance with all state and local
laws and regulations. In addition, Medicare regulations generally require that
entry into such facilities be through physician referral. The Company must offer
services to Medicare recipients on a non-discriminatory basis and may not
preferentially accept private pay or commercially insured patients.
Medicaid Reimbursement
Currently, the only facility of the Company that receives reimbursement
under any state Medicaid program is Harbor Oaks. A portion of Medicaid costs is
paid by states under the Medicaid program and the federal matching payments are
not made unless the state's portion is made. Accordingly, the timely receipt of
Medicaid payments by a facility may be affected by the financial condition of
the relevant state.
Harbor Oaks is a participant in the Medicaid program administered by the
State of Michigan. The Company receives reimbursement on a per diem basis,
inclusive of ancillary costs. The state determines the rate and adjusts it
annually based on cost reports filed by the Company.
Fraud and Abuse Laws
Various federal and state laws regulate the business relationships and
payment arrangements between providers and suppliers of health care services,
including employment or service contracts, and investment relationships. These
laws include the fraud and abuse provisions of the Medicare and Medicaid
statutes as well as similar state statutes (collectively, the "Fraud and Abuse
Laws"), which prohibit the payment, receipt, solicitation or offering of any
direct or indirect remuneration intended to induce the referral of patients, the
ordering, arranging, or providing of covered services, items or equipment.
Violations of these provisions may result in civil and criminal penalties and/or
exclusion from participation in the Medicare, Medicaid and other
government-sponsored programs. The federal government has issued regulations
that set forth certain "safe harbors," representing business relationships and
payment arrangements that can safely be undertaken without violation of the
federal Fraud and Abuse Laws. Failure to fall within a safe harbor does not
constitute a per se violation of the federal fraud and abuse laws. The Company
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believes that its business relationships and payment arrangements either fall
within the safe harbors or otherwise comply with the Fraud and Abuse Laws.
The Company has an active compliance program in place with a corporate
compliance officer and compliance liaisons at each facility and a toll free
compliance hotline. Compliance in-services and trainings are conducted on a
regular basis.
Employees
As of July 30, 2004, the Company had 404 employees of whom six were
dedicated to marketing, 131 (19 part time and 1 contingent) to finance and
administration and 267 (31 part time and 40 contingent) to patient care. Until
January of 2003, all of the Company's employees were leased through Team
America, a national employee-leasing firm. The Company elected to discontinue
the use of the leasing Company and begin processing payroll in-house or using a
more traditional payroll service while providing more employee services when the
benefit of using a leasing company began to diminish.
The Company believes that it has been successful in attracting skilled and
experienced personnel. Competition for such employees is intense, however, and
there can be no assurance that the Company will be able to attract and retain
necessary qualified employees in the future. On July 31, 2003, the Company's
largest facility, Harbor Oaks Hospital, with approximately 125 Union eligible
nursing and administrative employees, voted for union (UAW) representation.
Contract negotiations are in progress at this time.
The limited number of healthcare professionals in the areas in which we
operate may create staffing shortages. Our success depends, in large part, on
our ability to attract and retain highly qualified personnel, particularly
skilled health care personnel, which are in short supply. We face competition
for such personnel from governmental agencies, health care providers and other
companies and are constantly increasing our employee benefit programs, and
related costs, to maintain required levels of skilled professionals. As a result
of staffing shortages, we use professional placement services to supply us with
a pool of professionals from which to choose. These individuals generally are
higher skilled, seasoned individuals who require higher salaries, richer benefit
plans, and in some instances, require relocation. We have also entered into
contracts with agencies to provide short-term interim staffing in addition to
placement services. These additional costs impact our profitability.
Insurance
Each of the Company's facilities maintains separate professional liability
insurance policies. Harbor Oaks, Highland Ridge Hospital, Mount Regis Center,
Harmony Healthcare, Total Concept and Pivotal, Inc. each have coverage of
$1,000,000 per claim and $3,000,000 in the aggregate. In addition, the Company
has maintained the insurance coverage in place for Pivotal Research Centers, LLC
of $3,000,000 per claim and $3,000,000 in the aggregate. In addition to this
coverage, Harbor Oaks and Mount Regis Center each maintain an umbrella policy of
$1,000,000. In addition, these entities maintain general liability insurance
coverage in similar amounts.
The parent Company maintains $1,000,000 of directors' and officers'
liability insurance coverage, general liability coverage of $1,000,000 per claim
and $2,000,000 in aggregate and an umbrella policy of $1,000,000. The Company
believes, based on its experience, that its insurance coverage is adequate for
its business and, although cost has escalated in recent years, that it will
continue to be able to obtain adequate coverage.
- 14 -
Acquisition and Expansion
If we acquire new businesses or expand our businesses, the operating costs
may be far greater than revenues for a significant period of time. The operating
losses and negative cash flow associated with start-up operations or
acquisitions could have a material adverse effect on our profitability and
liquidity unless and until such facilities are fully integrated with our other
operations and become self sufficient. Until such time we may be required to
borrow at higher rates and less favorable terms to supplement short term
operating cash flow shortages. The acquisition of Pivotal Research Centers, LLC
in April 2004 has impacted our net operating results positively by approximately
$131,000 for the months of May and June 2004. Since no receivables were
purchased in the acquisition, the operations of May and June have impacted the
Company's cash flow negatively by approximately $290,000, which will be reversed
as we collect the receivables.
ITEM 2. DESCRIPTION OF PROPERTY
Executive Offices
The Company's executive offices are located in Peabody, Massachusetts. The
Company's lease agreement in Peabody covers approximately 4,800 square feet for
a 60-month term, which expires September 16, 2009. The current annual payment
under the lease is $76,800. The Company believes that this facility will be
adequate to satisfy its needs for the foreseeable future.
Highland Ridge Hospital
The Highland Ridge premises consist of approximately 24,000 square feet of
space occupying the majority of the first floor of a two-story hospital owned by
Valley Mental Health. The lease is for a six-year term expiring December 31,
2009, which provides for monthly rental payments of approximately $21,500.
Changes in rental payments each year are based on increases or decreases in the
CPI. The Company believes that these premises are adequate for its current and
anticipated needs and does not anticipate any difficulty in renewing or securing
alternate space on expiration of the lease.
Mount Regis Center
The Company owns the Mount Regis facility, which consists of a three-story
wooden building located on an approximately two-acre site in a residential
neighborhood. The building consists of over 14,000 square feet and is subject to
a mortgage in the approximate amount of $358,800. The facility is used for both
inpatient and outpatient services. The Company believes that these premises are
adequate for its current and anticipated needs.
Psychiatric Facilities
The Company owns or leases premises for each of its psychiatric facilities.
Harmony, North Point Pioneer and Pivotal Research lease their premises. The
Company believes that each of these premises is leased at fair market value and
could be replaced without significant time or expense if necessary. The Company
believes that all of these premises are adequate for its current and anticipated
needs.
The Company owns the building in which Harbor Oaks operates, which is a
single story brick and wood frame structure comprising approximately 32,000
square feet situated on an approximately three acre site. The Company has a
$1,500,000 mortgage on this property. The Company believes that these premises
are adequate for its current and anticipated needs.
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ITEM 3. LEGAL PROCEEDINGS.
A medical malpractice claim was filed by a former patient against the
Company's subsidiary, North Point-Pioneer, Inc. and a former clinician, alleging
sexual abuse by a former clinician that first manifested itself prior to the
Company's acquisition of the subsidiary in 1996. At trial in December 2002, a
jury returned a verdict in favor of the plaintiff in the amount of approximately
$9 million plus interest and taxable costs and attorney's fee for conduct. The
clinician declared bankruptcy and was not a party to the proceeding. After
numerous successful motions by the Company to reduce the amount of the verdict,
a judgment in the amount of $3,079,741 was entered on October 24, 2003.
The Company's subsidiary, North Point-Pioneer, Inc., is covered by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company, which is insolvent and is being administered by the State of New York.
Representatives of Frontier's receiver acknowledged to the Company, Frontier's
obligations under the policy and the Company has recovered a small portion of
the legal fees expended to date on this matter.
In April 2004, the Company successfully resolved this medical malpractice
lawsuit. As a result of the settlement, the Company made a payment of
approximately $463,000, which compares to the previous judgment of approximately
$3 million. The Company has not released other parties, including an insurance
company. Payments made by insurance and other related parties, if collected,
could significantly reduce the Company's financial burden below the $463,000
payment.
The financial impact of this settlement and related legal fees is reflected
in the operating results during the year ended June 30, 2004. The Company will
continue to seek reimbursement from all sources for amounts expended on this
case.
In fiscal 2004, the State of Nebraska asked the Company to provide the
history of payments received from the State of Nebraska and the payments made to
a consultant in Nebraska for his work on the smoking cessation contract. In the
fourth quarter of fiscal 2004, the Company became aware that the State and the
Federal governments are investigating the consultant. The Company is cooperating
fully with the investigating agencies on this matter and to date has expended
approximately $120,000 in legal fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 2004.
- 16 -
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since the Company's public offering which was declared effective on March
3, 1994, until December 2000 the Company's Units, Class A Common Stock and Class
A Warrants were traded on the NASDAQ National Market under the symbols "PIHCU,"
"PIHC" and "PIHCW," respectively. In December 2000, the Company's stock was
delisted due to failure to meet listing criteria. Currently, the Company's Class
A Common Stock is traded on the NASDAQ Bulletin Board under the symbol
"PIHC-BB." There is no public trading market for the Company's Class B Common
Stock. The following table sets forth, for the periods indicated, the high and
low sale price of the Company's Class A Common Stock, as reported by NASDAQ
Bulletin Board.
HIGH LOW
________ ________
2003
First Quarter $ .89 $ .56
Second Quarter $ .85 $ .65
Third Quarter $ .95 $ .69
Fourth Quarter $ .94 $ .72
2004
First Quarter $ .98 $ .72
Second Quarter $ 1.39 $ .83
Third Quarter $ 1.71 $ 1.17
Fourth Quarter $ 1.37 $ .87
2005
First Quarter (through August 31, 2004) $ 1.19 $ .93
On August 31, 2004, the last reported sale price of the Class A Common
Stock was $1.05. On July 30, 2004, there were 715 holders of record of the
Company's Class A Common Stock and 312 holders of record of the Company's Class
B Common Stock.
DIVIDEND POLICY
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.
MARKET RISKS
The Company's failure to meet listing requirements resulted in the
delisting of the Company's stock from the Nasdaq Stock Market in December 2000.
Since then, the Company's stock has been a bulletin board traded stock. The cost
of trading on the bulletin board can be more than the cost of trading on the
SmallCap market and since there may be an absence of market makers on the
bulletin board the price may be more volatile and it may be harder to sell the
securities. The shares have sold at prices varying between a low of $.56 and a
high of $1.71 from July 2002 through July 2004. If our common stock is not
actively traded, the small number of transactions can result in significant
swings in the market price, and it may be difficult for stockholders to dispose
of stock in a timely way at a desirable market price or may result in purchasing
of shares for a higher price.
Our right to issue convertible preferred stock may adversely affect the
rights of the common stock. Our Board of Directors has the right to establish
the preferences for and issue up to 1,000,000 shares of preferred stock without
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.
- 17 -
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion and analysis of the financial condition and
results of operations of the Company for the quarters and years ended June 30,
2004 and 2003 . It should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere herein.
Overview
The Company presently provides behavioral health care services through two
substance abuse treatment centers, a psychiatric hospital and five 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. Although the Company has changed the focus and
reduced expenses of its internet operation, Behavioral Health Online, Inc.
continues to provide technology and internet support for the Company's other
operations. It also continues to provide behavioral health information and
education through its web site at Wellplace.com. The expenses of the internet
operation decreased approximately 25% for the fiscal year ended June 30, 2004,
as the total effect of cost cuts were realized. 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 illness through its clinics in Michigan and
Arizona.
The healthcare industry is subject to extensive federal, state and local
regulation governing, among other things, licensure and certification, conduct
of operations, audit and retroactive adjustment of prior government billings and
reimbursement. In addition, there are on-going debates and initiatives regarding
the restructuring of the health care system in its entirety. The extent of any
regulatory changes and their impact on the Company's business is unknown. The
current administration has put forth proposals to mandate equality in the
benefits available to those individuals suffering from mental illness. If
passed, this legislation will 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.
- 18 -
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,
third party". The provision for contractual allowances is deducted directly from
revenue and the net revenue amount is recorded as accounts receivable. The
allowance for doubtful accounts does not include the contractual allowances.
The Company currently has one "at-risk" contract. The contract calls for
the Company to provide for all of the inpatient and outpatient behavioral health
needs of the insurance carrier's enrollees in Nevada for a fixed monthly fee per
member per month. Revenues are recorded monthly based on this formula and the
expenses related to providing the services under this contract are recorded as
incurred. The Company provides most of the outpatient care directly and, through
utilization review, monitors closely, and pre-approves all inpatient and
outpatient services not provided directly. The contract is considered "at-risk"
because the payments to third-party providers for services rendered could equal
or exceed the total amount of the revenue recorded.
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.
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 reported by the Company are shown net of estimated allowances
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."
Allowance for doubtful accounts:
The provision for bad debt 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 70-100% 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 30% 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
- 19 -
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. The Company considers estimated future
taxable income or loss and other available evidence when assessing the need for
its deferred tax valuation allowance.
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 represent fair values calculated by
independent third-party appraisers. Such valuations require the Company to
provide significant estimates and assumptions which are derived from information
obtained from the management of the acquired businesses and the Company's
business plans for the acquired businesses. Critical estimates and assumptions
used in the initial valuation of goodwill and other intangible assets include,
but are not limited to: (i) future expected cash flows from services to be
provided, customer contracts and relationships, and (ii) the acquired market
position. These estimates and assumptions may be incomplete or inaccurate
because unanticipated events and circumstances may occur. If estimates and
assumptions used to initially value goodwill and intangible assets prove to be
inaccurate, ongoing reviews of the carrying values of such goodwill and
intangible assets may indicate impairment which will require the Company to
record an impairment charge in the period in which the Company identifies the
impairment.
Results of Operations
Quarter ended June 30, 2004 as compared to June 30, 2003
Total net revenue from all facilities, excluding the recent acquisition of
Pivotal Research Centers, LLC, increased 9.1% to $6,885,321 for the quarter
ended June 30, 2004 from $6,313,032 for the quarter ended June 30, 2003. This is
due to increased census in our inpatient facilities and an increase in contract
revenue provided by Wellplace. Total operating expenses related to this period
increased 6.8% to $6,443,509 for the quarter ended June 30, 2004 from $6,035,579
for the quarter ended June 30, 2003. This is primarily due to the costs
associated with the Wellplace contracts and additional Administrative expenses
for salaries, benefits and general insurance costs. Net income for the same
period increased 129.72% to $412,999 for the quarter ended June 30, 2004 from
$179,786 for the same period last year.
Years ended June 30, 2004 as compared to June 30, 2003
The Company's profitability from its ongoing operations, without the impact
of the litigation and settlement costs of approximately $1,030,000, decreased
for the fiscal year ended June 30, 2004. Higher expenses and less favorable
overall economic conditions resulted in the decrease. Total revenues increased
11.8% to $26,648,845 for the year ended June 30, 2004 from $23,833,323 for the
year ended June 30, 2003. Higher unemployment, reduced insurance coverage and
increases in some operating expenses, resulted in a decrease in income from
operations, before the expenses of the litigation noted above, of 18.7% to
$1,175,536 for the year ended June 30, 2004 from $1,445,689 for the year ended
June 30, 2003 and a decrease in income before taxes of 24.0% to $784,291 for the
fiscal year ended June 30, 2004 from $1,031,976 for the fiscal year ended June
30, 2003.
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Total net patient care revenue from all facilities, increased 5.5% to
$22,418,355 for the year ended June 30, 2004 as compared to $21,243,177 for the
year ended June 30, 2003. Although occupancy and net revenue per patient day
shown in "Operating Statistics" on page 7 of this report decreased, actual
patient days increased by over 1,250 days. The decrease in percentage of
occupancy is the result of the increase in available beds starting in November
2003 from 122 to 130. Net inpatient care revenue from inpatient psychiatric
services increased 2.9% to $14,845,163 for the year ended June 30, 2004 from
$14,430,069 for the fiscal year ended June 30, 2003. Net partial hospitalization
and outpatient care revenue increased 11.2% to $7,573,192 for the year ended
June 30, 2004 from $6,813,108 for the year ended June 30, 2003. This increase is
the result of utilization of these step-down programs by managed care as a
treatment alternative to inpatient care. Pharmaceutical study revenue increased
32.4% to $1,246,013 for the year ended June 30, 2004 from $940,772 for the year
ended June 30, 2003. This increase is due to the recent acquisition of Pivotal
Research Centers, LLC, which contributed $699,341 of revenue in the last two
months of the period. The largest increase in revenues for the year was from
Wellplace, formerly known as Pioneer Development and Support Services ("PDS2").
Wellplace revenues increased 80.9% to $2,984,477 for the year ended June 30,
2004 from $1,649,374 for the year ended June 30, 2003. This increase in revenue
is due to the inclusion of the Wayne County call center contract, which began in
March 2003 and the Kansas smoking cessation contract, which began in May 2003.
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 Pivotal, increased by $510,187 to
$12,186,386 for the year ended June 30, 2004 from $11,676,199 for the year ended
June 30, 2003 due to the increase in patient census at our inpatient facilities.
Inpatient census increased by approximately 1,250 patient days, 4%, for the year
ended June 30, 2004 compared to the year ended June 30, 2003. Direct patient
care payroll and payroll related expenses increased 6.3% to $10,553,817 for the
year ended June 30, 2004 from $9,927,554 for the year ended June 30, 2003; food
and dietary expense increased 9.4% to $524,023 for the year ended June 30, 2004
from $479,102 for the year ended June 30, 2003, hospital supplies expense
increased 24.4% to $48,667 for the year ended June 30, 2004 from $39,116 for the
year ended June 30, 2003, laundry expense increased 11.0% to $44,124 for the
year ended June 30, 2004 from $39,761 for the year ended June 30, 2003 and
Medical records expense increased 12.2% to $69,415 for the year ended June 30,
2004 from $61,865 for the year ended June 30, 2003. All of these increases were
a result of increased patient census and increased needs of the patients based
on the severity of their illness. Other patient related expenses decreased 31.3%
to $237,806 for the year ended June 30, 2004 from $345,907 for the year ended
June 30, 2003. This decrease is primarily due to the decrease in patients
participating in pharmaceutical research studies through Pivotal in Michigan.
Laboratory fees decreased 17.8% to $151,933 for the year ended June 30, 2004
from $184,810 for the year ended June 30, 2003 due to a change in service
provider and closer monitoring of tests ordered. 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).
Website expenses increased 35.2% to $293,200 for the year ended June 30,
2004 from $216,827 for the year ended June 30, 2003. This is a result of
increased depreciation expense based on a revision of the estimated remaining
useful life of the assets. Without this change, website expenses would have
remained relatively stable. We expect Website expenses will remain at this level
while the internet Company's focus remains internal.
- 21 -
Cost of contract support services related to Wellplace increased 79.2% to
$2,391,660 for the year ended June 30, 2004 from $1,398,602 for the year ended
June 30, 2003. This increase is due to the inclusion of the Wayne County call
center contract, which began March 2003 and the Kansas smoking cessation
contract, which began in May 2003. Expenses are expected to increase as new
contracts are added. Legal fees for Wellplace increased to $133,975 for the year
ended June 30, 2004 from $12,352 for the year ended June 30, 2003. This
disproportionate increase is a result of an inquiry by the State of Nebraska.
(see "Legal Proceedings" Part 1, Item 3)
Total administrative expenses, excluding Pivotal, increased 21.5% to
$9,708,423 for the year ended June 30, 2004 from $7,987,508 for the year ended
June 30, 2003. Legal expense increased approximately $1,068,000, which accounts
for more than 62% of the increase. This is a result of the litigation and
settlement described in "Legal Proceedings" on page 13 of this report.
Administrative salaries increased 6.8% to $2,455,232 for the year ended June 30,
2004 from $2,297,918 for the year ended June 30, 2003. Greater competition for
experienced health care administrative staff resulted in these increased
salaries. Insurance expense increased 59.0% to $452,147 for the year ended June
30, 2004 from $284,306 for the year ended June 30, 2003 due to general increases
in property and liability insurance. Accounting fees, which includes non-audit
accounting services, including but not limited to cost reports and individual
contract audits, provided by firms other than our principal audit firm,
increased 3.0% to $185,626 for the year ended June 30, 2004 from $180,815 for
the year ended June 30, 2003.
Interest expense decreased 2.0% to $531,564 for the year ended June 30,
2004 from $542,269 for the year ended June 30, 2003. This decrease is due to the
decrease in the prime rate, which dictates the interest rate on the majority of
the Company's long-term debt and the decrease in outstanding debt. The Company
also expensed $114,500 of costs related to the Company's initial efforts to
finance the Pivotal acquisition through debt. This amount would have been
amortized over the term of the loan had the loan been consummated. It was
determined that equity financing would be in the best interest of the Company
and its shareholders when more favorable loan terms could not be secured.
Without this one time expense, interest expense for the year would have
decreased 23.1% to $417,064.
The Company's income taxes of $11,294 and $54,234 for the years ended June
30, 2004 and June 30, 2003, respectively, are significantly below the Federal
statutory rate of 34% primarily due to the availability of net operating loss
carry-forwards. Total income tax expense for fiscal 2004 and 2003 represents
state income taxes for certain subsidiaries with no available net operating loss
carry-forwards. The Company has provided a significant valuation allowance
against its deferred tax asset due to the uncertainty of its full recoverability
given the Company's history of operating losses that may limit the accessibility
of the loss carry-forwards.
Provision for doubtful accounts increased 22.3% to $1,355,770 for the
fiscal year ended June 30, 2004 from $1,108,498 for the fiscal year ended June
30, 2003. This increase is the result of an increase in the age of outstanding
accounts receivable with many insurance carriers delaying payment as much as 180
days as well as increased overall 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 resulted in an overall decrease in its accounts
receivable. Although the Company's gross receivables from direct patient care
have decreased, the Company continues to reserve for bad debts 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 reserves.
- 22 -
Liquidity and Capital Resources
The Company`s net cash used in operating activities was $149,744 for the
year ended June 30, 2004 compared to cash provided by operating activities of
$1,406,694 for the year ended June 30, 2003. Cash used in operations in fiscal
2004 consists primarily of the net loss of $257,003, increase in total net
accounts receivable of $731,540 due to increased revenue, an increase in prepaid
expenses of $99,001, an increase in other assets of $135,904, a decrease in
accrued expenses and other liabilities of $126,507 and an increase in deferred
tax asset of $34,199. These uses of cash from operations were offset by
depreciation and amortization of $321,835 and non-cash equity based charges of
$99,498, which are non cash expenditures contributing to the net loss above and
an increase in accounts payable of $813,077. The use of cash in operations
results primarily from the loss from operations resulting from the litigation
settlement and related legal fees as described in Legal Proceedings.
Cash used in investing activities in fiscal 2004 consisted of $193,185 in
capital expenditures for the acquisition of property and equipment and
$2,191,697 related to the acquisition of the membership interest in Pivotal
Research Centers, LLC compared to $226,100 in capital expenditures for the
acquisition of property and equipment in fiscal 2003. (See Note L to the
consolidated financial statements included herewith for additional detail
regarding the acquisition of Pivotal Research Centers, LLC)
Cash used in financing activities in fiscal 2004 consisted of $627,380 in
net debt repayments, $4,000 in deferred financing cost, $3,026,665 received from
the issuance of common stock and $68,827 paid in the purchase of treasury stock.
In addition to these transactions, the Company also issued 50,000 shares of
class B common stock at market value in the retirement of related party debt.
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Current accounts receivable from
patient care, net of allowance for doubtful accounts increased approximately 6%
to $5,261,202 on June 30, 2004 from $4,945,301 on June 30, 2003. This increase
is a result of increased net revenue. The Company's goal is to maintain
receivables at their current levels or to have any increases result from higher
revenues and timing of receivables collection. Only better accounts receivable
management due to increased staff, standardization of some procedures for
collecting receivables and a more aggressive collection policy has made this
possible in behavioral health, which is typically a difficult collection
environment. Increased staff has allowed the Company to concentrate on current
accounts receivable and resolve any problem issues before they become
uncollectable. The Company's collection policy calls for 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. At the same time, the Company continues to
closely monitor reserves for bad debt based on potential insurance denials and
past difficulty in collections.
In order to facilitate the acquisition of the membership interest in
Pivotal Research Centers, LLC, the Company determined that it would be in the
best interest of the shareholders to finance the cash portion of the purchase
price through equity as well as raise additional working capital, since debt
with favorable terms was not available. Therefore, the Company offered 2,800,000
shares of Class A Common Stock at $1.10 per share in a private placement. The
private placement also included 25% warrant coverage at an exercise price of
$1.10 per share with a three-year term and standard anti-dilution features. This
offering was completed in two stages. As a result of the first stage of the
offering, in March 2004, the Company issued 684,999 shares of Class A Common
Stock for $753,500 and warrants to purchase 171,248 additional shares of Class A
- 23 -
Common Stock. As a result of the second stage of this offering, in April 2004,
the Company issued 1,918,196 shares of Class A Common Stock for $2,110,016 and
warrants to purchase 479,549 additional shares of Class A Common Stock. The
private placement facilitated the closing of the acquisition without incurring
any additional bank debt, and also provides the necessary working capital for
Pivotal to execute its business plan. . The Company's future minimum payments
under contractual obligations related to capital leases, operating leases and
term notes as of June 30, 2004 are as follows:
Year Ending Term Capital Operating
June 30, Notes Leases Leases Total
__________ ________ __________ __________
2005 $1,713,395 $20,540 $1,495,087 $3,229,022
2006 55,899 14,532 1,322,882 1,393,313
2007 40,913 9,495 1,008,456 1,058,864
2008 44,353 2,072 823,136 869,561
2009 192,237 -- 810,463 1,002,700
Thereafter 195,976 -- 275,215 471,191
__________ ________ __________ __________
Total minimum payments $2,242,773 $46,639 $5,735,239 $8,024,651
========== ======== ========== ==========
In addition to the above term notes, the Company also has $250,000 in
outstanding convertible debentures, which include the provision that the holders
of the debentures may put all or any portion of the debentures to the Company at
the original purchase price plus unpaid interest upon 30 days written notice.
These debentures mature in December 2004 and will, unless the holders agree to
extend the maturity date, be paid through our operating line of credit limiting
available funds for operations. The Company is also subject to three contingent
notes with a total face value of $2,500,000 as part of the Pivotal acquisition.
Of these notes, two totaling $1,500,000 bear interest at 6% per annum. These
notes are subject to adjustment based on the earnings of the acquired
operations. Since adjustment can be positive or negative based on earnings, with
no ceiling or floor, no liability for these notes, or interest on the notes has
been recorded. 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 these two notes,
if required, are scheduled to begin January 1, 2005. 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 is included in the schedule above.
The Company's current debt includes $1,500,000 due on the term loan, which
is scheduled for repayment in November 2004. The Company plans to renew or
replace this debt or extinguish it through an equity placement. Subsequent to
year end, the Company entered into an agreement to sell 526,316 shares of
preferred stock for $1,500,000 as an alternate financing plan should more
favorable financing not be available. The Company believes that, with its
revolving credit facility through its primary lender and cash flow from
operations, it will have sufficient cash and financing available to fund its
growing operations for the foreseeable future. The Company plans to expand its
core business through increased capacity at its current facilities and the
current expansion plans to add a leased facility in Detroit Michigan for up to
114 acute and long term psychiatric beds. The Company expects to open the first
30-bed unit when the build out has been completed and employees are in place,
which is expected to be in the first quarter of the current fiscal year. The
Company expanded its pharmaceutical research operations on April 30, 2004
through the acquisition of Pivotal Research Centers, LLC. Additional expansion
in this area will be through opening additional locations and signing additional
contracts. Any additional acquisitions will be funded through acquisition
specific financing instruments.
- 24 -
The Company has operated ongoing operations profitably for fourteen
consecutive quarters with the exception of the litigation settlement and related
legal costs incurred in the third quarter of fiscal year 2004. While it is
difficult to project whether the current positive business environment towards
behavioral health treatment and the new business opportunities will continue, it
gives us confidence to foresee continued improved results.
Operating Risks
Negative cash flow could arise as a result of slow government payments. The
concentration of accounts receivable due from government payors could create a
severe cash flow problem should these agencies fail to make timely payment. We
had substantial receivables from Medicaid and Medicare of approximately
$1,135,000 at June 30, 2004 and $1,078,000 at June 30, 2003, which would create
a cash flow problem should these agencies defer or fail to make reimbursement
payments as due, which would require us to borrow at unfavorable rates or pay
additional interest as overline fees on current debt instruments. This would
result in lower net income for the same services provided and lower earnings per
share.
Negative Cash flow could impact our ability to meet obligations when due.
If managed care organizations delay approving treatment, or reduce the patient
length of stay or number of visits or reimbursement, our Company's ability to
meet operating expenses is affected. As managed care organizations and insurance
companies adopt policies that limit the length of stay for substance abuse
treatment, our business is materially adversely affected since our revenues and
cash flow go down and our fixed operating expenses continue or increase based on
the additional resources required to collect accounts receivable.
Reimbursement for substance abuse and psychiatric treatment from private
insurers is largely dependent on our ability to substantiate the medical
necessity of treatment. The process of substantiating a claim often takes up to
four months and sometimes longer; as a result, we experience significant delays
in the collection of amounts reimbursable by third-party payors, which requires
us to increase staff to pursue payment and adversely affects our working capital
condition. This causes amounts borrowed on our accounts receivable revolver to
remain outstanding for longer periods of time resulting in higher interest
expense in addition to the reduced income resulting from the shorter lengths of
stay, which combined reduce net income and earnings per share.
Aging of accounts receivables could result in our inability to collect
receivalbes. As our accounts receivable age and become uncollectable our cash
flow is negatively impacted. Our accounts receivable from patient accounts (net
of allowance for bad debts) were $5,261,201 at June 30, 2004 compared with
$4,945,301 at June 30, 2003. 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, Allowance of
Doubtful Accounts at June 30, 2004 and 2003, respectively and Bad Debt Expense
for the years ended June 30, 2004 and 2003:
Accounts Receivable Allowance for doubtful Bad Debt
accounts Expense
June 30, 2004 $7,287,090 $2,025,888 $1,355,770
June 30, 2003 7,293,746 2,348,445 1,108,498
- 25 -
Due to the Company's current negative working capital and recent losses
from operations as a result of a medical malpractice litigation settlement and
related legal fees of approximately $1,030,000, if the Company needs additional
financing, it may require borrowing at unfavorable rates. We are utilizing, to
the maximum extent, our accounts receivable funding facilities, which bear
interest at the prime rate plus 2.25%, to meet our current cash needs. Should we
require additional funds to meet our cash flow requirements or to fund growth or
new investments, we may be required to meet these needs with more costly
financing. Our current financing relationship is scheduled to terminate or renew
as of November 2004. If we are unable to obtain needed financing, it could have
a material adverse effect on our financial condition, operations and business
prospects.
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 December 2003, the Securities and Exchange Commission ("SEC") published
SAB No. 104, "Revenue Recognition." SAB No. 104 was effective upon issuance. The
adoption of SAB No. 104 did not have a material effect on the Company's
financial position, results of operations, or cash flows.
In November 2002, the Emerging Issues Task Force ("EITF") reached consensus
on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
the guidance under this consensus did not have an impact on the Company's
financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 is the first phase of the FASB's project on liabilities and equity. SFAS
No. 150 provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. For
publicly held companies, SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. SFAS No. 150 requires companies to
record the cumulative effect of financial instruments existing at the adoption
date. The adoption of SFAS 150 did not have an effect on the Company's
operations, financial position or cash flows.
In December 2003, the FASB issued a revision to FIN No. 46, "Consolidation
of Variable Interest Entities." The revised FIN No. 46, which replaces the
original FIN No. 46 issued in January 2003, clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
- 26 -
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. While this interpretation exempts certain entities from its
requirements, it also expands the definition of a variable interest entity
("VIE") to a broader group of entities than those previously considered
special-purpose entities ("SPE's") and specifies the criteria under which it is
appropriate for an investor to consolidate VIE's. Application of the revised FIN
No. 46 is required in financial statements of public entities that have interest
in structures that are commonly referred to as SPE's for periods ending after
December 15, 2003. For all other types of VIE's, application of the revised FIN
No. 46 by public entities is required for periods ending after March 15, 2004.
The application of this interpretation did not have an impact on the Company's
financial position, results of operations, or cash flows.
- 27 -
ITEM 7. FINANCIAL STATEMENTS. PAGE
Index F-1
Report of Independent Registered Public Accounting Firm F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of changes in stockholders' equity F-5
Consolidated statements of cash flows F-6,
Notes to consolidated financial statements F-8 - F-27
F-1
- 28 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheets of PHC, Inc. and
subsidiaries as of June 30, 2004 and 2003, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, 2004 and 2003, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Boston, Massachusetts
August 12, 2004 (except with respect to the matter
discussed in Note M as to which the date is September 20, 2004)
F-2
- 29 -
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2004 2003
_____________ ___________
ASSETS (Note C)
Current assets: (Note A)
Cash and cash equivalents (Note A) $ 594,823 $ 494,991
Accounts receivable, net of allowance for
doubtful accounts of $2,025,888
and $2,348,445 at June 30, 2004
and 2003, respectively (Note A) 5,165,150 4,345,301
Pharmaceutical research receivables 549,974 157,454
Prepaid expenses 168,542 69,541
Other receivables and advances 310,221 97,552
Deferred tax assets (Note F) 842,806 808,607
Other receivables, third party (Note A) -- 172,043
_____________ ___________
Total current assets 7,631,516 6,145,489
Accounts receivable, non-current (Note A) 96,052 600,000
Other receivables (Note A) 94,469 111,976
Property and equipment, net (Notes A, B, C, D
and L) 1,353,975 1,295,113
Deferred financing costs, net of amortization
of $134,109 and $130,109 at June 30, 2004
and 2003, respectively -- 4,000
Customer relationships, net of amortization of
$20,000 at June 30, 2004 (Notes A & L) 2,380,000 --
Goodwill (Notes A and L) 1,416,119 969,099
Other assets (Note A) 339,438 286,046
_____________ ___________
Total assets $13,311,569 $9,411,723
============= ===========
LIABILITIES
Current liabilities:
Accounts payable $ 1,668,509 $ 860,952
Notes payable - related parties (Note E) -- 100,000
Current maturities of long-term debt (Note C) 1,713,395 883,659
Revolving credit note (Note C) 1,714,380 1,103,561
Deferred revenue 38,151 160,720
Current portion of obligations under capital
leases (Note D) 18,169 50,805
Accrued payroll, payroll taxes and benefits 1,305,490 1,016,088
Accrued expenses and other liabilities (Note K) 682,567 958,527
Convertible debentures (Notes C) 250,000 275,000
_____________ ___________
Total current liabilities 7,390,661 5,409,312
Long-term debt, less current maturities (Note C) 529,378 2,030,285
Obligations under capital leases (Note D) 24,493 36,869
_____________ ___________
Total liabilities 7,944,532 7,476,466
_____________ ___________
Commitments and contingent liabilities
(Notes D, G, H, I and L)
STOCKHOLDERS' EQUITY (Notes A, E, G, H, I and L)
Preferred stock, 1,000,000 shares authorized,
none issued and outstanding -- --
Class A common stock, $.01 par value;
20,000,000 shares authorized, 16,744,848
and 13,437,067 shares issued at June 30,
2004 and 2003, respectively. 167,448 134,371
Class B common stock, $.01 par value;
2,000,000 shares authorized, 776,991 and
726,991 issued and outstanding at June 30, 2004
and 2003, respectively, each convertible into
one share of class A common stock 7,770 7,270
Additional paid-in capital 22,791,637 19,147,604
Treasury stock, 168,136 and 97,804 class A
common shares at cost at June 30, 2004 and
2003, respectively. (141,207) (72,380)
Notes receivable - common stock -- (80,000)
Accumulated deficit (17,458,611) (17,201,608)
_____________ ___________
Total stockholders' equity 5,367,037 1,935,257
_____________ ___________
Total liabilities and stockholders'
equity $13,311,569 $ 9,411,723
============ ===========
See accompanying notes to consolidated financial statements. F-3
- 30 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended June 30,
2004 2003
___________ ___________
Revenues: (Note A)
Patient care, net $22,418,355 $21,243,177
Pharmaceutical study 1,246,013 940,772
Contract support services 2,984,477 1,649,374
___________ ___________
Total revenues 26,648,845 23,833,323
___________ ___________
Operating expenses:
Patient care expenses 12,422,627 11,829,799
Cost of contract support services 2,391,660 1,398,602
Provision for doubtful accounts 1,355,770 1,108,498
Website expenses 293,200 216,827
Administrative expenses 10,040,052 7,833,908
___________ ___________
Total operating expenses 26,503,309 22,387,634
___________ ___________
Income from operations 145,536 1,445,689
___________ ___________
Other income (expense):
Interest income 44,731 13,133
Interest expense (531,564) (542,269)
Other income, net 95,588 115,423
___________ ___________
Total other expense, net (391,245) (413,713)
___________ ___________
Income (loss) before income taxes (245,709) 1,031,976
Provision for income taxes (Notes A and F) 11,294 54,234
___________ ___________
Net income (loss) $(257,003) $ 977,742
=========== ===========
Basic income (loss) per common share (Note A) $ (.02) $ .07
=========== ===========
Basic weighted average number of shares
outstanding (Note A) 14,731,395 13,944,047
=========== ===========
Fully diluted income (loss) per common share
(Note A) $ (.02) $ .07
=========== ===========
Fully diluted weighted average number of
shares outstanding (Note A) 14,731,395 14,564,078
============ ===========
See accompanying notes to consolidated financial statements. F-4
- 31 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity (See Notes A, E, G,
H, I and L)
Class A Class B Additional
Common Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
_____________________________________________________
Balance - June 30, 2002 12,919,042 $129,190 726,991 $7,270 $18,769,863
Costs related to private
placements (7,212)
Issuance of shares for options
exercised 408,025 4,081 346,060
Issuance of warrants for services 3,185
Shares issued for employee
bonuses 28,623 286 18,726
Issuance of shares for warrants
exercised 62,363 624 9,376
Issuance of employee stock
purchase plan shares 19,014 190 7,606
Purchase of shares from former
employee
Net income-year ended June 30,
2003
_____________________________________________________
Balance - June 30, 2003 13,437,067 134,371 726,991 7,270 19,147,604
Costs related to private
placements (46,578)
Issuance of shares for options
exercised 46,165 461 50,169
Issuance of warrants for services 76,664
Shares issued for employee
bonuses 11,016 110 10,279
Issuance of shares for warrants
exercised 155,000 1,550 95,050
Issuance of employee stock
purchase plan shares 8,238 83 6,383
Purchase of shares from former
employee
Net value of repriced options 5,425
Forgiveness of stock purchase
debt
Private placement 2,660,012 26,600 2,899,414
Shares issued in acquisition 427,350 4,273 495,727
Conversion of debt into Class B
common stock 50,000 500 51,500
Net loss year ended June 30, 2004____________________________________________________
Balance - June 30, 2004 16,744,848 $167,448 776,991 $7,770 $22,791,637
====================================================
See accompanying notes to consolidated financial statements.
- 32 -
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity (See Notes A, E, G,
H, I and L)
Notes
Receivable
Treasury Stock Common Stock Accumulated
Shares Amount Purchase Deficit Total
___________________________________________________________
Balance - June 30, 2002 38,126 $(30,988) $(80,000) $(18,179,350) $615,985
Costs related to private
placements (7,212)
Issuance of shares for
options exercised 350,141
Issuance of warrants for
services 3,185
Shares issued for
employee bonuses 19,012
Issuance of shares for
warrants exercised 10,000
Issuance of employee stock
purchase plan shares 7,796
Purchase of shares from
former employee 59,678 (41,392) (41,392)
Net income-year ended June
30, 2003 977,742 977,742
__________ __________ __________ ____________ __________
Balance - June 30, 2003 97,804 (72,380) (80,000) (17,201,608) 1,935,257
Costs related to private
placements (46,578)
Issuance of shares for
options exercised 50,630
Issuance of warrants for
services 76,664
Shares issued for
employee bonuses 10,389
Issuance of shares for
warrants exercised 96,600
Issuance of employee stock
purchase plan shares 6,466
Purchase of shares from
former employee 70,332 (68,827) (68,827)
Net value of repriced
options 5,425
Forgiveness of stock
purchase debt 80,000 80,000
Private placement 2,926,014
Shares issued in acquisition 500,000
Conversion of debt into
class B common stock 52,000
Net loss-year ended June
30, 2004 (257,003) (257,003)
__________ __________ __________ ___________ __________
Balance - June 30, 2004 168,136 $(141,207) $ -- $(17,458,611) $5,367,037
========= ========== =========== ============ ============
See accompanying notes to consolidated financial statements. F-5
- 33 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year
Ended June 30,
2004 2003
__________________________
Cash flows from operating activities:
Net income (loss) $(257,003) $ 977,742
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 321,835 198,695
Deferred income taxes (34,199) (41,814)
Non-cash compensation 74,142 22,686
Fair value of warrants issued 25,356 3,185
Changes in operating assets and liabilities:
Accounts receivable (731,540) 513,193
Prepaid expenses and other current assets (99,001) (2,889)
Other assets (135,904) (96,766)
Accounts payable 813,077 (422,437)
Accrued expenses and other liabilities (126,507) 255,099
___________ __________
Net cash provided by (used in) operating
activities (149,744) 1,406,694
___________ __________
Cash flows from investing activities:
Acquisition of property and equipment (193,185) (226,100)
Costs related to business acquisition (Note L) (2,191,697) --
___________ __________
Net cash used in investing activities (2,384,882) (226,100)
Cash flows from financing activities:
Repayment revolving debt, net 610,819 (365,083)
Proceeds from borrowings 49,633 810,081
Principal payments on long-term debt (987,832) (1,359,983)
Deferred financing costs 4,000 8,000
Purchase of treasury stock (68,827) (41,392)
Proceeds from issuance of common stock, net 3,026,665 58,210
___________ __________
Net cash provided by (used in) financing
activities 2,634,458 (890,167)
___________ __________
Net increase in cash and cash equivalents 99,832 290,427
Cash and cash equivalents, beginning of year 494,991 204,564
___________ __________
Cash and cash equivalents, end of year $ 594,823 $ 494,991
=========== ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 452,454 $ 506,909
=========== ===========
Income taxes $ 35,986 $ 121,323
=========== ==========
See accompanying notes to consolidated financial statements. F-6
- 34 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Year Ended June 30,
2004 2003
____________________________
Supplemental disclosures of non-cash investing and
financing activities:
Conversion of debt into common stock $ 52,000 $ --
Issuance of common stock in cashless exercise
of options 15,000 134,866
Issuance of common stock in cashless exercise
of warrants -- 424
Acquisition disclosure
On April 30, 2004, the Company acquired
Pivotal Research Centers, LLC (Note L):
Property and equipment $ 85,000
Intangible assets 2,847,020
Accrued expenses (40,000)
Accrued acquisition costs (149,016)
Warrants issued in lieu of cash
payment for acquisition costs (51,307)
Cash paid for purchase (2,191,697)
__________
Fair value of common stock issued $ 500,000
===========
See accompanying notes to consolidated financial statements. F-7
- 35 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and business segments:
PHC, Inc. (the "Company") is a national healthcare company which operates
subsidiaries specializing in behavioral health services including the treatment
of substance abuse, which includes alcohol and drug dependency and related
disorders and the provision of psychiatric services. The Company also conducts
pharmaceutical research studies, operates help lines for employee assistance
programs, call centers for state and local programs and provides management,
administrative and online behavioral health services. The Company primarily
operates under four business segments:
(1) Behavioral health treatment services, including two substance abuse
treatment facilities: Highland Ridge Hospital, located in Salt Lake City,
Utah, which also treats psychiatric patients, and Mount Regis Center,
located in Salem, Virginia, and six psychiatric treatment locations which
include Harbor Oaks Hospital, a 64-bed psychiatric hospital located in New
Baltimore, Michigan and five outpatient behavioral health locations (two in
Las Vegas, Nevada operating as Harmony Healthcare and three locations
operating as Pioneer Counseling Center in the Detroit, Michigan
metropolitan area);
(2) Pharmaceutical study services, including three clinic study sites. Two in
Arizona, in Peoria and Mesa, and one Michigan location in Royal Oak,
Michigan. 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 Centers;
(3) Call center and help line 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, a
smoking cessation contract with the state of Kansas and a call center
contract with the state of Michigan. The call centers both operate as
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.
Revenues and accounts receivable:
Patient care revenues and accounts receivable are recorded at established
billing rates or at the amount realizable under agreements with third-party
payors, including Medicaid and Medicare. Revenues under third-party payor
agreements are subject to examination and contractual adjustment, and amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
provided and subsequent settlements are recorded in operations in the year of
settlement. The provision for contractual allowances is deducted directly from
revenue and the net revenue amount is recorded as accounts receivable. The
allowance for doubtful accounts does not include the contractual allowances.
F-8
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues and accounts receivable (continued):
Medicaid reimbursements are currently based on established rates depending
on the level of care provided and are adjusted prospectively. Medicare
reimbursements are currently based on provisional rates that are adjusted
retroactively based on annual cost reports filed by the Company with Medicare.
The Company's cost reports to Medicare 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 22% and 16% of the Company's total revenue is derived from
Medicare and Medicaid payors for the years ended June 30, 2004 and 2003,
respectively. Differences between the amounts provided and subsequent
settlements are recorded in operations in the year of the settlement. To date,
settlement adjustments have not been material.
Patient care revenue is recognized as services are provided, 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. As of June 30, 2004, the Company has no outstanding balance in other
receivables, third party, 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. Where
contracts require completion of the study by the patient, no revenue is
recognized until the patient completes the study program.
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. Accounts of former patients that do not comply with
these supplemental payment agreements 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 $147,096 and $54,263 for the years
ended June 30, 2004 and June 30, 2003, respectively. Patient care revenue is
stated net of charity care in the accompanying consolidated statements of
operations.
Additionally, the Company had accounts receivable from Medicaid and
Medicare of approximately $1,136,000 at June 30, 2004 and $1,078,000 at June 30,
2003.
F-9
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 our ability to meet our 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 us 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. 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 losses and attendant loss in
income.
Cash equivalents:
Cash equivalents include short-term highly liquid investments with
maturities of less than three months when purchased.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:
Estimated
Assets Useful Life
______________________________________________________
Buildings 39 years
Furniture and equipment 3 through 10 years
Motor vehicles 5 years
Leasehold improvements Lesser of useful life or term of lease
Other assets:
Other assets consists of deposits, advances and web development costs.
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
F-10
- 38 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-lived assets (continued):
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, 2004.
Goodwill and other intangible assets:
Goodwill and other intangible assets are initially created as a result of
business combinations or acquisitions. The values the Company records for
goodwill and other intangible assets represent fair values calculated by
independent third-party appraisers. Such valuations require the Company to
provide significant estimates and assumptions which are derived from information
obtained from the management of the acquired businesses and the Company's
business plans for the acquired businesses. Critical estimates and assumptions
used in the initial valuation of goodwill and other intangible assets include,
but are not limited to: (i) future expected cash flows from services to be
provided, customer contracts and relationships, and (ii) the acquired market
position. These estimates and assumptions may be incomplete or inaccurate
because unanticipated events and circumstances may occur. If estimates and
assumptions used to initially value goodwill and intangible assets prove to be
inaccurate, ongoing reviews of the carrying values of such goodwill and
intangible assets may indicate impairment which will require the Company to
record an impairment charge in the period in which the Company identifies the
impairment.
Customer relationships, acquired as a part of the of the assets acquired in
the membership interest purchase of Pivotal Research Centers, LLC, (Note L) are
being amortized, using the straight-line method, over an estimated useful life
of twenty years. Amortization expense of intangible assets, which amounted to
$20,000 for the fiscal year ended June 30, 2004, is included in administrative
expenses in the accompanying consolidated statement of operations. The following
is a summary of amortization expense of intangible assets for the succeeding
fiscal years as of June 30, 2004:
Year Ending
June 30, Amount
2005 $ 120,000
2006 120,000
2007 120,000
2008 120,000
2009 120,000
thereafter 1,780,000
__________
$2,380,000
==========
Goodwill:
SFAS No. 142, "Goodwill and Other Intangible Assets", requires, among other
things, that companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS 142 requires 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.
F-11
- 39 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and other intangible assets: (continued):
The Company's goodwill of $969,099 relating to the treatment services
reporting unit of the Company and $447,020 related to the research study
services reporting unit of the Company were evaluated under SFAS No. 142 as of
June 30, 2004. As a result of the evaluation, the Company determined that no
impairment exists. The Company will continue to test goodwill for impairment at
least annually in accordance with the guidelines of SFAS No. 142.
Fair value of financial instruments:
The carrying amounts of cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value
based on their short-term maturity and prevailing interest rates.
Basic and diluted income per share:
Income per share is computed by dividing the income applicable to common
shareholders, net of dividends charged directly to retained earnings, by the
weighted average number of shares of common stock outstanding for each fiscal
year. All dilutive common stock equivalents have been included in the
calculation of diluted earnings per share for the fiscal year ended June 30,
2003. Any increase in number of shares of common stock equivalents for the year
ended June 30, 2004 would be anti-dilutive based on the year to date loss and
therefore not included. The number of shares outstanding increased by 620,031
dilutive common stock equivalents for the fiscal year ended June 30, 2003.
The weighted average number of common shares outstanding used in the
computation of earnings per share is summarized as follows:
Years Ended June 30,
2004 2003
Denominator for basic earnings per share-
weighted average shares 14,731,395 13,944,047
Effect of dilutive securities:
Employee stock options -- 377,741
Warrants -- 242,290
Convertible debentures -- --
___________ __________
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversions 14,731,395 14,564,078
=========== ===========
The following table summarizes securities outstanding as of June 30, 2004
and 2003, but not included in the calculation of diluted net earnings per share
because such shares are antidilutive:
F-12
- 40 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic and diluted income per share (continued):
Years Ended June 30,
2004 2003
_______________________________
Employee stock options 945,000 29,500
Warrants 1,415,357 327,500
Convertible debentures 125,000 125,000
____________ __________
Total 2,485,357 482,000
============ ==========
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 unless it is more likely than not that such assets
will be realized in future periods. The Company considers estimated future
taxable income or loss and other available evidence when assessing the need for
its 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 (loss) is equal to its
net income (loss) for all periods presented.
Stock-based compensation:
Until January 1, 2003, all of the Company's employees were employed under
leasing arrangements. The Company believes that its employee leasing arrangement
met the employee definition requirements under FASB Interpretation ("FIN") No.44
"Accounting for Certain Transactions Involving Stock Compensation". The Company
elected to discontinue the use of the leasing company and begin processing
payroll in-house or using a more traditional payroll service while providing
more employee services internally when it believed the benefit of using a
leasing company began to diminish.
For all periods presented 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 has
elected to use the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation, and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." Had compensation expense for stock
option grants to employees been determined based on the fair value method at the
grant dates for awards under the stock option plans consistent with the method
prescribed by SFAS No. 123, the Company's net income (loss) would have decreased
(increased) to the pro forma amounts indicated as follows:
F-13
- 41 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-based compensation (continued):
Year Ended
June 30,
2004 2003
__________________________
Net income (loss), as reported $ (257,003) $ 977,742
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 74,142 22,686
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related taxes (134,630) (78,575)
____________ ___________
Pro forma net income (loss) $ (317,491) $ 921,853
============ ===========
Earnings (loss) per share:
Basic - as reported $ (0.02) $ 0.07
============ ===========
Basic - pro forma $ (0.02) $ 0.07
============ ===========
Diluted - as reported $ (0.02) $ 0.07
============ ===========
Diluted - pro forma $ (0.02) $ 0.06
============ ===========
The Company has computed the pro forma disclosures for stock options
granted to employees using the Black-Scholes option pricing model prescribed by
SFAS No. 123. The assumptions used and certain results during each of the two
years ended June 30, 2004 were as follows:
June 30,
2004 2003
__________ __________
Risk free interest rate 4.00% 6.00%
Expected dividend yield -- --
Expected lives 5-10 years 5-10 years
Expected volatility 30% 30%
Weighted average value of grants per share $.46 $.29
Weighted average remaining contractual life of
options outstanding (years) 4.05 3.76
Reclassifications:
Certain June 30, 2003 amounts have been reclassified to be consistent with
the June 30, 2004 presentation.
Recent accounting pronouncements:
In December 2003, the Securities and Exchange Commission ("SEC") published
SAB No. 104, Revenue Recognition. SAB No. 104 was effective upon issuance. The
adoption of SAB No. 104 did not have a material effect on the Company's
financial position, results of operations, or cash flows.
F-14
- 42 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent accounting pronouncements (continued):
In November 2002, the Emerging Issues Task Force ("EITF") reached consensus
on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
the guidance under this consensus did not have an impact on the Company's
financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 is the first phase of the FASB's project on liabilities and equity. SFAS
No. 150 provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. For
publicly held companies, SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. SFAS No. 150 requires companies to
record the cumulative effect of financial instruments existing at the adoption
date. The adoption of SFAS 150 did not have an effect on the Company's
operations, financial position or cash flows.
In December 2003, the FASB issued a revision to FIN No. 46, "Consolidation
of Variable Interest Entities." The revised FIN No. 46, which replaces the
original FIN No. 46 issued in January 2003, clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. While this interpretation exempts certain entities from its
requirements, it also expands the definition of a variable interest entity
("VIE") to a broader group of entities than those previously considered
special-purpose entities ("SPE's") and specifies the criteria under which it is
appropriate for an investor to consolidate VIE's. Application of the revised FIN
No. 46 is required in financial statements of public entities that have interest
in structures that are commonly referred to as SPE's for periods ending after
December 15, 2003. For all other types of VIE's, application of the revised FIN
No. 46 by public entities is required for periods ending after March 15, 2004.
The application of this interpretation did not have an impact on the Company's
financial position, results of operations, or cash flows.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is composed of the following:
June 30,
2004 2003
____________________________
Land $ 69,259 $ 69,259
Buildings 1,136,963 1,136,963
Furniture and equipment 1,446,005 1,284,646
Motor vehicles 134,995 92,871
Leasehold improvements 570,291 508,441
___________ ___________
3,357,513 3,092,180
Less accumulated depreciation and amortization 2,003,538 1,797,067
___________ ___________
Property and equipment, net $1,353,975 $1,295,113
=========== ===========
F-15
- 43 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is summarized as follows:
June 30,
2004 2003
___________ __________
9% mortgage note due in monthly installments of
$4,850 including interest through July 1, 2012,
when the remaining principal balance is payable,
collateralized by a first mortgage on the PHC
of Virginia, Inc, Mount Regis Center facility. $358,811 $383,498
Note payable issued in conjunction with the final
earn-out on the BSC-NY, Inc. acquisition due
in monthly installments of $11,567 including
interest at 11% through July 2005. 141,148 257,384
Note payable issued in conjunction with the final
earn-out on the BSC-NY, Inc. acquisition due in
monthly installments of $3,653 including interest
at 11% through July 2005. 44,573 81,279
Note payable due in monthly installments of $429
including interest at 8.69% through May
2004. -- 4,536
Note payable due in monthly installments of $665
including interest at 10.8% through November 2005. 10,211 16,705
Term mortgage note payable with principal installments
of $45,000 beginning December 2001 through November
2002 and increasing annually by $5,000 through November
2004 at which time the remaining balance becomes due.
The note bears interest at prime (4.0% at June 30,
2004) plus 3.5% and is collateralized by all assets
of PHC of Michigan, Inc., guaranteed by PHC, Inc. and
may be renewed at maturity at the lender's discretion.
In May 2003, $500,000 was paid on the revolving credit
note through an increase in this note. At that time,
the payments were increased by $5,000 each month but
all other terms and conditions of the original note
remain in effect. 1,500,542 2,170,542
Note payable due in monthly installments of $775
including interest at 3.9% through October 2008. 36,978 --
Note payable in conjunction with the earn out of
the Pivotal Research Centers, LLC acquisition.
Minimum payment amount $200,000 in class A common
stock due March 2009 interested imputed at 6%.
(Note L) 150,510 --
___________ ___________
Total 2,242,773 2,913,944
Less current maturities 1,713,395 883,659
___________ ___________
Long-term portion $ 529,378 $ 2,030,285
============ ============
Maturities of long-term debt are as follows as of June 30, 2004:
Year Ending
June 30, Amount
_______________________________________________
2005 $ 1,713,395
2006 55,899
2007 40,913
2008 44,353
2009 192,237
Thereafter 195,976
___________
$2,242,773
F-16
- 44 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The Company has a revolving credit note under which a maximum of $3,000,000
may be outstanding at any time. At June 30, 2004 and 2003, the outstanding
balance was $1,714,380 and $1,103,561, respectively. Advances are available
based on a percentage of accounts receivable and principal is payable upon
receipt of proceeds of the accounts receivable. Interest is payable monthly at
prime (4.0% at June 30, 2004) plus 2.25%. The agreement is automatically
renewable for one-year periods unless terminated by either party. 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 and guaranteed by PHC.
On December 7, 1998, the Company issued the principal sum of $500,000 of
convertible debentures with interest at 12% per annum that are due on December
2, 2004. Interest is payable quarterly. The debentures and any unpaid interest
are convertible into shares of common stock at the rate of $1,000 for 500 shares
of common stock, which equates to $2.00 per share of class A common stock. The
traded market price of the Company's common stock at the date of issuance of the
convertible debentures was $1.188 per share and accordingly there was no
beneficial conversion feature. The holders of the debentures have the right to
put all or any portion of the debentures to the Company at the original purchase
price plus unpaid interest upon 30 days written notice beginning December 3,
2001. Accordingly, the debt is classified as a current liability on the
accompanying consolidated balance sheets. The Company has the right to call the
debentures upon the same terms as above. If called, the holders of the
debentures then have 20 days from the date of written notice to exercise their
conversion privilege as to any debentures not then already converted. In July
2002, the holders of the debentures exercised the put provision in the agreement
as to 50% of the outstanding debentures, which was paid as stipulated in the
agreement. The current outstanding balance of the debentures is $250,000.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 2004, the Company was obligated under various capital leases
for equipment providing for monthly payments of approximately $4,100 and $4,500
for fiscal 2004 and 2003, respectively, and terms expiring from July 2004
through July 2007.
The carrying value of assets under capital leases included in property and
equipment is as follows:
June 30,
2004 2003
_________________________
Equipment and improvements $116,185 $ 141,998
Less accumulated amortization (65,007) (69,322)
___________ __________
$ 51,178 $ 72,676
=========== ==========
Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 2004:
Year Ending June 30,
2005 $20,540
2006 14,532
2007 9,495
2008 2,072
________
Total future minimum lease payments 46,639
Less amount representing interest 3,977
________
Present value of future minimum lease payments 42,662
Less current portion 18,169
_________
Long-term obligations under capital leases $24,493
=========
F-17
- 45 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows: June 30,
2004 2003
__________ _________
Notes payable, Tot Care, Inc., a company owned by the
President and principal stockholder, interest at 12%
and payable on demand. During fiscal 2004, this debt
was extinquished by the issuance of fifty thousand
shares of class B common stock issued, at market,
$52,000, and cash payment for the balance of $48,000
and accrued interest. $ -- $100,000
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the accompanying
balance sheets:
Year Ended
June 30,
2004 2003
________________________
Temporary differences attributable to:
Allowance for doubtful accounts $ 811,000 $ 939,000
Depreciation 109,000 68,000
Reserves not currently deductible and other 759,000 201,000
Operating loss carryforward 3,800,000 3,628,000
__________ _________
Total deferred tax asset 5,479.000 4,836,000
__________ _________
Less:
Valuation allowance (4,636,194) (4,027,393)
__________ _________
Subtotal 842,806 808,607
__________ _________
Current portion (842,806) (808,607)
__________ __________
Long-term portion $ -- $ --
=========== ==========
Although the Company experienced a loss for the current fiscal year due to
a legal settlement and related legal expenses, the Company anticipates that it
will have sufficient taxable income in future fiscal years to realize its net
deferred tax asset. The Company closed three facilities that contributed most
significantly to its past losses, the Franvale Nursing and Rehabilitation
Center, the Good Hope Center and the Pioneer Counseling of Virginia clinics. The
Company also closed its practice management business and has implemented
procedures to improve the operating efficiency of its remaining centers.
The components of the income tax provisions for the years ended June 30,
2004 and 2003 are as follows:
2004 2003
__________________________
Current
Federal $ -- $ --
State 45,493 96,048
__________ __________
45,493 96,048
__________ __________
Deferred
Federal -- (35,542)
State (34,199) (6,272)
__________ __________
(34,199) (41,814)
Income tax provision $ 11,294 $ 54,234
========== ==========
F-18
- 46 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE F - INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended June 30, 2004 and 2003 is as follows:
2004 2003
Income tax provision at federal statutory rate 34.0% 34.0%
Increase (decrease) in tax resulting from
State tax provision, net of federal benefit 4.5% 4.5%
Non-deductible expenses 1.0% 1.3%
Other, net (5.0%) (0.5%)
Valuation allowance (34.0%) (34.0%)
________ _______
Effective income tax rate 1.0% 5.3%
======== =======
At June 30, 2004 the Company had a federal net operating loss carryforward
amounting to approximately $10,000,000. The Company's Federal net operating loss
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service and are subject to certain limitations in the event of
cumulative changes in the ownership interest of significant stockholders over a
three-year period in excess of 50%. The Federal carryforward expires beginning
in 2011 through 2024.
The Company has provided a significant valuation allowance against its
deferred tax asset at June 30, 2004 and 2003 due to the uncertainty of its full
recoverability given the Company's history of operating losses.
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
Operating leases:
The Company leases office and treatment facilities, furniture and equipment
under operating leases expiring on various dates through September 2009. Rent
expense for the years ended June 30, 2004 and 2003 was approximately $1,035,000
and $899,000, 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, 2004 are as follows:
Year Ending
June 30, Amount
2005 $ 1,495,087
2006 1,322,882
2007 1,008,456
2008 823,136
2009 810,463
Thereafter 275,215
___________
$5,735,239
Notes Receivable:
In August 2000, the Company entered into agreements with nine officers and
directors to provide each officer and director with $10,000 with which to
purchase stock. One individual left the Company on February 28, 2001 and
forfeited all rights. The agreement called for the parties to sign notes, which
would provide the purchased shares as security, with the Company releasing the
shares, and canceling the officers' and directors' obligations under the Notes
based on specific PHC stock price targets. In the event that the stock price
targets were not met,
F-19
- 47 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED):
the agreement called for the cancellation of the obligation and release of the
shares on the third anniversary of the agreement. The notes were cancelled
pursuant to these provisions in August 2003, which resulted in a compensation
charge of $80,000 during the quarter ended September 30, 2003. Under FIN 44, the
shares underlying the notes were subject to variable accounting but did not
result in any material change in value during any period presented.
Litigation:
Various legal proceedings, claims and investigations of a nature considered
normal to its business operations are pending against the Company. The most
significant of these matters is described below.
A medical malpractice claim was filed by a former patient against the
Company's subsidiary, North Point-Pioneer, Inc. and a former clinician, alleging
sexual abuse by a former clinician that first manifested itself prior to the
Company's acquisition of the subsidiary in 1996. At trial in December 2002, a
jury returned a verdict in favor of the plaintiff in the amount of approximately
$9 million plus interest and taxable costs and attorney's fees for conduct. The
clinician declared bankruptcy and was not a party to the proceeding. After
numerous successful motions by the Company to reduce the amount of the verdict,
a judgment in the amount of $3,079,741 was entered on October 24, 2003.
The Company's subsidiary, North Point-Pioneer, Inc., is covered by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company, which is insolvent and is being administered by the State of New York.
Representatives of Frontier's receiver acknowledged to the Company, Frontier's
obligations under the policy and the Company has recovered a small portion of
the legal fees expended to date on this matter.
In April 2004, the Company successfully resolved this medical malpractice
lawsuit. As a result of the settlement, the Company made payment of
approximately $463,000, which compares to the previous judgment of approximately
$3 million. The Company has not released other parties, including an insurance
company. Payments made by insurance and other related parties, if collected,
could significantly reduce the Company's financial burden below the $463,000
payment.
The financial impact of this settlement and related legal fees is reflected
in the operating results of the year ended June 30, 2004. The Company will
continue to seek reimbursement from all sources for amounts expended on this
case.
In fiscal 2004 the State of Nebraska asked the Company to provide the
history of payments received from the State of Nebraska and the payments made to
a consultant in Nebraska for his work on the smoking cessation contract. In the
fourth quarter of fiscal 2004, the Company became aware that the State and the
Federal governments are investigating the consultant. The Company is cooperating
fully with the investigating agencies on this matter and to date has expended
approximately $120,000 in legal fees.
Contingent Notes Payable:
In conjunction with the acquisition of Pivotal Research Centers, LLC (Note
L), the Company signed three notes, with face amounts of $1,000,000, $500,000
and $1,000,000. The ultimate amount payable under these notes is based on the
future earnings of the acquired entity. Since all but $200,000 is contingent on
future earnings only $200,000 less imputed interest has been recorded as a
liability as of June 30, 2004 as stipulated in SFAS No. 141.
F-20
- 48 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE H - STOCK AND STOCK PLANS
Common Stock
The Company has authorized two classes of common stock, the Class A common
stock and the Class B common stock. Subject to preferential rights in favor of
the holders of the Preferred Stock, the holders of the common stock are entitled
to dividends when, as and if declared by the Company's Board of Directors.
Holders of the Class A common stock and the Class B common stock are entitled to
share equally in such dividends, except that stock dividends (which shall be at
the same rate) shall be payable only in Class A common stock to holders of Class
A common stock and only in Class B common stock to holders of Class B common
stock.
Class A Common Stock
The Class A common stock is entitled to one vote per share with respect to
all matters on which shareholders are entitled to vote, except as otherwise
required by law and except that the holders of the Class A common stock are
entitled to elect two members to the Company's Board of Directors.
The Class A common stock is non-redeemable and non-convertible and has no
pre-emptive rights. The shares of Class A common stock offered hereby and the
shares issued on the exercise of the warrants will be fully paid and
non-assessable.
Class B Common Stock
The Class B common stock is entitled to five votes per share with respect
to all matters on which shareholders are entitled to vote, except as otherwise
required by law and except that the holders of the Class A common stock are
entitled to elect two members to the Company's Board of Directors. The holders
of the Class B common stock are entitled to elect all of the remaining members
of the Board of Directors.
The Class B common stock is non-redeemable and has no pre-emptive rights.
Each share of Class B common stock is convertible, at the option of its
holder, into a share of Class A common stock. In addition, each share of Class B
common stock is automatically convertible into one fully-paid and non-assessable
share of Class A common stock (i) upon its sale, gift or transfer to a person
who is not an affiliate of the initial holder thereof or (ii) if transferred to
such an affiliate, upon its subsequent sale, gift or other transfer to a person
who is not an affiliate of the initial holder. Shares of Class B common stock
that are converted into Class A common Stock will be retired and cancelled and
shall not be reissued.
All of the outstanding shares of Class B common stock are fully paid and
nonassessable.
Preferred Stock
The Board of Directors is authorized, without further action of the
shareholders, to issue up to 1,000,000 shares in one or more classes or series
and to determine, with respect to any series so established, the preferences,
voting powers, qualifications and special or relative rights of the established
class or series, which rights may be in preference to the rights of common
stock. No shares of the Company's preferred stock are currently issued or
outstanding.
F-21
- 49 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE H - STOCK AND STOCK PLANS (CONTINUED)
Stock Plans
The Company has three stock plans: a stock option plan, an employee stock
purchase plan and a nonemployee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 1,300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
of the Board of Directors has the authority to select the optionees and
determine the terms of the options including: (i) the number of shares, (ii)
option exercise terms, (iii) the exercise or purchase price (which in the case
of an incentive stock option will not be less than the market price of the Class
A common stock as of the date of grant), (iv) type and duration of transfer or
other restrictions and (v) the time and form of payment for restricted stock
upon exercise of options.
The employee stock purchase plan provides for the purchase of Class A
common stock at 85 percent of the fair market value at specific dates, to
encourage stock ownership by all eligible employees. A maximum of 500,000 shares
may be issued under this plan.
The non-employee directors' stock option plan provides for the grant of
nonstatutory stock options automatically at the time of each annual meeting of
the Board. Through June 30, 2004, options for 145,500 shares were granted under
this plan. A maximum of 350,000 shares may be issued under this plan. Each
outside director is granted an option to purchase 10,000 shares of Class A
common stock 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.
Under the above plans, at June 30, 2004, 1,775,063 shares were available
for future grant or purchase.
The Company had the following activity in its stock option plans for fiscal
2004 and 2003:
Weighted-
Number Average
of Exercise Price
Shares Per Share
Balance - June 30, 2002 1,275,000 $0.37
Granted 297,500 $0.73
Exercised (555,000) $0.25
Expired (15,500) $0.52
____________ ________
Balance - June 30, 2003 1,002,000 $0.54
Granted 130,000 $1.17
Exercised (68,500) $0.41
Expired (118,500) $0.49
____________ ________
Balance - June 30, 2004 945,000 $0.64
============ ========
The following tables summarize information about stock options outstanding
and exercisable at June 30, 2004:
F-22
- 50 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE H - STOCK AND STOCK PLANS (CONTINUED)
Weighted-Average
Number Remaining Contractual
Exercise Outstanding Life of Options Number Exercisable
Price At June 30,2004 Outstanding (years) At June 30, 2004
_______________________________________________________________________________
$ .19 5,000 1.6 5,000
.22 8,000 2.8 8,000
.25 50,000 5.1 5,000
.30 286,500 2.7 286,500
.35 40,000 6.0 30,000
.45 33,000 2.5 24,750
.55 138,000 4.25 103,500
.69 25,000 3.5 12,500
.74 50,000 7.5 15,000
.75 150,000 3.2 77,500
.76 20,000 4.5 5,000
.81 6,000 5.5 6,000
.87 10,000 4.5 2,500
.97 15,000 4.9 3,750
1.03 6,000 4.5 6,000
1.07 10,000 4.9 2,500
1.33 50,000 8.5 12,500
1.45 25,000 4.6 6,250
2.06 6,000 3.5 6,000
3.50 6,000 2.6 6,000
6.63 5,500 1.5 5,500
_____ ________ ________ _________
$ .64 945,000 4.05 629,750
===== ======== ===== ========
The Company re-priced options to purchase 791,500 shares of class A common
stock in January 2001. During the fiscal year ended June 30, 2004, 43,500 of the
repriced options were exercised and 10,000 expired. As a result of this
modification, 50,000 of the options remaining at June 30, 2004 are subject to
variable accounting from the date of the modification as they become vested. The
compensation expense related to the vested re-priced options was approximately
$16,435 and $2,505 for the years ended June 30, 2004 and 2003, respectively.
NOTE I - CERTAIN CAPITAL TRANSACTIONS
In addition to the outstanding options under the Company's stock plans
(Note H), the Company has the following warrants outstanding at June 30, 2004:
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
_______________________________________________________________________________________________
12/31/1998 Warrants issued with convertible
debenture $9,240 value charged to
professional fees over term of
debentures 43,694 shares $ .57 per share Dec 2004
07/01/1999 Warrants issued for convertible
debentures finders fee
$5,745 value charged to professional
fees over term of debentures 17,281 shares $ .58 per share July 2004
08/01/1999 Warrants issued for convertible
debentures finders fee $4,187 value
charged to professional fees over term
of debentures 17,362 shares $ .58 per share Aug 2004
F-23
- 51 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE I - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
_______________________________________________________________________________________________
07/05/1999 Warrants for investment banker services
$12,944 value charged to professional
fees over service period 68,744 shares $ .79 per share July 2004
10/05/1999 Warrants for investment banker services
$6,042 value charged to professional
fees over service period 68,744 shares $ .79 per share Oct 2004
03/31/2000 Warrants issued for services $10,000
value charged to website development and
$1,247 charged to professional fees when
extended 16,483 shares $ .91 per share Mar 2005
05/26/2000 Warrants issued as additional interest
on debt $33,264 value charged to interest
expense 60,000 shares $1.50 per share May 2005
12/20/2000 Warrants issued for investment banker
services $1,938 value charged to
professiona fees 28,573 shares $ .15 per share Dec 2005
04/15/2001 Warrants issued for investor relations
consulting services $1,136 value charged
to professional fees 10,000 shares $ .25 per share Apr 2006
05/15/2001 Warrants issued for investor relations
consulting services $2,577 value charged
to professional fees 10,000 shares $ .25 per share May 2006
06/15/2001 Warrants issued for investor relations
consulting services $2,577 value charged
to professional fees 10,000 shares $ .25 per share June 2006
07/20/2001 Warrants issued for investor relations
consulting services $1,786 value charged
to professional fees 12,000 shared $ .35 per share July 2006
02/08/2002 Warrants issued for investor relations
consulting services $391 value charged
to professional fees 3,000 shares $ .50 per share Feb 2007
03/01/2002 Warrants issued for investor relations
consulting services $1,476 charged to
professional fees 34,874 shares $ .36 per share Mar 2007
03/01/2002 Warrants issued for investor relations
consulting services $398 charged to
professional fees 23,709 shares $ .63 per share Mar 2007
03/01/2002 Warrants issued for investor relations
consulting services $310 charged to
professional fees 3,000 shares $ .50 per share Mar 2007
04/01/2002 Warrants issued for investor relations
consulting services $310 value charged
to professional fees 3,000 shares $ .50 per share Apr 2007
05/01/2002 Warrants issued for investor relations
consulting services $790 charged to
professional fees 3,000 shares $ .50 per share May 2007
05/07/2002 Warrants issued as a finders fee in
connection with preferred stock
conversion 151,783 shares $ .45 per share May 2005
05/07/2002 Warrants issued as a finders fee in
connection with preferred stock
conversion. 50,594 shares $ .50 per share May 2005
04/01/2003 Warrants issued for consulting services
$3,185 charged to professional fees. 10,000 shares $1.00 per share April 2008
07/03/2003 Warrants issued for conslting services
$4,430 charged to professional fees 20,000 shares $ .84 per share July 2008
09/22/2003 Warrants issued for consulting services
$6,261 charged to professional fees 20,000 shares $ .90 per share Sept 2008
10/20/2003 Warrants issued for invester relations
consulting services $6,842 charged to
professional fees 30,000 shares $ .86 per share Oct 2006
10/20/2003 Warrants issued for invester relations
consulting services $6,578 charged to
professional fees 30,000 shares $ .84 per share Oct 2006
03/02/2004 Warrants issued in a private placement
of class A common stock 114,431 shares $1.10 per share Mar 2007
04/29/2004 Warrants issued in a private placement
of class A common stock 479,549 shares $1.10 per share Apr 2007
04/30/2004 Warrants issued as a finders fee in
connection with the acquisition of
Pivotal, $51,307 recorded as
acquisition costs. 200,000 shares $1.24 per share Apr 2007
Warrants issued for services or in connection with debt are valued at fair
value at grant date using the Black-Scholes pricing model and charged to
operations consistent with the underlying reason the warrants were issued.
Charges to operations in connection with these warrants were $25,358 and $3,185
in fiscal 2004 and 2003, respectively. These warrants were all fully vested at
grant date.
F-24
- 52 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE I- CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Under existing dilution agreements with other stockholders, the issuance of
common stock under agreements other than the employee stock purchase and option
plans will increase the number of shares issuable and decrease the exercise
price of certain of the above warrant agreements based on the difference between
the then current market price and the price at which the new common stock is
being issued. The dilutive effects of transactions through June 30, 2004 are
reflected in the table above. The value of the additional shares issuable as a
result of these dilution provisions was not material.
NOTE J - BUSINESS SEGMENT INFORMATION
The Company's behavioral health treatment services have similar economic
characteristics, services, patients and clients. Accordingly, all behavioral
health treatment services are reported on an aggregate basis under one segment.
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:
- 53 -
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
_______________________________________________________________________________
For the Year ended
June 30, 2004
Revenues-external
customers $22,418,355 $1,246,013 $2,984,477 $ -- $ -- $26,648,845
Revenues - intersegment 197,780 -- 4,140 3,234,840 (3,436,760) --
Segment net income
(loss) 1,822,642 (68,870) 706,817 (2,717,592) -- (257,003)
Total assets 7,799,709 3,620,676 283,666 1,607,518 -- 13,311,569
Capital expenditures 126,848 2,208 5,973 58,156 -- 193,185
Depreciation &
amortization 175,810 28,325 4,371 113,329 -- 321,835
Goodwill 969,099 447,020 -- -- -- 1,416,119
Interest expense 378,163 2,307 -- 151,094 -- 531,564
Income tax expense 10,000 1,294 -- -- -- 11,294
For the Year ended
June 30, 2003
Revenues-external
customers $21,243,177 $940,772 $1,649,374 $ -- $ -- $23,833,323
Revenues - intersegment 286,200 -- -- 2,962,224 (3,248,424) --
Segment net income
(loss) 2,962,177 90,153 334,772 (2,409,360) 977,742
Total assets 7,534,816 180,373 -- 1,696,534 -- 9,411,723
Capital expenditures 210,497 3,517 12,086 -- 226,100
Depreciation &
amortization 146,553 4,802 2,464 44,876 -- 198,695
Goodwill 969,099 -- -- -- -- 969,099
Interest expense 402,260 818 -- 139,191 -- 542,269
Income tax expense 54,234 -- -- -- -- 54,234
F-25
- 54 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE K - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
June 30
2004 2003
_______________________________
Accrued professional fees $ 468,035 $ 683,277
Accrued operating expenses 203,068 263,294
Income tax payable 11,464 11,956
____________ __________
Total $ 682,567 $ 958,527
============ ==========
NOTE L - ACQUISITIONS
On April 30, 2004, the Company acquired Phoenix-based Pivotal Research
Centers, LLC, ("Pivotal") significantly expanding the Company's clinical
research capabilities and geographic presence. As part of the acquisition, one
of the former owners and the CEO signed three year employment and non-compete
agreements.
Pivotal performs all phases of clinical research for Phase I-IV drugs under
development through two dedicated research sites. Pivotal currently has
approximately 22 enrolling studies and an additional 31 ongoing studies with
approximately 75-80 percent of Pivotal's research activity in central nervous
system (CNS) research.
The Company paid $1.5 million in cash and $500,000 in PHC, Inc. Class A
common stock based on the closing market price of $1.17. The value of the class
A common stock was determined in accordance with EITF 99- 12, "Determination of
the Measurement Date for the Market Price of Acquirer Securities Issued in a
Purchase Business Combination." Additionally, the Company agreed to three
performance-based notes which are staged during the next five years based on
future profitability and secured by all the assets of Pivotal as well as by PHC,
Inc.'s ownership interest in Pivotal.
Note A is a secured promissory note with a face value of $1,000,000, with
an annual interest rate of 6%, a maturity date of December 31, 2008 and payments
due in quarterly installments beginning January 2005. The outstanding principal
will be adjusted in the first and second years of the note based on adjusted
EBITDA as defined in the agreement of $780,000. Where adjusted EBITDA of greater
then $780,000 for each period increases the note value by the difference and
adjusted EBITDA of less than $780,000 will decrease the note value by the
difference. Quarterly payments are then made based on the adjusted value of the
notes.
Note B is a secured promissory note with a face value of $500,000, with an
annual interest rate of 6%, a maturity date of December 31, 2008 and payments
due in quarterly installments beginning January 2007. The outstanding principal
will be adjusted on February 1, 2006 based on annual adjusted EBITDA as defined
in the agreement of $780,000 for the adjustment period of January 1, 2005
through December 31, 2006. Where adjusted EBITDA greater then $780,000 for the
adjustment period increases the note value by the difference and adjusted EBITDA
of less than $780,000 for the adjustment period will decrease the note value by
the difference. Quarterly payments are then made based on the adjusted value of
the notes.
Note C is a secured promissory note with a face value of $1,000,000, with
an annual interest rate of 6%, 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, of 2004 and each year thereafter multiplied
by .35. In addition this 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 then the $1,000,000 face value of the note.
F-26
- 55 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
NOTE L - ACQUISITIONS (CONTINUED)
The purchase price was allocated as follows:
Furniture and equipment $ 85,000
Customer relationships 2,400,000
Goodwill 447,020
Accrued Expenses 40,000
______________
$2,892,020
The fair value assigned to customer relationships was based upon the results of
an independent appraisal.
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.
Since all but $200,000 of these notes is contingent on future earnings, only
$200,000, less imputed interest, has been recorded as of June 30, 2004 as
stipulated in SFAS No. 141.
Based on unaudited data, the pro forma results of operations as though the
acquisition was completed at the beginning of the periods indicated below are as
follows. Management does not believe such results are necessarily indicative of
future operations. The pro forma shares outstanding include the shares issued in
the acquisition and the private placement shares issued to fund the acquisition,
as though they were issued at the beginning of the periods shown.
Year Ended June 30,
(In thousands except
per share data)
2003 2004
___________ ___________
Revenues $ 27,774 $ 30,231
Net income 1,389 191
Basic income per common share .09 .01
Fully diluted income per common share .08 .01
NOTE M -SUBSEQUENT EVENTS
Subsequent to year end, the Company entered into an agreement to sell
526,316 shares of Preferred Stock for $1,500,000 as an alternative to the
Company's term loan refinancing should the Company be unable or unwilling to
refinance when the loan becomes due in November 2004. As consideration for the
binding obligation of the investor under this agreement the Company paid $10,000
in cash to the investor. This agreement was entered into to provide part of the
documentation required by Company's auditor's in their consideration of the
Company's ability to continue as a going concern.
F-27
- 56 -
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The preparation of this annual report on form 10-KSB did not result in any
disagreement with our accountants on accounting and financial disclosure
requirements.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified within the
SEC's Rules and Forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management was necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures to meet the
criteria referred to above. Based on the foregoing, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective.
Change in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluations.
- 57 -
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company as of June 30, 2004 are as
follows:
Name Age Position
______________________________________________________________________________
Bruce A. Shear 49 Director, President and Chief Executive Officer
Robert H. Boswell 56 Senior Vice President
Paula C. Wurts 55 Controller, Treasurer and Assistant Clerk
Gerald M. Perlow, M.D. 66 Director and Clerk
Donald E. Robar (1)(2) 67 Director
Howard W. Phillips 74 Director
William F. Grieco (1)(2) 50 Director
David E. Dangerfield (1) 63 Director
(1) Member of Audit Committee. (2) Member of Compensation Committee.
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 Compensation Committee reviews and sets executive compensation.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. 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 and compensation committee of Vaso Active
Pharmaceuticals, Inc., a public company marketing and selling over-the-counter
pharmaceutical products that incorporate Vaso's transdermal drug delivery
technology.
ROBERT H. BOSWELL has served as the Senior Vice President of the Company
since February 1999 and as executive vice president of the Company from 1992 to
1999. From 1989 until the spring of 1994, Mr. Boswell served as the
Administrator of the Company's Highland Ridge Hospital facility where he is
based. Mr. Boswell is principally involved with the Company's substance abuse
facilities. From 1981 until 1989, he served as the Associate Administrator at
the Prevention Education Outpatient Treatment Program--the Cottage Program,
International. Mr. Boswell graduated from Fresno State University in 1975 and
from 1976 until 1978 attended Rice University's doctoral program in philosophy.
Mr. Boswell is a Board Member of the National Foundation for Responsible Gaming
and the Chair for the National Center for Responsible Gaming.
PAULA C. WURTS has served as the Controller of the Company since 1989, as
Assistant Clerk since January 1996, 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.
- 58 -
GERALD M. PERLOW, M.D. has served as a Director of the Company since May
1993 and as Clerk since February 1996. Dr. Perlow is a retired cardiologist who
practiced medicine in Lynn, Massachusetts, and has been Associate Clinical
Professor of Cardiology at the Tufts University School of Medicine since 1972.
Dr. Perlow is a Diplomat of the National Board of Medical Examiners and the
American Board of Internal Medicine (with a subspecialty in cardiovascular
disease) and a Fellow of the American Heart Association, the American College of
Cardiology and the American College of Physicians. From 1987 to 1990, Dr. Perlow
served as the Director, Division of Cardiology, at AtlantiCare Medical Center in
Lynn, Massachusetts. Dr. Perlow served as a consultant to Wellplace.com,
formerly Behavioralhealthonline.com, in fiscal year 2000 and has been a
contributing journalist to Wellplace.com since 1999. Dr. Perlow received a B.A.
from Harvard College in 1959 and an M.D. from Tufts University School of
Medicine in 1963.
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. from the University of
Massachusetts in 1978, an M.A. 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 27,
1996 and has been employed by the Company as a public relations specialist since
August 1, 1995. From 1982 until October 31, 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
18, 1997. Mr. Grieco has been a Managing Director of Arcadia Strategies, LLC, a
legal and business consulting organization servicing science and technology
companies, since 1999. 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 BS from Boston College in 1975, an MS in Health Policy and
Management from Harvard University in 1978 and a JD from Boston College Law
School in 1981.
DAVID E. DANGERFIELD has served as a Director of the Company since December
2001. Since 1977, he has served as the Chief Executive Officer for Valley Mental
Health in Salt Lake City, Utah. Since 1974, Mr. Dangerfield has been a partner
for Professional Training Associates (PTA). In 1989, he became a consultant
across the nation for managed mental health care and the enhancement of mental
health delivery services. David Dangerfield serves as a Board member of the
Mental Health Risk Retention Group and Utah Alliance for the Mentally Ill, an
advocacy organization of family and friends of the mentally ill, which are
privately held corporations, and the Utah Hospital Association, which is a state
organization. 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.
Compliance with Section 16(A) of the Exchange Act Based on a review of
Forms 3 and 4 furnished to the Company, all directors, officers and beneficial
owners of more than ten percent of any class of equity securities of the Company
registered pursuant to Section 12 of the Securities Exchange Act filed on a
timely basis reports required by Section 16(a) of the Exchange Act during the
most recent fiscal year.
ITEM 10. Executive Compensation
Employment agreements
The Company has not entered into any employment agreements with its
executive officers. The Company owns and is the beneficiary on a $1,000,000 key
man life insurance policy on the life of Bruce A. Shear.
- 59 -
Executive Compensation
Three executive officers of the Company received compensation in the 2004
fiscal year which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 2004, 2003 and 2002:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
___________________ _____________
(a) (b) (c) (d) (e) (g) (i)
Securities
Name and Other Annual Underlying All Other
Principal Year Salary Bonus Compensation Options/SARs Compensation
Position ($) ($) ($) (#) ($)
___________________________________________________________________________________________
Bruce A. Shear 2004 $345,416 $25,147 $15,395 (1) -- $ --
President and Chief 2003 $306,771 $25,000 $15,730 (2) 40,000 $11,200
Executive Officer 2002 $310,000 $37,500 $71,390 (3) 20,000 $ 3,400
Robert H. Boswell 2004 $155,417 $32,794 $15,582 (4) -- $ --
Senior Vice President 2003 $152,937 $40,147 $12,820 (5) 25,000 $ 7,000
2002 $137,000 $ 7,000 $67,301 (6) 25,000 $ 3,725
Paula C. Wurts 2004 $129,125 $17,647 $13,901 (7) -- $ --
Controller, Treasurer 2003 $116,981 $22,000 $11,270 (8) 25,000 $ 7,000
And Assistant Clerk 2002 $111,800 $ 2,000 $36,825 (9) 25,000 $ 3,725
(1) This amount represents $5,063 contributed by the Company to the Company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $5,532 in premiums
paid by the Company with respect to life and disability insurance for the
benefit of Mr. Shear, $912 in club membership dues paid by the Company for
the benefit of Mr. Shear, $3,888 personal use of a Company car held by Mr.
Shear.
(2) This amount represents $4,057 contributed by the Company to the Company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $4,768 in premiums
paid by the Company with respect to life insurance for the benefit of Mr.
Shear, $1,387 in premiums paid by the Company with respect to disability
insurance for the benefit of Mr. Shear, $2,009 in club membership dues paid
by the Company for the benefit of Mr. Shear and $3,509 personal use of a
Company car held by Mr. Shear.
(3) This amount represents $3,983 contributed by the Company to the Company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $4,768 in premiums
paid by the Company with respect to life insurance for the benefit of Mr.
Shear, $336 in club membership dues paid by the Company for the benefit of
Mr. Shear, $2,678 personal use of a Company car held by Mr. Shear and
$59,625 based on the intrinsic value of the repricing of options held by
Mr. Shear.
(4) This amount represents a $6,000 automobile allowance, $4,650 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $428 in membership dues paid by the Company for the benefit of
Mr. Boswell, $699 in benefit derived from the purchase of shares through
the employee stock purchase plan, and $3,805 based on the intrinsic value
of the repricing of options held by Mr. Boswell.
- 60 -
(5) This amount represents a $6,000 automobile allowance, $3,212 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $640 in membership dues paid by the Company for the benefit of
Mr. Boswell, $617 in benefit derived from the purchase of shares through
the employee stock purchase plan, $401 in club membership dues paid by the
Company for the benefit of Mr. Boswell and $1,950 based on the intrinsic
value of the repricing of options held by Mr. Boswell
(6) This amount represents a $6,000 automobile allowance, $2,323 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $640 in membership dues paid by the Company for the benefit of
Mr. Boswell, $363 in benefit derived from the purchase of shares through
the employee stock purchase plan, and $57,975 based on the intrinsic value
of the repricing of options held by Mr. Boswell.
(7) This amount represents a $4,800 automobile allowance, $5,063 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $233 in benefit derived from the purchase of shares through the
employee stock purchase plan and $3,805 based on the intrinsic value of the
repricing of options held by Ms. Wurts.
(8) This amount represents a $4,800 automobile allowance, $4,211 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $309 in benefit derived from the purchase of shares through the
employee stock purchase plan and $1,950 based on the intrinsic value of the
repricing of options held by Ms. Wurts.
(9) This amount represents a $4,800 automobile allowance, $4,319 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $181 in benefit derived from the purchase of shares through the
employee stock purchase plan and $27,525 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 $5,000 stipend per year and $1,250 for each Board meeting they attend.
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").
- 61 -
COMPENSATION COMMITTEE
During fiscal 2004 the Compensation Committee consisted of Mr. Donald Robar
and Mr. William Grieco. The Compensation Committee met twice during fiscal 2004.
Mr. Shear does not participate in discussions concerning, or vote to approve,
his salary. As required by the SEC, all members of the compensation committee
are independent.
AUDIT COMMITTEE
During fiscal 2004 the Audit Committee consisted of Dr. David Dangerfield,
Mr. Donald Robar and Mr. William Grieco. As required by the SEC, all members of
the committee are independent and Dr. Dangerfield serves as the chairmen and is
the financial expert on the committee. The Audit Committee met five times during
fiscal 2004. Two committee members attended all of the meetings and one
committee member missed two of the meetings.
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
709,000 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 and
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, 2004, the Company issued additional
options to purchase 90,000 shares of Class A Common Stock under the 2003 Stock
Plan at a price per share ranging from $.79 to $1.45. 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.
- 62 -
A total of 68,500 options were exercised in a cashless exercise during the
fiscal year ended June 30, 2004, of which 43,500 options were exercised at $.25
and 25,000 were exercised at $.70.
Employee Stock Purchase Plan
On October 18, 1995, the Board of Directors voted to provide employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to participate in an Employee Stock Purchase Plan (the "Plan"), which
became effective February 1, 1996. The price per share shall be the lesser of
85% of the average of the bid and ask price on the first day of the plan period
or the last day of the plan period. The plan was amended on December 19, 2001
and December 19, 2002 to allow for a total of 500,000 shares of class A common
stock to be issued under the plan.
As of June 30, 2004 a total of 139,437 shares of class A common stock have
been issued under the plan. Eleven employees are participating in the current
offering period under the plan, which began on February 1, 2004 and will end on
January 31, 2005.
Non-Employee Director Stock Plan
The Board of Directors adopted the Company's Non-Employee Director Stock
Plan (the "Director Plan") on October 18, 1995. The Stockholders of the Company
approved the plan on December 15, 1995 and amended the plan on December 26,
1997, December 19, 2001 and December 19, 2002. Non-qualified options to purchase
a total of 350,000 shares of Class A Common Stock are available for issuance
under the Director Plan.
The Board of Directors or a committee of the Board administers the Director
Plan. Under the Director Plan, each director of the Company who was a director
at the time of adoption of the Director Plan and who was not a current or former
employee of the Company received an option to purchase that number of shares of
Class A Common Stock as equals 500 multiplied by the years of service of such
director as of the date of the grant. At the first meeting of the Board of
Directors subsequent to each annual meeting of stockholders, each non-employee
director is granted under the Director Plan an option to purchase 2,000 shares
of the Class A Common Stock of the Company. The plan was amended December 19,
2001 to increase the number of options issued each year from 2,000 per director
to 10,000 per director. The option exercise price is the fair market value of
the shares of the Company's Class A Common Stock on the date of grant. The
options are non-transferable and become exercisable as follows: 25% immediately
and 25% on each of the first, second and third anniversaries of the grant date.
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.
On February 18, 1997, the Company issued options to purchase 6,000 shares
of Class A Common Stock under the Director Plan at an exercise price of $3.50
per share. On January 22, 1998, the Company issued options to purchase 6,000
shares of Class A Common Stock under the Director Plan at an exercise price of
$2.06. On February 23, 1999, the Company issued options to purchase 6,000 shares
of Class A Common Stock under the Director Plan at an exercise price of $1.03.
On December 28, 1999, the Company issued options to purchase 6,000 shares of
- 63 -
class A common stock under the Director Plan at an exercise price of $.81. On
January 11, 2001 the Company issued options to purchase 6,000 shares of class A
common stock under the Director Plan at an exercise price of $.22. On December
19, 2001 the Company issued options to purchase 30,000 shares of class A common
stock under the Director Plan at an exercise price of $.35. On January 8, 2003
the Company issued options to purchase 40,000 shares of class A common stock
under the Director Plan at an exercise price of $.74. On January 9,2004 the
Company issued options to purchase 40,000 shares of class A common stock under
the Director Plan at an exercise price of $1.33. As of June 30, 2004, none of
the options issued had been exercised.
The following table provides information about options granted to the named
executive officers during fiscal 2004 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
(a) (b) (c) (d) (e)
% of Total
Number of Options/SARs
Securities Granted to Exercise
Underlying Employees or Base
Options/SARs in Fiscal Price Expiration
Name Granted (#) Year ($/Share) Date
_______________________________________________________________________________
Bruce A. Shear 0
Robert H. Boswell 0
Paula C. Wurts 0
All Directors and Officers
as a group (8 Persons) 50,000 38.4% $1.33 01/09/2009-01/08/2014
The following table provides information about options exercised by the
named executive officers during fiscal 2004 and the number and value of options
held at the end of fiscal 2004.
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable ($) Unexercisable
________________________________________________________________________________
Bruce A. Shear 0 $ 0 102,000/50,000 $69,870/$31,500
Robert H. Boswell 3,750 3,750 67,250/27,083 $44,723/$15,354
Paula C. Wurts 3,750 3,750 67,250/30,417 $44,723/$18,221
All Directors and
Officers as a group
(8 persons) 17,375 $16,380 510,250/235,750 $315,040/$106,245
In January 2001, all 791,500 shares underlying the then outstanding
employee stock options were repriced to $0.25, which was greater than the then
current market price, using the existing exercise durations. The computed effect
of the option repricing of $16,435 and $2,505 was charged to salaries in the
fiscal years ended June 30, 2004 and 2003, respectively.
- 64 -
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of shares of the Company's Class A Common Stock and Class B Common Stock (the
only classes of common stock of the Company currently outstanding) as of July
30, 2004 by each person known by the Company to beneficially own more than 5% of
any class of the Company's voting securities, each director of the Company, each
of the named executive officers as defined in 17 CFR 228.402(a)(2) and all
directors and officers of the Company as a group. Unless otherwise indicated
below, to the knowledge of the Company, all persons listed below have sole
voting and investment power with respect to their shares of Common Stock, except
to the extent authority is shared by spouses under applicable law. In preparing
the following table, the Company has relied on the information furnished by the
persons listed below:
Name and Address Amount and Nature Percent of
Title of Class of Beneficial Owner of Beneficial Owner (12) Class
_______________________________________________________________________________
Class A Common Stock Bruce A. Shear 518,995(1) 3.1%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Robert H. Boswell 188,802(2) 1.1%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Paula C. Wurts 135,988(3) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 138,625(4) *
P. O. Box 2047
East Hampton, NY 11937
Gerald M. Perlow 106,250(5) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 105,852(6) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
William F. Grieco 100,875(7) *
115 Marlborough Street
Boston, MA 02116
David E. Dangerfield 17,500(8) *
5965 South 900 East
Salt Lake City, UT 84121
All Directors and Officers
as a Group (8 persons) 1,312,887(9) 7.7%
- 65 -
Name and Address Amount and Nature Percent of
Title of Class of Beneficial Owner of Beneficial Owner (12) Class
_______________________________________________________________________________
Class A Common Stock Marathon Capital Mgmt, LLC 853,900 5.1%
(continued) P. O. Box 771
Hunt Valley, MD 21030
Peter S. Lynch 668,681 4.0%
82 Devonshire Street, S8A
Boston, MA 02109
Class B Common Stock
(10) Bruce A. Shear 721,259(11) 92.8%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and Officers 721,259 92.8%
as a Group (8 persons)
* Less than 1%
1. Includes 102,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.75 per share.
2. Includes 67,250 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options at an exercise price range of $.25 to
$.75 per share.
3. Includes 67,250 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.75 per share.
4. Includes 73,375 shares issuable pursuant to currently exercisable stock
options having an exercise price range of $.22 to $1.33 per share.
5. Includes 60,125 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $.22 to $6.63 per share.
6. Includes 63,625 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $.22 to $6.63 per share.
7. Includes 59,125 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.22
to $3.50 per share.
8. Includes 17,500 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $
.55 to $1.33 per share.
9. Includes an aggregate of 510,250 shares issuable pursuant to currently
exercisable stock options. Of those options, 5,500 have an exercise price
of $6.63 per share, 6,000 have an exercise price of $3.50 per share, 6,000
have an exercise price of $2.06 per share, 12,500 have an exercise price of
$1.33 per share, 6,000 have an exercise price of $1.03 per share, 6,000
have an exercise price of $.81 per share, 70,000 have an exercise price of
$.75 per share, 15,000 have an exercise price of $.74 per share, 103,500
have an exercise price of $.55 per share, 11,250 have an exercise price of
$.45 per share, 30,000 have an exercise price of $.35 per share, 230,500
have an exercise price of $.30 per share and 8,000 have an exercise price
of $.22 per share.
10. Each share of class B common stock is convertible into one share of class A
common stock automatically upon any sale or transfer or at any time at the
option of the holder.
11. Includes 56,369 shares of class B common stock pledged to Steven J. Shear
of 2 Addison Avenue, Lynn, Massachusetts 01902, Bruce A. Shear's brother,
to secure the purchase price obligation of Bruce A. Shear in connection
with his purchase of his brother's stock in the Company in December 1988.
In the absence of any default under this obligation, Bruce A. Shear retains
full voting power with respect to these shares.
- 66 -
12. "Amount and Nature of Beneficial Ownership". Each share of Class A Common
Stock is entitled to one vote per share and each share of Class B Common
Stock is entitled to five votes per share on all matters on which
stockholders may vote (except that the holders of the Class A Common Stock
are entitled to elect two members of the Company's Board of Directors and
holders of the Class B Common Stock are entitled to elect all the remaining
members of the Company's Board of Directors).
By virtue of the fact that Mr. Shear owns 92% of the class B shares and the
class B shareholders have the right to elect all of the directors except the two
directors elected by the class A shareholders, Mr. Shear has the right to elect
the majority of the members of the Board of directors and may be deemed to be in
control of the Company.
Based on the number of shares listed under the column headed "Amount and
Nature of Beneficial Ownership," the following persons or groups held the
following percentages of voting rights for all shares of common stock combined
as of July 30, 2004:
Bruce A. Shear .......................................20.08%
All Directors and Officers as a Group
(8 persons).........................................23.48%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Related Party Indebtedness
For approximately the last fifteen years, Bruce A. Shear, a director and
the President and Chief Executive Officer of the Company, and persons affiliated
and associated with him have made a series of unsecured loans to the Company and
its subsidiaries to enable them to meet ongoing financial commitments. The
borrowings generally were entered into when the Company did not have financing
available from outside sources and, in the opinion of the Company, were entered
into at market rates given the financial condition of the Company and the risks
of repayment at the time the loans were made.
During the period ended June 30, 2004, the Company paid Mr. Shear and
affiliates approximately $62,515 in principal and accrued interest under the
related party notes. The remaining balance of this debt, $52,000, was converted
into 50,000 shares of class B common stock at the then current market price for
class A common stock. As of June 30, 2004 all outstanding related party debt has
been eliminated.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit No. Description
3.1 Restated Articles of Organization of the Registrant, as amended.
(Filed as exhibit 3.1 to the Company's Registration Statement on March
2, 1994. Commission file number 333-71418).
3.1.1 Articles of Amendment filed with the Commonwealth of Massachusetts.
(Filed with the 10-QSB dated May 1997. Commission file number
0-22916).
3.1.2 Restated Articles of Organization of the Registrant, as amended.
(Filed as exhibit 3.1.2 to the Company's report on Form 10-QSB dated
May 14, 2001. Commission file number 0-22916).
3.2 By-laws of the Registrant, as amended. (Filed as exhibit 3.2 to the
Company's Post-Effective Amendment No. 2 on Form S-3 to Registration
Statement on Form SB-2 under the Securities Act of 1933 dated November
13, 1995. Commission file number 333-71418).
4.1 Warrant Guaranty Agreement for Common Stock Purchase Warrants issuable
by PHC, Inc. dated August 14, 1998 for Warrants No. 2 and No. 3.
(Filed as exhibit 4.19 to the Company's report on Form 10-KSB, filed
with the Securities and Exchange Commission on October 14, 1997.
Commission file number 0-22916).
4.2 12% Convertible Debenture by and between PHC, Inc., and Dean & Co.,
dated December 3, 1998 in the amount of $500,000. (Filed as exhibit
4.20 to the Company's report on Form 10-QSB dated February 12, 1999.
Commission file number 0-22916).
4.3 Securities Purchase Agreement for 12% Convertible Debenture by and
between PHC, Inc. and Dean & Co., a Wisconsin nominee partnership for
Common Stock. (Filed as exhibit 4.21 to the Company's report on Form
10-QSB dated February 12, 1999. Commission file number 0-22916).
4.4 Warrant Agreement to purchase up to 25,000 shares of Class A Common
Stock by and between PHC, Inc., and Dean & Co., dated December 3,
1998. (Filed as exhibit 4.22 to the Company's report on Form 10-QSB
dated February 12, 1999. Commission file number 0-22916).
4.5 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares of Class A Common Stock dated July 1, 1999. (Filed as
exhibit 4.29 to the Company's report on Form 10-KSB dated October 13,
1999. Commission file number 0-22916).
4.6 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares of Class A Common Stock dated August 1, 1999. (Filed as
exhibit 4.30 to the Company's report on Form 10-KSB dated October 13,
1999. Commission file number 0-22916).
4.7 Warrant to purchase up to 37,500 shares of Class A Common Stock by and
between PHC, Inc., and National Securities Corporation dated April 5,
1999. (Filed as exhibit 4.31 to the Company's report on Form 10-KSB
dated October 13, 1999. Commission file number 0-22916).
4.8 Warrant to purchase up to 37,500 shares of Class A Common Stock by and
between PHC, Inc., and National Securities Corporation dated July 5,
1999. (Filed as exhibit 4.32 to the Company's report on Form 10-KSB
dated October 13, 1999. Commission file number 0-22916).
4.9 Common Stock Purchase Warrant by and between PHC, Inc. and Heller
Healthcare Finance, Inc. for 60,000 shares of Class A Common Stock.
(Filed as exhibit 4.37 to the Company's report on Form 10-KSB, filed
with the Securities and Exchange Commission on September 29, 2000.
Commission file number 0-22916).
4.10 Equity Purchase Warrant to purchase 1% equity in Behavioral Health
Online by and between PHC, Inc., and Heller Healthcare Finance dated
March 16, 1998. (Filed as exhibit 4.38 to the Company's quarterly
report on Form 10-QSB, filed with the Securities and Exchange
Commission on November 14, 2000. Commission file number 0-22916).
4.11 Warrant Agreement issued to Marshall Sterman to purchase 10,000 Class
A Common shares dated April 15, 2001. (Filed as exhibit 4.41 to the
Company's report on Form 10-QSB dated May 14, 2001. Commission file
number 0-22916).
4.12 Equity Purchase Warrant to purchase 1% equity in Behavioral Health
Online by and between PHC, Inc., and Heller Healthcare Finance dated
December 18, 2000. (Filed as exhibit 4.36 to the Company's report on
Form 10-KSB dated September 25, 2001. Commission file number 0-22916).
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Exhibit No. Description
4.13 Form of Subscription Agreement and Warrant. (Filed as exhibit 4.22 to
the Company's report on Form 8-K filed with th Securities and Exchange
commission on May 13, 2004. Commission file number 0-22916).
5.1 Opinion of Arent Fox PLLC. (Filed as exhibit 5.1 to the Company's
report on Form S-3 filed with the Securities and Exchange Commission
on July 6, 2004. Commission file number 333-117146).
10.1 Deed of Trust Note of Mount Regis Center Limited Partnership in favor
of Douglas M. Roberts, dated July 28, 1987, in the amount of $560,000,
guaranteed by PHC, Inc., with Deed of Trust executed by Mount Regis
Center, Limited Partnership of even date. (Filed as exhibit 10.33 to
Form SB-2 dated March 2, 1994. Commission file number 333-71418).
10.2 Assignment and Assumption of Limited Partnership Interest, by and
between PHC of Virginia Inc. and each assignor dated as of June 30,
1994. (Filed as exhibit 10.57 to Form 10-KSB on September 28, 1994.
Commission file number 0-22916).
10.3 Copy of Note of Bruce A. Shear in favor of Steven J. Shear, dated
December 1988, in the amount of $195,695; Pledge Agreement by and
between Bruce A. Shear and Steven J. Shear, dated December 15, 1988;
Stock Purchase Agreement by and between Steven J. Shear and Bruce A.
Shear, dated December 1, 1988. (Filed as exhibit 10.52 to the
Company's Registration Statement on Form SB-2 dated March 2, 1994.
Commission file number 333-71418).
10.4 Unconditional Guaranty of Payment and performance by and between PHC,
Inc. in favor of HCFP. (Filed as exhibit 10.112 to the Company's
quarterly report on Form 10-QSB, filed with the Securities and
Exchange Commission on February 25, 1997. Commission file number
0-22916).
10.5 Agreement between Family Independence Agency and Harbor Oaks Hospital
effective January 1, 1997. (Filed as exhibit 10.122 to the Company's
report on Form 10-KSB, with the Securities and Exchange Commission on
October 14, 1997. Commission file number 0-22916).
10.6 Master Contract by and between Family Independence Agency and Harbor
Oaks Hospital effective January 1, 1997. (Filed as exhibit 10.123 to
the Company's report on Form 10-KSB, filed with the Securities and
Exchange Commission on October 14, 1997. Commission file number
0-22916).
10.7 Financial Advisory Agreement, Indemnification Agreement and Warrant by
and between Brean Murray & Company and PHC, Inc. dated 06/01/97.
(Filed as exhibit 10.125 to the Company's report on Form 10-KSB, filed
with the Securities and Exchange Commission on October 14, 1997.
Commission file number 0-22916).
10.8 Loan and Security Agreement by and among HCFP Funding, Inc., and PHC
of Michigan, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., PHC of
Rhode Island, Inc., and Pioneer Counseling of Virginia, Inc. dated as
of February 18, 1998. (Filed as exhibit 10.139 to the Company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission
file number 333-59927).
10.9 Credit Line Deed of Trust by and between PHC of Virginia, Inc., and
HCFP Funding II, Inc. dated July 1998. (Filed as exhibit 10.140 to the
Company's Registration Statement on Form SB-2 dated July 24, 1998.
Commission file number 333-59927).
10.10 Promissory Note for $50,000 dated May 18, 1998 by and between PHC,
Inc. and Tot Care, Inc. (Filed as exhibit 10.142 to the Company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission
file number 333-59927).
10.11 Promissory Note for $50,000 dated June 9, 1998 by and between PHC,
Inc. and Tot Care, Inc. (Filed as exhibit 10.143 to the Company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission
file number 333-59927).
10.12 Amendment No. 1 to Loan and Security Agreement in the amount of
$4,000,000 by and among HCFP Funding, Inc., and PHC of Michigan, Inc.,
PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Rhode Island, Inc.,
and Pioneer Counseling of Virginia, Inc. dated as of February 18,
1998. (Filed as exhibit 10.57 to the Company's report on Form 10-KSB
dated October 13, 1998. Commission file number 0-22916).
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Exhibit No. Description
10.14 Amendment number 1 to Loan and Security Agreement dated February 17,
2000 by and between PHC of Michigan, Inc., PHC, of Utah, Inc., PHC of
Virginia, Inc., PHC of Rhode Island, Inc. and Pioneer Counseling of
Virginia, Inc. and Heller Healthcare Finance, Inc., f/k/a HCFP Funding
in the amount of $2,500,000. (Filed as exhibit 10.70 to the Company's
report on Form 10-QSB filed with the Securities and Exchange
Commission on May 11, 2000. Commission file 0-22916).
10.15 Promissory Note for $532,000 dated May 30, 2000 by and between PHC,
Inc. and Irwin J. Mansdorf, Ph.D. (Filed as exhibit 10.76 to the
Company's report on Form 10-KSB, filed with the Securities and
Exchange Commission on September 29, 2000. Commission file number
0-22916).
10.16 Promissory Note for $168,000 dated May 30, 2000 by and between PHC,
Inc. and Yakov Burstein, Ph.D. (Filed as exhibit 10.77 to the
Company's report on Form 10-KSB, filed with the Securities and
Exchange Commission on September 29, 2000. Commission file number
0-22916).
10.17 Settlement Agreement and Mutual Releases by and between PHC, Inc. and
Yakov Burstein, Ph.D. and Irwin J. Mansdorf, Ph.D. dated May 30, 2000.
(Filed as exhibit 10.78 to the Company's report on Form 10-KSB, filed
with the Securities and Exchange Commission on September 29, 2000.
Commission file number 0-22916).
10.18 Amendment number 2 to Loan and Security Agreement originally dated
February 18, 1998 by and among PHC of Utah, Inc., PHC of Virginia,
Inc. and PHC of Michigan, Inc. and Heller Healthcare Finance, Inc. in
the amount of $3,000,000 amended as of May 24, 2001. (Filed as exhibit
10.46 to the Company's report on Form 10-KSB dated September 25, 2001.
Commission file number 0-22916).
10.19 Amendment Number 3 dated December 6, 2001 to Loan and Security
Agreement dated February 18, 1998 by and between PHC of Michigan,
Inc., PHC of Utah, Inc., and PHC of Virginia, Inc. and Heller
Healthcare Finance, Inc. providing collateral for the Loan and
Security Agreement in the amount of $3,000,000. (Filed as exhibit
10.50 to the Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on February 12, 2002. Commission
file number 0-22916).
10.20 Consolidating Amended and Restated Secured Term Note in the amount of
$2,575,542 dated December 6, 2001 by and between PHC of Michigan, Inc.
and Heller Healthcare Finance, Inc. (Filed as exhibit 10.51 to the
Company's quarterly report on Form 10-QSB, filed with the Securities
and Exchange Commission on February 12, 2002. Commission file number
0-22916).
10.21 Amended and Restated Revolving Credit Note in the amount of
$3,000,000 dated December 6, 2001 by and between PHC of Michigan,
Inc., PHC of Utah, Inc. and PHC of Virginia, Inc. and Heller
Healthcare Finance, Inc. (Filed as exhibit 10.52 to the Company's
quarterly report on Form 10-QSB, filed with the Securities and
Exchange Commission on February 12, 2002. Commission file number
0-22916).
10.22 Amended and Restated Consolidated Mortgage Note in the amount of
$5,688,598 dated December 6, 2001 by and between PHC of Michigan, Inc.
and Heller Healthcare Finance, Inc. (Filed as exhibit 10.53 to the
Company's quarterly report on Form 10-QSB, filed with the Securities
and Exchange Commission on February 12, 2002. Commission file number
0-22916).
10.23 Third Amended and Restated Cross-Collateralization and Cross-Default
Agreement dated December 6, 2001 by and between PHC, Inc., PHC of
Michigan, Inc., PHC of Utah, Inc. and PHC of Virginia, Inc. and Heller
Healthcare Finance, Inc. (Filed as exhibit 10.54 to the Company's
quarterly report on Form 10-QSB, filed with the Securities and
Exchange Commission on February 12, 2002. Commission file number
0-22916).
10.24 The Company's 1993 Stock Purchase and Option Plan, as amended
December 2002. (Filed as exhibit 10.34 to the Company's report on Form
S-8 dated January 8, 2003. Commission file number 333-102402).
10.25 The Company's 1995 Non-Employee Director Stock Option Plan, as
amended December 2002. (Filed as exhibit 10.35 to the Company's report
on Form S-8 dated January 8, 2003. Commission file number 333-102402).
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Exhibit No. Description
10.26 The Company's 1995 Employee Stock Purchase Plan, as amended December
2002. (Filed as exhibit 10.36 to the Company's report on Form S-8
dated January 8, 2003. Commission file number 333-102402).
10.27 First Amended Consolidating Amended and Restated Secured Term Note by
and between PHC of Michigan, Inc. and Heller Healthcare Finance, Inc.
(Filed as exhibit 10.26 on form 10-KSB, filed with the Securities and
Exchange Commission on September 19, 2003. Commission file number
0-22916).
10.28 Membership Purchase Agreement between PHC, Inc. and Pivotal Research
Centers, LLC and its Sellers Louis C. Kirby, Carol A. Colombo and
Anthony A. Bonacci dated April 30, 2004. (Filed as exhibit 10.27 to
the Company's report on Form 8-K filed with the Securities and
Exchange Commission on May 13, 2004. Commission file number 0-22916).
10.29 Pledge Agreement entered into April 30, 2004 by and between PHC, Inc.
and Louis C. Kirby, Carol A. Colombo and Anthony A. Bonacci. (Filed as
exhibit 10.28 to the Company's report on Form 8-K filed with the
Securities and Exchange Commission on May 13, 2004. Commission file
number 0-22916).
10.30 Security Agreement entered into April 30, 2004 by and between PHC,
Inc. and Louis C. Kirby, Carol A. Colombo and Anthony A. Bonacci.
(Filed as exhibit 10.29 to the Company's report on Form 8-K filed with
the Securities and Exchange Commission on May 13, 2004. Commission
file number 0-22916).
10.31 Secured Promissory Note dated April 30, 2004 in the amount of
$1,000,000 by PHC, Inc. in favor of Louis C. Kirby, Carol A. Colombo
and Anthony A. Bonacci (Note A). (Filed as exhibit 10.30 to the
Company's report on Form 8-K filed with the Securities and Exchange
Commission on May 13, 2004. Commission file number 0-22916).
10.32 Secured Promissory Note dated April 30, 2004 in the amount of
$500,000 by PHC, Inc. in favor of Louis C. Kirby, Carol A. Colombo and
Anthony A. Bonacci (Note B). (Filed as exhibit 10.31 to the Company's
report on Form 8-K filed with the Securities and Exchange Commission
on May 13, 2004. Commission file number 0-22916).
10.33 Secured Promissory Note dated April 30, 2004 in the amount of
$1,000,000 by PHC, Inc. in favor of Louis C. Kirby, Carol A. Colombo
and Anthony A. Bonacci (Note C). (Filed as exhibit 10.32 to the
Company's report on Form 8-K filed with the Securities and Exchange
Commission on May 13, 2004. Commission file number 0-22916).
10.34 Kirby Employment and Non-Compete Agreement. (Filed as exhibit 10.33
to the Company's report on Form 8-K filed with the Securities and
Exchange Commission on May 13, 2004. Commission file number 0-22916).
10.35 Colombo Employment and Non-Compete Agreement. (Filed as exhibit 10.34
to the Company's report on Form 8-K filed with the Securities and
Exchange Commission on May 13, 2004. Commission file number 0-22916).
10.36 First Amendment to Membership Purchase Agreement and Colombo
Employment Agreement and Note C. (Filed as exhibit 10.35 the Company's
report on Form 8-K filed with the Securities and Exchange Commission
on May 13, 2004. Commission file number 0-22916).
10.37 Subscription Agreement entered into September 20, 2004 by and between
PHC, Inc. and Sandor Capital Master Fund, LP, together with the
registration rights agreement and the form of certificate of
designation. (Filed as exhibit 10.37 the Company's report on Form 8-K
filed with the Securities and Exchange Commission on September 23,
2004. Commission file number 0-22916).
* 21.1 List of Subsidiaries.
* 23.1 Consent of BDO Seidman, LLP (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.
* Indicates exhibits filed with this registration statement
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(b) REPORTS ON FORM 8-K.
The Company filed two reports on form 8-K during the quarter ended June 30,
2004. One report provided the same earnings information to the public as shown
in the Company's quarterly press release as required by Item 12 of the
instructions for form 8-K. The second report provided information regarding the
Company's acquisition of 100% membership interest in Pivotal Research Centers,
LLC. The second report was also amended during the quarter to report pro-forma
financial information for the acquisition, which was not available when the
first report was filed.
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SIGNATURES
In accordance with 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: September 24, 2004 By: /S/ BRUCE A. SHEAR
Bruce A. Shear, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, the following
persons on behalf of the registrant and in the capacities and on the dates
indicated have signed this report below.
SIGNATURE TITLE(S) DATE
/s/ BRUCE A. SHEAR President, Chief September 24, 2004
_________________________ Executive Officer and
Bruce A. Shear Director (principal
executive officer)
/s/ PAULA C. WURTS Controller and Treasurer September 24, 2004
_________________________ (principal financial
Paula C. Wurts and accounting officer)
/s/ GERALD M. PERLOW Director September 24, 2004
_________________________
Gerald M. Perlow
/s/ DONALD E. ROBAR Director September 24, 2004
_________________________
Donald E. Robar
Director September 24, 2004
_________________________
Howard Phillips
/s/ WILLIAM F. GRIECO Director September 24, 2004
_________________________
William F. Grieco
/S/ DAVID E. DANGERFIELD Director September 24, 2004
_________________________
David E. Dangerfield
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