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, 2002 [ ] 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, 2002 were $22,698,268 .
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 August 1, 2002, was $7,439,461.90. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At August 1, 2002, 12,880,916 shares of the issuer's Class A Common Stock and
726,991 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 health care company, which provides psychiatric
services primarily to individuals who have alcohol and drug dependency, related
disorders and to individuals in the gaming and transportation industries. We
operate substance abuse treatment facilities in Utah and Virginia, four
outpatient psychiatric facilities in Michigan, two outpatient psychiatric
facilities in Nevada, one outpatient psychiatric facility in Kansas and an
inpatient psychiatric facility in Michigan. We also operate a website,
Wellplace.com, which provides education, training and materials to behavioral
health professionals in addition to providing Internet support to all of our
other subsidiaries. We also provide help line services through contracts with
major railroads and the State of Nebraska. Through our newest subsidiary in
Michigan the company conducts studies of the effects of psychiatric
pharmaceuticals on a controlled population through contracts with major
manufacturers of these pharmaceuticals. Until February 2001 we also provided
management and administrative services to psychotherapy and psychological
practices in New York.
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, 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.
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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 on site and off site 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.
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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%.
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 32-bed, freestanding alcohol and drug
treatment hospital, which the company has been operating since 1984. 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
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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
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 spring of 1994, the company began to operate a crisis hotline
service under contract with a major transportation client. The hotline, Pioneer
Development Support Services, or PDS2 ("PDS2"), shown as Contract support
services on the accompanying income statement, 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, 2002. This operation is physically
located in Highland Ridge Hospital, but a staff dedicated to PDS2 provides the
services. PDS2 is currently operated by the parent entity, PHC, 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 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.
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The company offers inpatient and partial hospitalization psychiatry
services through Harbor Oaks Hospital. The company also currently operates seven
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.
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.
The psychiatric facilities treat a larger percentage of female patients than the
substance abuse facilities.
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 and it is 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 now expanded its
coverage area to include Wayne, Sanilac and Livingston Counties.
The company utilizes the Harbor Oaks facility as a mental health resource
to complement its nationally focused substance abuse treatment programs. Harbor
Oaks Hospital has a specialty program that treats substance abuse patients who
have a coexisting psychiatric disorder. This program provides an integrated
holistic approach to the treatment of individuals who have both substance abuse
and psychiatric problems. Both adults and adolescents can benefit from this
program.
On February 10, 1997, Harbor Oaks Hospital opened an 8-bed adjudicated
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 casino 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. In addition, Harmony began clinical trials in the last quarter of the
current fiscal year.
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TOTAL CONCEPT EAP - Total Concept, an outpatient clinic located in Shawnee
Mission, Kansas, provides psychiatric and substance abuse treatment to children,
adolescents and adults and manages employee assistance programs for local
businesses, gaming, railroads and managed health care companies.
NORTH POINT-PIONEER, INC. - NPP consists of four 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 four clinics are located in close proximity to the Harbor
Oaks facility, which provides more efficient integration of inpatient and
outpatient services, a larger coverage area and the ability to share personnel
which results in cost savings.
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. These studies are
conducted primarily through our facilities in Michigan, Harbor Oaks Hospital and
North Point-Pioneer with the permission and assistance of patients who are in
treatment.
Internet Operations
WELLPLACE - 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,
2002 2001
_____________________________
Inpatient
Net patient service revenues $ 14,130,471 $ 13,507,124
Net revenues per patient day (1) $ 413 $ 418
Average occupancy rate (2) 76.9% 72.0%
Total number of licensed beds
at end of period 122 122
Source of Revenues:
Private (3) 76.82% 82.0%
Government (4) 23.18% 18.0%
Partial Hospitalization
and
Outpatient
Net Revenues:*
Individual $ 4,678,493 $ 5,283,278
Contract $ 2,300,140 $ 2,297,071
Sources of revenues:
Private 98.1% 97.9%
Government 1.9% 2.1%
Other Psychiatric Services:
PDS2 (5) $ 842,345 $ 944,567
Practice Management (6) $ 0 $ 345,111
(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) 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 Nebraska.
(6) Practice Management revenue was produced through BSC-NY and PHC, Inc.
During the fiscal year ended June 30, 2001 the company closed it practice
management services as outlined in this report under "Description of
Business" and detailed in footnote A to the financial statements included
in this report.
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Business Strategy
The company's objective is to become the leading national provider of
treatment services, specializing in substance abuse and psychiatric care.
The company focuses its marketing efforts on "safety-sensitive" industries.
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.
The company employs four individuals dedicated to marketing among 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. 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
clinics complement the company's inpatient facilities. These clinics are
strategically located in Nevada, Virginia, Kansas City, 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
Pioneer Development and Support Services (PDS2) located in the Highland Ridge
facility in Salt Lake City, Utah. PDS2 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 has been successful in securing a number of national accounts
with a variety of corporations including: Boyd Gaming, Conrail, CSX, the IUE,
MCC, MGM, Station Casinos, 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.
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. 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.
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") survey and accredit the company's inpatient facilities
and the company's outpatient facilities comply with the standards of National
Commission Quality Assurance ("NCQA") although the facilities are not NCQA
certified. The company's professional staff, including physicians, social
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workers, psychologists, nurses, dietitians, therapists and counselors, must meet
the minimal 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.
Health Planning Requirements
Some of the states in which the company operates, and many of the states
where the company may consider expansion opportunities, 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 determination
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. Several states have instituted moratoria on some types of DoN's or
otherwise stated intent not to grant approvals for certain health services. Such
moratoria may adversely affect the company's ability to expand in such states,
but may also provide a barrier to entry to potential competitors.
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Licensure and Certification
State regulatory authorities must license all of the company's facilities.
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, 2002 13.36% of
revenues for Harbor Oaks were derived from Medicare programs.
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.
The Harbor Oaks facility is currently PPS-exempt. The amount of its
cost-based reimbursement may be limited by 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.
- 12 -
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
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 31, 2002 the company had 327 employees of which 4 were dedicated
to marketing, 77 (13 part time) to finance and administration and 246 (84 part
time) to patient care. All of the company's 327 employees are leased through
Inovis, which was recently purchased by Team America, a national
employee-leasing firm. The company has elected to lease its employees to provide
more favorable employee health benefits at lower cost than would be available to
the company as a single employer and to eliminate certain administrative tasks
which otherwise would be imposed on the management of the company. The agreement
provides that Inovis, now Team Inovis, will administer payroll, provide for
compliance with workers' compensation laws, including procurement of workers'
compensation insurance and administering claims, and procure and provide
designated employee benefits. The company retains the right to reject the
services of any leased employee and Inovis has the right to increase its fees at
any time upon thirty days' written notice or immediately upon any increase in
payroll taxes, workers' compensation insurance premiums or the cost of employee
benefits provided to the leased employees.
- 13 -
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. None of the company's employees are
covered by a collective bargaining agreement. The company believes that its
relationships with its employees are good.
Insurance
Each of the company's facilities maintains separate professional liability
insurance policies. Harbor Oaks, Mount Regis Center, Harmony Healthcare, Total
Concept and NPP have coverage of $1,000,000 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. Highland Ridge has limits of
$1,000,000 per claim and $6,000,000 in the aggregate. 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 that it will continue to be able to obtain adequate coverage.
- 14 -
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 17, 2004. The current annual payment
under the lease is $85,728 and increases to $88,896 in the final year. 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 first floor of a two-story hospital owned by
Valley Mental Health. The lease is for a five-year agreement, which provides for
monthly rental payments of approximately $16,360, which included housekeeping
and maintenance provided by the landlord for the first six months, and includes
changes in rental payments each year based on increases or decreases in the CPI.
In July 1999 the facility began paying approximately $6,500 each month for
housekeeping and maintenance. The lease expires December 31, 2004, and includes
an option to renew for an additional five years. The company believes that these
premises are adequate for its current and anticipated needs.
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 $406,000. 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, Total Concept, North Point Pioneer and Pioneer Pharmaceutical 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
$2,500,000 mortgage on this property. The company believes that these premises
are adequate for its current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
As a consequence of Franvale's bankruptcy and subsequent receivership, a
number of claims were asserted against the Company. In April 2002 the Bankruptcy
Court allowed the Final Report and Account of the Trustee in this matter closing
all claims relating to the bankruptcy. This resulted in the elimination of the
current liability of discontinued operations and an increase in equity of
approximately $800,000.
- 15 -
On or about May 15, 2000, the company was served with a subpoena by the
United States Attorney for the District of Massachusetts. The subpoena
requested, inter alia, patient and financial records relating to Franvale
Nursing and Rehabilitation Center for the period of 1995 through 1998. The
company has reached an agreement in principle with the government to settle all
outstanding billing issues. The final agreement is currently being drafted for
signatures. The company believes that it has adequately accrued for the
settlement of this claim in the accompanying financial statements.
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, 2002.
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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. In March 2001 the company's warrants issued with its initial public
offering expired: therefore, there is currently no market for the company's
warrants or units. 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.
HIGH LOW
2001
First Quarter $ 1.50 $ .50
Second Quarter $ .5625 $ .6250
Third Quarter $ .6094 $ .1250
Fourth Quarter $ .59 $ .19
2002
First Quarter $ .48 $ .30
Second Quarter $ .63 $ .34
Third Quarter $ .45 $ .35
Fourth Quarter $ .99 $ .37
2003
First Quarter (through August 1, 2002) $ .81 $ .56
On August 1, 2002, the last reported sale price of the Class A Common Stock
was $.65. On August 1, 2002 there were 696 holders of record of the company's
Class A Common Stock and 313 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. During
the fiscal year ended June 30, 2002 the company was precluded under capital law
from paying cash dividends, however, the company accrued dividends on preferred
stock according to the preferred stock agreement and paid all dividends in
common stock, as required, upon conversion of the preferred stock. Although
there are now no restrictions on the Company's ability to pay dividends, 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.
- 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 years ended June 30, 2002 and 2001.
It should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein. During fiscal year 2001 BSC-NY, Inc.
was closed, as part of the divestiture of unprofitable business, as outlined in
this report under "Description of Business" and detailed in footnote A to the
consolidated financial statements included in this report.
Overview
The company presently provides behavioral health care services through two
substance abuse treatment centers, a psychiatric hospital and seven 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 out patient 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., 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 78% through the consolidation of operations and elimination of
excess leased space. The company's most recent addition, Pioneer Pharmaceutical
Research, contracts with major manufacturers of psychiatric pharmaceuticals to
assist in the study of the effects of certain pharmaceuticals in the treatment
of specific mental illness.
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 companies 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 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 and the impairment of
long-lived assets, 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. 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.
Allowance for doubtful accounts:
Reserves for bad debt are maintained at a percentage of outstanding
accounts receivable based on the company's historic collection results, the age
of the receivable and other relevant information.
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.
Organization costs:
Organization costs are expensed as incurred as required by the American
Institute of Certified Public Accounts Statement of Position 98-5 "Reporting the
Costs of Start-up Activities".
Goodwill:
The excess of the purchase price over the fair market value of net assets
of an acquisition is recorded as goodwill. The company's net goodwill relates to
the treatment services segment of the company and is evaluated at least annually
for impairment.
Results of Operations
Years Ended June 30, 2002 and 2001
The company experienced a significant increase in profitability from its
ongoing operations during the fiscal year ended June 30, 2002. Total revenues
excluding BSC-NY, Inc., the practice management operation closed in the previous
fiscal year, increased 1.3% to $22,698,268 for the year ended June 30, 2002 from
$22,404,725 for the year ended June 30, 2001. The stability of the company's
core business revenues and reduced operating expenses, resulted in an increase
in income from operations of 82.7% to $1,764,274 for the year ended June 30,
2002 from $937,486 before closing expenses of the practice management operation
for the year ended June 30, 2001 and an increase in net income before dividends
of $1,148,294 to $1,083,895 for the fiscal year ended June 30, 2002 from a loss
of $64,399, excluding BSC-NY, Inc. closing costs of $5,186,306, for the fiscal
year ended June 30, 2001. The company has returned to profitability having
recorded its sixth consecutive profitable quarter from ongoing operations with
the quarter ended June 30, 2002.
- 19 -
Total net patient care revenue from all facilities, remained relatively
stable at $21,109,104 for the year ended June 30, 2002 as compared to
$21,087,473 for the year ended June 30, 2001. This stability of core business
revenues coupled with reductions in expenses resulted in increased net income.
Although patient census increased as shown in "Operating Statistics" on page 7
of this report, a change in payor mix resulted in lower net revenue per patient
day. Net inpatient care revenue from psychiatric services increased 4.6% to
$14,130,471 for the year ended June 30, 2002 from $13,507,124 for the fiscal
year ended June 30, 2001. Net partial hospitalization and outpatient care
revenue decreased 7.9% to $6,978,633 for the year ended June 30, 2002 from
$7,580,349 for the year ended June 30, 2001. This decrease is due in part to the
decrease in the number of employees covered under our contracts in the aftermath
of September 11, 2001. Revenues from Pioneer Development and Support Services
("PDS2") decreased 10.8% to $842,345 for the year ended June 30, 2002 from
$944,567 for the year ended June 30, 2001. This is due to the completion of a
large short-term contract in the fiscal year ended June 30, 2001 and the
elimination of the related revenues. All revenues reported in the accompanying
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 increased by approximately $1,028,772 due to the
increase in patient census at our inpatient facilities for the year ended June
30, 2002. Inpatient census increased by approximately 1,900 patient days, 6%,
for the year ended June 30, 2002 compared to the year ended June 30, 2001.
Direct patient care payroll and payroll related expenses increased approximately
8% to $9,762,087 for the year ended June 30, 2002 from $8,617,575 for the year
ended June 30, 2001; pharmacy costs increased approximately 9% to $351,531 for
the year ended June 30, 2002 from $322,520 for the year ended June 30, 2001;
laboratory fees increased approximately 48% to $213,973 for the year ended June
30, 2002 from $144,485 for the year ended June 30, 2001; and food expense
increased approximately 8% to $481,363 for the year ended June 30, 2002 from
$445,651 for the year ended June 30, 2001. All of these increases were a result
of increased patient census and increased acuity of patients. We also increased
our census from outside of the facilities' local areas resulting in an increase
in patient transportation expense of approximately 6% to $289,715 for the year
ended June 30, 2002 from $274,493 for the year ended June 30, 2001. Other
patient related expenses increased approximately 259% due to the increase in
patients participating in research studies through our newest subsidiary Pioneer
Pharmaceutical Research. The corresponding revenue increase was approximately
$388,000 or 109% over last year's revenues. We continue to closely monitor the
ordering of 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 decreased 78.7% to $287,556 for the year ended June 30,
2002 from $1,351,150 for the year ended June 30, 2001. This decrease is due to
the change in focus of the Internet company to internal support of the other
operating locations. Website expenses are expected to continue at this level
while the Internet company's focus remains internal.
In December 2000 the Company's Board of Directors decided to close its'
BSC-NY, Inc. practice management operations due to the deterioration of
operating results. Revenues of BSC-NY, Inc. were dependent on the success of the
professional corporation for which it provided management services. Although
the New York practice management operations reported operating income of
approximately $131,000 for the fiscal year ended June 30, 2000, adverse business
conditions resulted in a loss of approximately $399,000 for the six months ended
- 20 -
December 31, 2000 before closing expenses. These adverse operating conditions
were caused by the decline in revenues produced by the professional corporation
which had closed down its business operations. Closing expenses for the practice
management company were $5,186,306 and included $1,545,609 in goodwill
impairment, $3,401,650 in receivables due from the Professional Corporation and
$239,047 in lease termination and other expenses.
Contract expenses related to PDS2 decreased 17.6% to $704,363 for the year
ended June 30, 2002 from $855,128 for the year ended June 30, 2001. This
decrease is due to the completion of a large short-term contract and the
elimination of related expenses.
Total administrative expenses for all facilities increased 14.5% to
$8,533,571 for the year ended June 30, 2002 from $7,452,714 for the year ended
June 30, 2001. This increase in administrative expense is due to the increase in
expenses for Pioneer Pharmaceutical Research and the non-cash equity based
compensation charge of approximately $264,000.
Interest expense decreased 24.2% to $790,955 for the year ended June 30,
2002 from $1,043,030 for the year ended June 30, 2001. This decrease is due to
the refinancing of debt resulting in lower interest rates and the decrease in
prime rate, which dictates the interest rate on the majority of the company's
long-term debt.
The Company's income taxes of $15,446 and $44,450 for the years ended June
30, 2002 and June 30, 2001, respectively, are significantly below the Federal
statutory rate of 34% primarily related to the availability of net operating
loss carry-forward. Total income tax expense for fiscal 2002 and 2001 represents
state income taxes for certain subsidiaries with no available net operating loss
carry-forwards.
Bad debt expense decreased 71.2% to $716,681 for the fiscal year ended June
30, 2002 from $2,490,307 for the fiscal year ended June 30, 2001. This is due
primarily to the elimination of bad debt related to the closed practice
management company and the overall decrease in the age of outstanding accounts
receivable.
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 receivables 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.
Liquidity and Capital Resources
The company`s net cash provided by operating activities was $1,576,109 for
the year ended June 30, 2002 compared to cash used by operating activities of
$461,277 for the year ended June 30, 2001. Cash flow from operations in fiscal
2002 consists of net income of $1,083,895 plus depreciation and amortization of
$202,776, decrease in accounts receivable of $440,638 and non-cash equity based
charges of $336,745 less cash used for net changes in other operating assets and
liabilities of $487,945. Cash flow from operations would have been $156,506
higher in fiscal 2002 without the legal expenses related to the final
disposition of the Franvale bankruptcy.
- 21 -
Cash used in investing activities in fiscal 2002 consisted of $124,362 in
capital expenditures compared to $186,842 and $70,226 in capital expenditures
and website development costs, respectively in fiscal 2001.
Cash used in financing activities in fiscal 2002 primarily consisted of
$1,113,344 in debt repayments compared to $63,806 in net borrowings during
fiscal 2001. Other fiscal 2002 financing activities are summarized below.
During the fiscal years ended June 30, 2000 and 2001 the company issued 8%
series C convertible preferred stock in a private placement. As of June 30, 2002
all of this preferred stock has been converted with the issuance of
approximately 4,600,000 shares of class A common stock. Approximately 541,000
additional shares were issued in payment of unpaid accrued dividends on the
preferred stock. The company incurred costs of $198,149 in fiscal 2002, related
to the private placement of the preferred stock conversion shares.
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 decreased approximately 7%
to $5,768,419 on June 30, 2002 from $6,220,715 on June 30, 2001. This decrease
is a result of better accounts receivable management due to increased staff,
standardization of some procedures for collecting receivables and a more
aggressive collection policy. The 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 May 2001, in order to support the company's continued revenue growth,
the company increased its accounts receivable funding revolving credit agreement
with Heller Healthcare Finance, Inc. on behalf of three of its subsidiaries. The
amended agreement provides for funding of up to $3,000,000 based on outstanding
receivables. The outstanding balance on this receivables financing on June 30,
2002 was $1,468,644, reflecting a $642,942 decrease from June 30, 2001. In
November 2001 the company refinanced all of the outstanding mortgage debt with
Heller Healthcare Finance. This resulted in the consolidation of several
outstanding notes, the reduction of interest on the debt from prime plus 5% to
prime plus 3.5% and the reduction in the principal payments due each month.
Total proceeds from the refinancing transaction during fiscal 2002 amounted to
$748,912. Principal payments on long-term debt totaled $1,219,314 in fiscal 2002
compared to $639,157 in fiscal 2001.
- 22 -
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes as of June 30, 2002 are as
follows:
Year Ending Term Capital Operating
June 30, Notes Leases Leases Total
_______________________________________________________________________________
2003 $ 765,415 $ 13,556 $ 776,551 $1,555,522
2004 823,659 10,536 748,119 1,582,314
2005 1,255,415 8,126 539,195 1,802,736
2006 47,598 5,037 181,607 234,242
2007 32,307 -- 111,239 143,546
Thereafter 269,966 -- -- 269,966
_________ _________ ___________ ___________
Total minimum payments $ 3,194,360 $ 37,255 $2,356,711 $5,588,326
=========== ========= =========== ==========
In addition to the above term notes, the company also has $500,000 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
beginning December 3, 2001. The holders of the debentures have exercised the put
provision in the agreement as to 50% of the outstanding debentures. The company
will begin making monthly payments of $25,000 plus accrued interest in October
2002, which will further reduce indebtedness and interest costs. .
The company believes that, with the refinancing debt mentioned above, 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 is concentrating on
its core business and expansion of its pharmaceutical research operations
through additional contracts, which will increase revenues considerably and
provide for additional cash from operations.
The liquidation of the assets and liabilities of Franvale resulted in a
non-cash increase in equity of $804,046 in the quarter ended June 30, 2002. In
April 2002 the bankruptcy was finalized and all obligations were recorded. (see
Note A to the accompanying consolidated financial statements for additional
information.) This increase in equity, coupled with the increase in equity from
fiscal 2002 net income, contributed to a positive stockholders' equity of
$615,985 for the company as of June 30, 2002 compared to a total stockholders'
deficit of $1,281,120 as of June 30, 2001.
The company has operated ongoing operations profitably for six consecutive
quarters. The current positive business environment towards behavioral health
treatment and the new business opportunities give us confidence to foresee
continued improved results.
New accounting standards
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations ("SFAS 141") and No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after July 1, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also may
require, upon adoption of SFAS 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
- 23 -
SFAS 142 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. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidelines in SFAS 142. SFAS 142 is required to be applied
in fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized
The Company elected early adoption of SFAS 142 in the quarter ended
September 30, 2001. The Company's net goodwill of $969,099 relating to the
treatment services segment of the Company was evaluated as of July 1, 2001. The
adoption of SFAS 142 resulted in a decrease in amortization expense of $65,700
for the year ended June 30, 2002.
The impact of the adoption of SFAS 142 is summarized as follows:
For the Year Ended
June 30,
2002 2001
___________ ____________
Reported net income (loss) applicable to
common shareholders $ 985,484 $ (5,634,323)
Add back: Goodwill amortization -- 65,700
___________ ____________
Adjusted net income (loss) 985,484 (5,568,623)
Basic earnings per share:
Reported net income(loss)applicable to
common shareholders $ 0.10 $ (0.66)
Goodwill amortization -- .01
___________ ____________
Adjusted net income (loss) $ 0.10 $ (0.65)
Diluted earnings per share:
Reported net income (loss)applicable to
common shareholders $ 0.09 $ (0.66)
Goodwill amortization -- .01
___________ ____________
Adjusted net income (loss) $ 0.09 $ (0.65)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" and APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business". SFAS No.144 becomes effective for the fiscal years
beginning after December 15, 2001. The Company will adopt SFAS No. 144 in the
first quarter of fiscal 2003. The Company does not expect the adoption of SFAS
No. 144 to impact its financial position and results of operations.
- 24 -
In July 2002, the FASB issued SFAS No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
cost associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS 146 will be
applied prospectively to any exit or disposal activities initiated after
December 31, 2002. The company expects there will be no effect on its financial
results relating to the adoption of SFAS No. 146.
- 25 -
ITEM 7. FINANCIAL STATEMENTS.
PAGE
Index F-1
Report of independent certified public accountants F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of changes in stockholders'equity (deficit) F-5
Consolidated statements of cash flows F-6, F-7
Notes to consolidated financial statements F-8, F-26
F-1
- 26 -
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 2002 and 2001 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), 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 generally accepted
in the United States of America. 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, 2002 and 2001 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.
BDO Seidman, LLP
Boston, Massachusetts
August 16, 2002
F-2
- 27 -
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2002 2001
___________ __________
ASSETS (Note C)
Current assets:
Cash and cash equivalents $ 204,564 $ 43,732
Accounts receivable, net of allowance for
doubtful accounts of $2,715,760 and
$2,632,525 at June 30, 2002 and 2001,
respectively (Note A) 5,078,419 5,620,715
Prepaid expenses 66,652 63,940
Other receivables and advance 137,032 112,579
Deferred income tax asset (Note F) 766,793 613,980
___________ ___________
Total current assets 6,253,460 6,454,946
Accounts receivable, non-current 690,000 600,000
Other receivables (Note A) 92,068 104,863
Property and equipment, net (Notes A, B and D) 1,259,648 1,338,066
Deferred financing costs, net of amortization
of $122,109 and $114,109 at June 30, 2002
and 2001, respectively 12,000 20,000
Goodwill, net of accumulated amortization of $270,105
at June 30, 2002 and 2001 (Note A) 969,099 969,099
Other assets (Note A) 197,340 236,478
___________ ___________
Total assets $9,473,615 $9,723,452
=========== ==========
LIABILITIES
Current liabilities:
Accounts payable $1,283,389 $1,866,631
Notes payable - related parties (Note E) 200,000 200,000
Current maturities of long-term debt (Note C) 765,415 2,038,077
Revolving credit note (Note C) 1,468,644 2,111,586
Deferred revenue 129,258 --
Current portion of obligations under capital
leases (Note D) 11,020 16,725
Accrued payroll, payroll taxes and benefits 452,177 460,723
Accrued expenses and other liabilities 1,597,642 1,208,469
Convertible debentures (Notes C) 500,000 500,000
Net liabilities of discontinued operations
(Note I) -- 960,552
___________ ___________
Total current liabilities 6,407,545 9,362,763
Long-term debt, less current maturities (Note C) 2,428,945 1,609,649
Obligations under capital leases (Note D) 21,140 32,160
___________ ___________
Total liabilities 8,857,630 11,004,572
___________ ___________
Commitments and contingent liabilities
(Notes D, G, H, I, and J )
STOCKHOLDERS' EQUITY (DEFICIT) (Notes A, C, H,
J and K) Convertible Preferred stock, $.01 par
value; 1,000,000 shares authorized: series C, none
and 150,700 shares issued and outstanding at June 30,
2002 and 2001, respectively, stated value $10 per
share, liquidation preference of $1,507,000 at June
30, 2001 -- 1,507
- 28 -
Class A common stock, $.01 par value; 20,000,000 shares
authorized, 12,919,042 and 8,709,834 shares issued
June 30, 2002 and 2001, respectively 129,190 87,098
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 726,991 issued and outstanding June 30,
2002 and 2001, convertible into one share of Class A
common stock. 7,270 7,270
Additional paid-in capital 18,769,863 18,696,779
Treasury stock, 38,126 and 22,926 common shares at
cost at June 30, 2002 and 2001, respectively (30,988) (24,894)
Notes receivable - common stock (80,000) (80,000)
Accumulated deficit (18,179,350) (19,968,880)
___________ ___________
Total stockholders' equity (deficit) 615,985 (1,281,120)
___________ ___________
Total liabilities and stockholders'
equity (deficit) $ 9,473,615 $ 9,723,452
=========== ===========
See accompanying notes to consolidated financial statements
F-3
- 29 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended June 30,
2002 2001
___________ _____________
Revenues:
Patient care, net (Note A) $21,109,104 $ 21,087,473
Management fees -- 345,111
Pharmaceutical study 742,380 354,618
Website services 4,439 18,067
Contract support services 842,345 944,567
___________ _____________
Total revenues 22,698,268 22,749,836
___________ _____________
Operating expenses:
Patient care expenses 10,691,823 9,663,051
Cost of contract support services 704,363 855,128
Provision for doubtful accounts 716,681 2,490,307
Website expenses 287,556 1,351,150
Practice management closing expenses (Note A) -- 5,186,306
Administrative expenses 8,533,571 7,452,714
___________ _____________
Total operating expenses 20,933,994 26,998,656
___________ _____________
Income (loss) from operations 1,764,274 (4,248,820)
___________ _____________
Other income (expense):
Interest income 10,852 23,519
Interest expense (790,955) (1,043,030)
Other income, net 115,170 62,076
___________ _____________
Total other expense, net (664,933) (957,435)
___________ _____________
Income (loss) before income taxes 1,099,341 (5,206,255)
Income taxes (Notes A and F) 15,446 44,450
___________ _____________
Net income (loss) 1,083,895 (5,250,705)
Dividends (Note J) (98,411) (383,618)
___________ _____________
Income (loss) applicable to common shareholders $ 985,484 $ (5,634,323)
========== =============
Basic income (loss) per common share (Note A) $ .10 $ (.66)
___________ _____________
Basic weighted average number of shares
outstanding 10,232,286 8,518,408
========== =============
Fully diluted income (loss) per common share
(Note A) $ .09 $ (.66)
___________ _____________
Fully diluted weighted average number of
shares outstanding 11,012,861 8,518,408
========== =============
See accompanying notes to consolidated financial statements
F-4
- 30 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity (Deficit) (See Notes
A, C, H, J and K)
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
_________ __________ ________ ________ __________ _________
Balance - June 30, 2000 7,019,608 $ 70,196 726,991 $7,270 136,000 $1,360
Costs related to private
placements
Issuance of shares for earn-out
obligations 414,815 4,148
Issuance of notes receivable for
employee stock purchase
Conversion of preferred stock 1,130,646 11,308 (19,300) (193)
Common stock issued for accrued
dividends 29,514 295
Issuance of preferred stock at a
discount 34,000 340
Beneficial conversion feature of
preferred stock
Dividends on preferred stock
Shares issued for employee bonuses 92,663 925
Issuance of warrants for services
Issuance of employee stock
purchase plan shares 22,588 226
- 31 -
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
_________ __________ ________ ________ __________ _________
Purchase of treasury stock in
exchange for note
Repurchase of shares on open
market
Net loss - year ended June 30,
2001
_________ __________ ________ ________ __________ _________
Balance - June 30, 2001 8,709,834 87,098 726,991 7,270 150,700 1,507
Costs related to private
placements
Dividends on preferred stock
Issuance of shares for options
exercised 1,250 13
Repurchase of shares on open
market
Issuance of warrants for services
Shares issued for employee bonuses 71,750 717
Conversion of preferred stock 3,483,583 34,836 (150,700) (1,507)
Common stock issued for accrued
dividends 511,800 5,118
Issuance of shares for warrants
exercised 31,624 316
Issuance of employee stock
purchase plan shares 25,871 259
Issuance of shares for services
provided 83,330 833
Reclassification of net
liabilities of discontinued
operations
- 32 -
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
_________ __________ ________ ________ __________ _________
Net income-year ended June 30,
2002
____________ __________ ________ ________ __________ _________
Balance - June 30, 2002 12,919,042 $ 129,190 726,991 $ 7,270 $ 0 $ 0
=========== ========= ======= ======= ======== =========
See accompanying notes to consolidated financial statements.
- 33 -
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity (Deficit) (See Notes
A, C, H, J and K)
Notes
Additional Receivable
Paid-in Stock Treasury Stock Accumulated
Capital Purchase Shares Amount Deficit Total
____________ __________ _________ __________ ____________ ___________
Balance - June 30, 2000 $ 17,895,162 $ -- 2,776 $ (12,122) $(14,334,557) $3,627,309
Costs related to private
placements (45,102) (45,102)
Issance of shares for earn-out
obligations 293,352 297,500
Issuance of notes receivable for
employee stock purchase (90,000) (90,000)
Conversion of preferred stock (11,115) 0
Common stock issued for accrued
dividends 3,211 3,506
Issuance of preferred stock
at a discount 339,660 (90,000) 250,000
Beneficial conversion feature of
preferred stock 166,500 (166,500) 0
Dividends on preferred stock (127,118) (127,118)
Shares issued for employee
bonuses 29,741 30,666
- 34 -
Notes
Additional Receivable
Paid-in Stock Treasury Stock Accumulated
Capital Purchase Shares Amount Deficit Total
____________ __________ _________ __________ ____________ ___________
Issuance of warrants for services 14,640 14,640
Issuance of employee stock
purchase plan shares 10,730 10,956
Purchase of treasury stock in
exchange for note 10,000 11,750 (10,000) 0
Repurchase of shares on open
market 8,400 ( 2,772) ( 2,772)
Net loss - year ended June 30,
2001 (5,250,705) (5,250,705)
____________ __________ _________ __________ ____________ ___________
Balance - June 30, 2001 18,696,779 (80,000) 22,926 (24,894) (19,968,880) (1,281,120)
Costs related to private
placements (198,149) (198,149)
Dividends on preferred stock (98,411) (98,411)
Issuance of shares for options
exercised 612 625
Repurchase of shares on open
market 15,200 (6,094) (6,094)
Issuance of warrants for services 5,461 5,461
Shares issued for employee bonuses 29,780 30,497
Conversion of preferred stock (31,690) 1,639
Common stock issued for accrued
dividends 213,644 218,762
Issuance of shares for warrants
exercised 9,684 10,000
- 35 -
Notes
Additional Receivable
Paid-in Stock Treasury Stock Accumulated
Capital Purchase Shares Amount Deficit Total
____________ __________ _________ __________ ____________ ___________
Issuance of employee stock
purchase plan shares 9,575 9,834
Issuance of shares for services
provided 34,167 35,000
Reclassification of net
liabilities of
discontinued operations 804,046 804,046
Net income-year ended June
30,2002 1,083,895 1,083,895
____________ __________ _________ __________ ____________ ___________
Balance - June 30, 2002 $ 18,769,863 $ (80,000) 38,126 $ (30,988) $(18,179,350) $ 615,985
============ ========= ========== =========== ============= ===========
See accompanying notes to consolidated financial statements
F-5
- 36 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended June 30,
2002 2001
____________________________
Cash flows from operating activities:
Net income (loss) $ 1,083,895 $(5,250,705)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 202,776 262,227
Goodwill impairment -- 1,545,609
Write down of accounts receivable from
professional corporation -- 3,401,650
Compensatory stock options and stock and
warrants issued for obligations 72,745 5,306
Equity based compensation charge 264,000 40,000
Changes in operating assets and liabilities:
Accounts receivable 440,638 649,407
Prepaid expenses and other current assets (2,712) 56,541
Other assets (113,675) (22,873)
Accounts payable (462,580) 152,775
Accrued expenses and other liabilities 247,528 (377,532)
Net liabilities of discontinued
operations (156,506) (923,682)
___________ __________
Net cash provided by (used in)
operating activities 1,576,109 (461,277)
___________ __________
Cash flows from investing activities:
Acquisition of property and equipment (124,362) (186,842)
Website development costs -- (70,226)
Disposition of property, equipment and
intangibles -- 3,689
___________ __________
Net cash used in investing
activities (124,362) (253,379)
___________ __________
Cash flows from financing activities:
Borrowing (repayment) revolving debt, net (642,942) 556,437
Proceeds from borrowings 748,912 146,526
Principal payments on long-term debt (1,219,314) (639,157)
Deferred financing costs 8,000 26,554
Preferred stock dividends -- (6,767)
Issuance of preferred stock at a discount -- 250,000
Cost related to preferred stock issuance (198,149) (45,102)
Purchase of treasury stock (6,094) (2,772)
Issuance of common stock 18,672 10,956
Notes receivable for stock purchase -- (90,000)
___________ __________
Net cash provided by (used in)
financing activities (1,290,915) 206,675
___________ __________
Net increase in cash and cash equivalents 160,832 (507,981)
Cash and cash equivalents, beginning of year 43,732 551,713
activities
Cash and cash equivalents, end of year $ 204,564 $ 43,732
========= ========
Supplemental cash flow information: Cash paid
during the period for:
Interest $ 782,416 $1,040,276
Income taxes $ 25,164 $ 94,780
See accompanying notes to consolidated financial statements F-6
- 37 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Year Ended June 30,
2002 2001
____________________________
Supplemental disclosures of non-cash investing and
financing activities:
Conversion of preferred stock at stated value $ 1,507,000 $ 193,000
Issuance of stock in lieu of cash for dividends
due 218,762 3,506
Accrued dividends on series C preferred stock 98,411 120,351
Increase in equity as a result of the
reclassification of net liabilities of
discontinued operations 804,046 --
Issuance of warrants in connection with preferred
stock conversion 53,848 --
Issuance of stock for the earn-out liability -- 297,500
Beneficial conversion feature of preferred stock -- 166,500
Preferred stock discount -- 90,000
Purchase of treasury stock in exchange for note -- 10,000
See accompanying notes to consolidated financial statements
F-7
- 38 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and business segments:
PHC, Inc. and its wholly owned subsidiaries (the "company") is a national health
care company 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 provides
management, administrative and online behavioral health services. The company
primarily operates under three business segments:
1. Behavioral health treatment services, including two substance abuse
treatment facilities: Highland Ridge Hospital, located in Salt Lake City,
Utah, which has recently begun a treatment program for psychiatric
patients; and Mount Regis Center, located in Salem Virginia, and eight
psychiatric treatment locations which include Harbor Oaks Hospital, a
64-bed psychiatric hospital located in New Baltimore, Michigan and seven
outpatient behavioral health locations (two in Las Vegas, Nevada operating
as Harmony Healthcare, one in Shawnee Mission, Kansas operating as Total
Concept and four locations operating as Pioneer Counseling Center in the
Detroit, Michigan metropolitan area);
2. Behavioral health administrative services, including delivery of
management, administrative and help line services. PHC, Inc. provides
management and administrative services for its behavioral health treatment
subsidiaries. BSC-NY, Inc., a subsidiary of PHC, Inc., which closed in
fiscal 2001, provided management services on behalf of physician owned
behavioral health practices in the greater New York City metropolitan area
(see below). Pioneer Development and Support Services ("PDS2") provides
help line services primarily through contracts with major railroads and the
State of Nebraska. Pioneer Pharmaceutical Research, Inc. conducts studies
of the effects of psychiatric pharmaceuticals on a controlled population
through contracts with major manufacturers of these pharmaceuticals; and
3. Behavioral health online services, provides internet support services for
all of the other subsidiaries and their contracts and provides behavioral
health education, training and products for the behavioral health
professional, through its website Wellplace.com.
In December 2000 the Company's Board of Directors decided to close its' BSC-NY,
Inc. practice management operations due to the deterioration of operating
results. The table below summarizes the practice management closing expenses for
the year ended June 30, 2001.
Goodwill impairment $1,545,609
Write down of the receivable
due from the professional corporation 3,401,650
Lease termination and other expenses 239,047
___________
Total $5,186,306
On October 5, 1998 Quality Care Centers of Massachusetts, Inc., which operated
the company's long-term care facility, Franvale Nursing and Rehabilitation
Center, filed for protection under the Chapter 7 Bankruptcy Code. In April 2002,
the bankruptcy court accepted the report of the trustee and the bankruptcy was
closed. This event resulted in the reclassification of the net liabilities of
discontinued operations of $804,046 to stockholders' equity in the fourth
quarter of fiscal 2002.
F-8
- 39 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
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.
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.
The company periodically reviews its provisional billing rates and provides for
estimated Medicare adjustments. 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 15% and 11% of the company's total
revenue is derived from Medicare and Medicaid payors for the years ended June
30, 2002 and 2001, respectively.
Long-term assets include accounts receivable non-current, other receivables,
non-current, related party and other receivables. 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 and 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.
Charity care amounted to approximately $415,700 and $491,000 for the years ended
June 30, 2002 and June 30, 2001, respectively. Patient care revenue is stated
net of charity care in the accompanying consolidated statements of operations.
Estimates and assumptions:
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Cash equivalents:
Cash equivalents include short-term highly liquid investments with maturities of
less than three months, when purchased.
F-9
- 40 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
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 Term of lease
Other assets:
Other assets consists of deposits, deferred expenses and web development costs.
Organization Costs:
Organization costs are expensed as incurred as required by the American
Institute of Certified