U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003.
| | 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.
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2601571
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
200 Lake Street, Suite 102, Peabody MA 01960
(Address of principal executive offices) (Zip Code)
978-536-2777
(Issuer's telephone number)
- -------------------------------------------------------------------------------
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the 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______
Number of shares outstanding of each class of common equity, as of May 2, 2003:
Class A Common Stock 13,398,941
Class B Common Stock 726,991
Transitional Small Business Disclosure Format
(Check one):
Yes______ No X
1
PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31,2003 and June 30, 2002.
Condensed Consolidated Statements of Operations - Three and nine months
ended March 31, 2003 and March 31, 2002.
Condensed Consolidated Statements of Cash Flows - Nine months ended
March 31, 2003 and March 31, 2002.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on form 8-K
Signatures
2
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2003 2002
_________ ________
(Unaudited)
Current assets:
Cash and cash equivalents $ 281,848 $ 204,564
Accounts receivable, net of allowance
for bad debts of $2,522,056 at March
31, 2003 and $2,715,760 at June 30, 2002 4,260,338 4,863,601
Prepaid expenses 211,749 66,652
Third party settlement receivables 166,700 214,818
Other receivables and advances 285,114 137,032
Deferred income tax asset, net 808,607 766,793
Total current assets 6,014,356 6,253,460
Accounts receivable, noncurrent 720,000 690,000
Other receivables 110,704 92,068
Property and equipment, net 1,306,108 1,259,648
Deferred financing costs, net of amortization
of $128,109 at March 31, 2003
and $122,109 at June 30, 2002 6,000 12,000
Goodwill, net of accumulated amortization of
$270,105 at March 31, 2003 and June 30, 2002 969,099 969,099
Other assets 247,571 197,340
Total assets $9,373,838 $9,473,615
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,005,388 $1,283,389
Notes payable--related parties 125,000 200,000
Current maturities of long-term debt 804,139 765,415
Revolving credit note 1,349,600 1,468,644
Deferred revenue 160,736 129,258
Current portion of obligations under capital leases 51,750 11,020
Accrued payroll, payroll taxes and benefits 601,449 452,177
Accrued expenses and other liabilities 1,274,858 1,597,642
Convertible debentures 350,000 500,000
Total current liabilities 5,722,920 6,407,545
Long-term debt 1,819,026 2,428,945
Obligations under capital leases, net of
current portion 38,214 21,140
Total noncurrent liabilities 1,857,240 2,450,085
Total liabilities 7,580,160 8,857,630
__________ _________
3
Stockholders' equity:
Class A common stock, $.01 par value; 20,000,000
shares authorized, 13,437,067 and 12,919,042
shares issued at March 31, 2003 and June 30,
2002, respectively 134,371 129,190
Class B common stock, $.01 par value; 2,000,000
shares authorized,726,991 issued and outstanding
convertible into 726,991 shares of Class A 7,270 7,270
common stock
Additional paid-in capital 19,144,419 18,769,863
Treasury stock, 38,126 shares at cost (30,988) (30,988)
Notes receivable, common stock (80,000) (80,000)
Accumulated deficit (17,381,394) (18,179,350)
Total stockholders' equity 1,793,678 615,985
Total liabilities and stockholders' equity $ 9,373,838 $ 9,473,615
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
________________________________________________
Revenues:
Patient care, net $ 5,341,816 $5,502,673 $15,863,921 $15,874,763
Contract support services 393,328 201,727 943,513 616,953
Pharmaceutical study 136,690 184,985 711,957 388,397
Website services -- 544 -- 3,845
___________ __________ ___________ ___________
Total revenues 5,871,834 5,889,929 17,519,391 16,883,958
___________ __________ ___________ ___________
Operating Expenses
Patient care expenses 2,638,772 2,720,445 7,877,313 7,963,481
Cost of contract support
services 354,632 180,377 855,862 525,476
Provision for doubtful
accounts 196,195 139,007 818,652 554,546
Website expenses 54,770 74,478 168,345 232,683
Administrative expenses 2,369,205 2,172,484 6,631,883 6,200,797
___________ __________ ___________ ___________
Total operating expenses 5,613,574 5,286,791 16,352,055 15,476,983
___________ __________ ___________ ___________
Income from operations 258,260 603,138 1,167,336 1,406,975
___________ __________ ___________ ___________
Other expenses:
Interest income 3,119 1,134 10,943 8,182
Other income 22,830 16,015 75,206 67,105
Interest expense (127,324) (176,101) (419,455) (577,234)
___________ __________ ___________ ___________
Total other expenses (101,375) (158,952) (333,306) (501,947)
___________ __________ ___________ ___________
Income before provision
for income taxes 156,885 444,186 834,030 905,028
Provision for income taxes 26,074 -- 36,074 --
___________ __________ ___________ ___________
Net income $ 130,811 $ 444,186 $ 797,956 $ 905,028
=========== ========== =========== ===========
Income per share information:
Net income $ 130,811 $ 444,186 $ 797,956 $ 905,028
Preferred stock dividends -- 27,755 -- 87,106
___________ __________ ___________ ___________
Income applicable to common
Stockholders $ 130,811 $ 416,431 $ 797,956 $ 817,922
=========== ========== =========== ===========
Basic income per common
share $ 0.01 $ 0.04 $ 0.06 $ 0.08
=========== ========== =========== ===========
Basic weighted average number
of shares outstanding 14,099,929 9,851,124 13,963,138 9,643,486
=========== ========== =========== ===========
Diluted income per common
share $ 0.01 $ 0.03 $ 0.05 $ 0.06
=========== ========== =========== ===========
Diluted weighted average
number of shares
outstanding 14,814,570 14,195,971 14,577,540 14,111,929
=========== ========== =========== ===========
See Notes to Condensed Consolidated Financial Statements
5
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended
March 31,
2003 2002
____________ ___________
Cash flows from operating activities:
Net income $ 797,956 $ 905,028
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 131,714 161,965
Amortization of financing costs 6,000 6,000
Non-cash compensation expense 18,543 --
Non-cash stock options and stock warrants
issued for obligations 655 36,572
Changes in operating assets and liabilities:
Accounts receivable 454,663 220,046
Prepaid expenses (145,097) (71,098)
Other assets (98,090) (163,340)
Accounts payable (271,344) (222,748)
Accrued expenses and other liabilities 145,651 (52,931)
Net liabilities of discontinued operations -- (24,976)
____________ ___________
Net cash provided by operating activities 1,040,651 794,518
____________ ___________
Cash flows from investing activities:
Acquisition of property and equipment (172,128) (117,100)
____________ ___________
Net cash used in investing activities (172,128) (117,100)
____________ ___________
Cash flows from financing activities:
Revolving credit note, net (119,044) (269,252)
Proceeds (repayment) of debt, net (738,391) (292,862)
Issuance of common stock 73,408 300
Purchase of treasury stock -- (6,094)
Cost related to issuance of capital stock (7,212) (14,755)
____________ ___________
Net cash used in financing activities (791,239) (582,663)
____________ ___________
NET INCREASE IN CASH AND CASH EQUIVALENTS 77,284 94,755
BEGINNING CASH AND CASH EQUIVALENTS 204,564 43,732
____________ ___________
ENDING CASH AND CASH EQUIVALENTS $ 281,848 $ 138,487
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 419,406 $ 531,956
Income taxes 113,163 9,718
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock in cashless
exercise of options $ 302,516 $ --
Issuance of common stock in cashless
exercise of warrants 42,363 --
Accrued dividends -- 87,106
Conversion of preferred stock to common stock -- 100,000
Issuance of common stock in lieu of cash
for dividends -- 12,395
See Notes to Condensed Consolidated Financial Statements
6
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2003
Note A - The Company
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 also treats 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.
Pioneer Development and Support Services, which does business as Wellplace,
provides help line services primarily through contracts with major railroads, a
smoking cessation contract with the State of Nebraska and a call center contract
with the State of Michigan. Pioneer Pharmaceutical Research 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, are provided through Behavioral
Health Online, Inc., the Company's internet subsidiary, which provides Internet
support services for all other subsidiaries of the Company and provides
behavioral health education, training and products for the behavioral health
professional, through its website Wellplace.com.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine months ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2003. The accompanying financial statements should be read in
conjunction with the June 30, 2002 consolidated financial statements and
footnotes thereto included in the Company's 10-KSB filed on September 19, 2002.
7
Note C - Stock Based Compensation
The Company re-priced 791,500 options in January 2001 of which 667,000 and
108,500 remained outstanding at June 30, 2002 and March 31, 2003, respectively
and are subject to variable accounting from the date of the modification.
Compensation expense relating to 568,500 vested repriced options at June 30,
2002 was approximately $264,000 for the fiscal year ended June 30, 2002 and the
compensation expense relating to 47,250 vested repriced options at March 31,
2003 was approximately $27,000 for the nine month period ended March 31, 2003.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123 but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. If the Company had elected to recognize compensation cost for the
plans based on the fair value at the grant date for awards granted, consistent
with the method prescribed by SFAS No. 123, the net income per share would have
been changed to the pro forma amounts indicated below:
8
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
_____________________________________________________
Net income, as reported $ 130,811 $ 416,411 $ 797,956 $ 817,922
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 31,368 3,965 19,198 36,572
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (46,542) (3,965) (102,382) (46,114)
____________ __________ ___________ __________
Pro forma net income $ 115,637 $ 416,411 $ 714,772 $ 808,380
=========== ============ ============= =============
Earnings per share:
Basic - as reported $ 0.01 $ 0.04 $ 0.06 $ 0.08
=========== ============ ============= =============
Basic - pro forma $ 0.01 $ 0.04 $ 0.05 $ 0.08
=========== ============ ============= =============
Diluted - as reported $ 0.01 $ 0.03 $ 0.05 $ 0.06
=========== ============ ============= =============
Diluted - pro forma $ 0.01 $ 0.03 $ 0.05 $ 0.06
=========== ============ ============= =============
9
Note D - Reclassifications
Certain March 31, 2002 and June 30, 2002 amounts have been reclassified
to be consistent with the March 31, 2003 presentation.
Note E - Business Segment Information
The Company's behavioral health treatment services have similar economic
characteristics, services, patients and clients. Accordingly, all behavioral
health treatment services are reported on an aggregate basis under one segment.
The Company's segments are more fully described in Note A above. Residual income
and expenses from closed facilities are included in the administrative services
segment. The following summarizes the Company's segment data:
10
TREATMENT ADMINISTRATIVE ONLINE
SERVICES SERVICES SERVICES ELIMINATIONS TOTAL
____________________________________________________________________
For the three months ended
March 31, 2003
Revenues - external customers $ 5,408,116 $ 463,718 $ -- $ -- $ 5,871,834
Revenues - intersegment 400 665,556 75,000 (740,956) --
Net income (loss) 822,844 (637,263) (54,770) -- 130,811
For the three months ended
March 31, 2002
Revenues - external customers $ 5,502,673 $ 386,712 $ 544 -- $ 5,889,929
Revenues - intersegment 54,198 474,000 75,000 $ (603,198) --
Net income (loss) 1,003,168 (485,048) (73,934) -- 444,186
For the nine months ended
March 31, 2003
Revenues - external customers $15,930,221 $ 1,589,170 $ -- $ -- $17,519,391
Revenues - intersegment 249,500 1,978,668 225,000 (2,453,168) --
Net income (loss) 2,543,431 (1,577,130) (168,345) -- 797,956
Identifiable Assets at
March 31, 2003 7,699,250 1,583,264 91,324 -- 9,373,838
For the nine months ended
March 31, 2002
Revenues - external customers $15,874,763 $ 1,005,350 $ 3,845 $ -- $16,883,958
Revenues - intersegment 54,198 1,422,000 225,000 (1,701,198) --
Net income (loss) 2,278,883 (1,150,712) (223,143) -- 905,028
Identifiable Assets at
March 31, 2002 8,339,229 1,339,705 102,796 -- 9,781,730
11
Note F - New Accounting Standards
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"), which
addresses financial accounting and reporting for costs associated with exit or
disposal activities and supersedes Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002, with earlier application encouraged. There were no transactions during
the period ended March 31, 2003 that were effected by this pronouncement.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation in the event companies adopt SFAS No. 123 and account for
stock options under the fair value method. SFAS No. 148 also amends the
disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial
Reporting (APB 28), to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While the Statement does not
amend SFAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of SFAS No. 148 are
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of APB Opinion No. 25 Accounting for
Stock Issued to Employees (APB 25). The Company has adopted the disclosure
requirements of SFAS No. 148 as disclosed in the Notes to our Consolidated
Financial Statements included as Note C of this Quarterly report on Form 10-QSB.
In November 2002, the FASB issued Interpretation No. (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Among other things, the Interpretation
requires guarantors to recognize, at fair value, their obligations to stand
ready to perform under certain guarantees. FIN 45 is effective for guarantees
issued or modified on or after January 1, 2003. The provisions of FIN 45 did not
have an effect on the Company's financial position or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46's consolidation criteria are based on analysis of
risks and rewards, not control, and represent a significant and complex
modification of previous accounting principles. FIN 46 represents an accounting
change, not a change in the underlying economics of asset sales. FIN 46 is
effective for consolidated financial statements issued after June 30, 2003. The
Company believes the adoption of FIN 46 will not have an effect on its financial
position or future results of operations.
12
Item 2. Management's Discussion and Analysis or Plan of Operation
PHC, INC. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 outpatient clinics. Payor mix is
determined by the source of payment to be received for each client being
provided billable services. The Company's administrative expenses do not vary
greatly as a percentage of total revenue but the percentage tends to decrease
slightly as revenue increases. The Company 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; however, it
also continues to provide behavioral health information and education through
its web site at Wellplace.com. 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 ongoing debates and initiatives regarding
the restructuring of the health care system in its entirety. The extent of any
regulatory changes and their impact on the Company's business is unknown. The
current administration has put forth proposals to mandate equality in the
benefits available to those individuals suffering from mental illness (the
Parity Act). If passed, this legislation will improve access to the Company's
programs. Managed care has had a profound impact on the Company's operations, in
the form of shorter lengths of stay, extensive certification of benefits
requirements and, in some cases, reduced payment for services.
Critical Accounting Policies
The preparation of the Company's 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,
management evaluates its 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.
Management bases its estimates on historical experience and various other
assumptions that they 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.
13
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, at the time the services are rendered.
Revenues under third-party payor agreements are subject to examination and
contractual adjustment, and amounts realizable may change due to periodic
changes in the regulatory environment. Provisions for estimated third party
payor settlements are provided in the period the related services are rendered.
Differences between the amounts provided and subsequent settlements are recorded
in operations in the year of settlement. Amounts due as a result of cost report
settlements is recorded and listed separately on the financial statement as
"Third party settlement receivables". The provision for contractual allowances
is deducted directly from revenue and the net revenue amount is recorded as
accounts receivable. The allowance for doubtful accounts does not include the
contractual allowances.
The Company currently has one "at risk" contract. The contract calls for
the Company to provide for all of the in-patient and outpatient behavioral
health needs of the insurance carrier's enrollees in Nevada for a fixed monthly
fee per member per month. Revenues are recorded monthly based on this formula
and the expenses related to providing the services under this contract are
recorded as incurred. The Company provides most of the outpatient care directly
and, through utilization review, monitors closely, and pre-approves all
in-patient and outpatient services not provided directly. The contract is
considered "at risk" because the payments to third-party providers for services
rendered could equal the total amount of the revenue recorded.
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and accepted
based on study criteria and billable units of service are provided. Where
contract requires completion of the study by the patient, no revenue is
recognized until the patient completes the study program.
Contract support service revenue is a result of fixed contracts to provide
telephone support. Revenue for these services is recognized ratably over the
service period, as there is no contingency for a change in the contracted amount
based on services provided.
Allowance for doubtful accounts:
The provision for bad debt is calculated based on a percentage of each aged
accounts receivable category beginning at 0-5% on current accounts and
increasing incrementally for each additional 30 days the account remains
outstanding until the account is over 360 days outstanding, at which time the
provision is 60-100% of the outstanding balance. These percentages vary by
facility based on each facility's experience in collecting older receivables.
The Company compares this required reserve amount to the current "Allowance for
doubtful accounts" to determine the required bad debt expense for the period.
This method of determining the required "Allowance for doubtful accounts" has
historically resulted in an allowance for doubtful accounts of 30% or greater of
the total outstanding receivables balance.
14
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.
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
Total net revenue from operations decreased 0.31% to $5,871,834 for the
three months ended March 31, 2003 from $5,889,929 for the three months ended
March 31, 2002 and increased 3.76% to $17,519,391 for the nine months ended
March 31, 2003 from $16,883,958 for the nine months ended March 31, 2002.
Net patient care revenue decreased 2.92% to $5,341,816 for the three months
ended March 31, 2003 from $5,502,673 for the three months ended March 31, 2002
and 0.07% to $15,863,921 for the nine months ended March 31, 2003 from
$15,874,763 for the nine months ended March 31, 2002. This decrease in revenue
is due primarily to a 3.3% decrease in patient days for the three months ended
March 31, 2003 and a change in payor mix (lower insurance coverage) over the
nine months ended March 31, 2003, when compared to the same periods last year.
Traditionally slow census during the December quarter holidays failed to rebound
as rapidly as usual in the March quarter. A poor economy with high unemployment
has resulted in fewer patients with insurance coverage and decreased insurance
benefits resulting in lower census and less favorable payor mix. This was
further complicated by the uncertainty surrounding the war, which we believe
affected patients' willingness to leave home and seek treatment. The census
improved toward the end of March and remains at higher levels through the date
of this report. Renewed marketing efforts have helped to maintain increased
census in the current quarter, but the economy continues to play a major role in
the number of people seeking treatment.
The key indicators of profitability of inpatient facilities are patient
days, or census, and payor mix. Patient days is the product of the number of
patients times length of stay. Increases in the number of patient days result in
higher census, which coupled with a more favorable payor mix (more patients with
higher paying insurance contracts or paying privately) will usually result in
higher profitability. Therefore, patient census and payor mix are monitored very
closely.
15
Revenue from pharmaceutical studies decreased 26.1% to $136,690 for the
three months ended March 31, 2003 from $184,985 for the three months ended March
31, 2002 and increased 83.3% to $711,957 for the nine months ended March 31,
2003 from $388,397 for the same period last year. These changes in revenue are
due to changes in the number of active studies and the number of patients
enrolled in the studies. Many of the studies in which we were enrolling patients
concluded in December 2002. Many planned studies for the new calendar year were
postponed due to recent controversy surrounding pharmaceutical studies. We have
just been awarded several new studies and are building patient enrollment in the
current quarter. This business is expected to fluctuate from period to period
based on the number of studies in progress, availability of study drugs and the
number of patients enrolled in each study.
Patient care expenses decreased by 3.0% to $2,638,772 for the three months
ended March 31, 2003 from $2,720,445 for the three months ended March 31, 2002
and decreased by 1.1% to $7,877,313 for the nine months ended March 31, 2003
from $7,963,481 for the nine months ended March 31, 2002. These decreases in
expenses for the period are due primarily to the decrease in patient days noted
above with the primary decreases in expenses directly related to patient census
such as food, laundry, laboratory fees and other direct patient related
expenses.
Contract support services revenue provided by Wellplace increased 95.0% to
$393,328 for the three months ended March 31, 2003 from $201,727 for the three
months ended March 31, 2002 and increased 52.9% to $943,513 for the nine months
ended March 31, 2003 from $616,953 for the same period last year. The cost of
providing these services increased 96.6% to $354,632 for the three months ended
March 31, 2003 from $180,377 for the three months ended March 31, 2002 and 62.9%
to $855,862 for the nine months ended March 31, 2003 from $525,476 for the same
period last year. These increases in revenue and expenses are a result of the
smoking cessation contract for the State of Nebraska, which carried high
start-up costs in the first six months of this fiscal year and a new Michigan
call center contract which began in March of this quarter and also resulted in
high start-up costs.
Bad debt expense increased 41.1% to $196,195 for the three months ended
March 31, 2003 from $139,007 for the three months ended March 31, 2002 and 47.6%
to $818,652 for the nine months ended March 31, 2003 from $554,546 for the same
period last year. These increases are due to the write off of some uncollectable
accounts not fully reserved for and an increase in the age of the receivables
due from one large payor over the last two quarters, which was a result of the
payors' system conversion. Approximately 25% of the outstanding receivables due
from this payor was received at the end of March and another 25% was received in
the first two weeks of April 2003. We continue to monitor payment from this
payor closely as all of their system conversion issues have not been resolved.
Web development expenses decreased 26.5% to $54,770 for the three months
ended March 31, 2003 from $74,478 for the three months ended March 31, 2002 and
27.7% to $168,345 for the nine months ended March 31, 2003 from $232,683 for the
nine months ended March 31, 2002. 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.
16
Administrative expenses increased 9.1% to $2,369,205 for the quarter ended
March 31, 2003 from $2,172,484 for the quarter ended March 31, 2002 and 7.0% to
$6,631,883 for the nine months ended March 31, 2003 from $6,200,797 for the same
period last year. This increase is due to increases in various expenses. General
insurance expense increased approximately 30% for the quarter ended March 31,
2003 and 22% for the nine month period ended March 31, 2003 as compared with the
same periods last year. Employee benefit costs increased approximately 17% for
the quarter ended March 31, 2003 and 15% for the nine months ended March 31,
2003 as compared to the same periods last year. Utilities increased
approximately 18% for the quarter ended March 31, 2003 and 12% for the nine
months ended March 31, 2003 as compared to the same periods last year. Rent
expense increased approximately 9% for the quarter ended March 31, 2003 and 11%
for the nine months ended March 31, 2003 as compared to the same periods last
year.
Other income increased 42.6% to $22,830 for the three months ended March
31, 2003 from $16,015 for the three months ended March 31, 2002 and 12.1% to
$75,206 for the nine months ended March 31, 2003 from $67,105 for nine months
ended March 31, 2002. This increase is primarily due to an increased request for
medical records at our treatment facilities.
Interest expense decreased 27.7% to $127,324 for the three months ended
March 31, 2003 from $176,101 for the three months ended March 31, 2002 and 27.3%
to $419,455 for the nine months ended March 31, 2003 from $577,234 for the same
period last year. This decrease is due to the general decline in interest rates,
the refinancing of debt in November 2001 at a more favorable rate, and repayment
of long-term debt.
The Company has no provision for federal income taxes for the three months
or nine months ended March 31, 2003 due to the utilization of net operating loss
carry-forwards. Total income tax expense for the quarter and nine months ended
March 31, 2003 represents state income taxes for certain subsidiaries with no
available net operating loss carry-forwards.
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. We continue to analyze receivables monthly to
determine an adequate reserve. This analysis has consistently resulted in a
ratio of reserves for bad debt to total patient receivables of approximately 30%
or greater. The ratio of reserves for bad debt to total patient receivables as
of March 31, 2003 is approximately 33% on an accounts receivable balance which
decreased 9.2% to $7,502,394 at March 31, 2003 from $8,263,361 at June 30, 2002.
The $720,000 shown as non-current patient accounts receivable is presented at
net realizable value. These amounts are due from individuals in payment for
treatment on which extended payment plans have been arranged and are being met.
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Liquidity and Capital Resources
The Company`s net cash provided by operating activities was $1,040,651 for
the nine months ended March 31, 2003 compared to $794,518 for the nine months
ended March 31, 2002. Cash flow from operations in the nine months ended March
31, 2003 consists of net income of $797,956 plus depreciation and amortization
of financing costs of $137,714, decrease in accounts receivable of $454,663 and
non-cash equity based charges of $19,198 less cash used for net changes in other
operating assets and liabilities of $368,880.
Cash used in investing activities in the nine months ended March 31, 2003
consisted of $172,128 in capital expenditures compared to $117,100 in capital
expenditures during the same period last year.
Cash used in financing activities in the nine months ended March 31, 2003
primarily consisted of $857,435 in debt repayments compared to $562,114 in debt
repayments for the same period last year.
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
10% to $4,980,338 on March 31, 2003 from $5,553,601 on June 30, 2002. This
decrease is a result of the continuation of our accounts receivable management
program instituted in fiscal 2001, 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, which results in a smaller number of
uncollectable accounts. 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.
The Company has operated ongoing operations profitably for nine consecutive
quarters. The current positive business environment towards behavioral health
treatment and the new business opportunities give us confidence to foresee
continued improved results.
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New Accounting Standards
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"), which
addresses financial accounting and reporting for costs associated with exit or
disposal activities and supersedes Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002, with earlier application encouraged. There were no transactions during
the period ended March 31, 2003 that were effected by this pronouncement.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation in the event companies adopt SFAS No. 123 and account for
stock options under the fair value method. SFAS No. 148 also amends the
disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial
Reporting (APB 28), to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While the Statement does not
amend SFAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of SFAS No. 148 are
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of APB Opinion No. 25 Accounting for
Stock Issued to Employees (APB 25). The Company has adopted the disclosure
requirements of SFAS No. 148 as disclosed in the Notes to our Consolidated
Financial Statements included as Note C of this Quarterly report on Form 10-QSB.
In November 2002, the FASB issued Interpretation No. (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Among other things, the Interpretation
requires guarantors to recognize, at fair value, their obligations to stand
ready to perform under certain guarantees. FIN 45 is effective for guarantees
issued or modified on or after January 1, 2003. The provisions of FIN 45 did not
have an effect on the Company's financial position or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46's consolidation criteria are based on analysis of
risks and rewards, not control, and represent a significant and complex
modification of previous accounting principles. FIN 46 represents an accounting
change, not a change in the underlying economics of asset sales. FIN 46 is
effective for consolidated financial statements issued after June 30, 2003. The
Company believes the adoption of FIN 46 will not have an effect on its financial
position or future results of operations.
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PART II. OTHER INFORMATION
Item 6 Exhibits and reports on form 8-K
(a) Exhibit List
Exhibit No. Description
99.1 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
99.3 Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(b) Reports on form 8-K
There were no reports on Form 8-K filed during the period ended March 31, 2003.
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Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PHC, Inc.
Registrant
Date: May 8, 2003 /s/ Bruce A. Shear
Bruce A. Shear
President
Chief Executive Officer
Date: May 8, 2003 /s/ Paula C. Wurts
Paula C. Wurts
Controller
Treasurer
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