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 SEPTEMBER 30, 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)
(Former Name, former address and former fiscal year, if changed since last
report)
Check 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____
Applicable only to corporate issuers
Number of shares outstanding of each class of common equity, as of October 31,
2003
Class A Common Stock 13,342,213
Class B Common Stock 726,991
Transitional Small Business Disclosure Format
(Check one):
Yes______ No X
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PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2003 (unaudited)
and June 30, 2003.
Condensed Consolidated Statements of Operations (unaudited) - Three
months ended September 30, 2003 and September 30, 2002.
Condensed Consolidated Statements of Cash Flows (unaudited) - Three
months ended September 30, 2003 and September 30, 2002.
Notes to Condensed Consolidated Financial Statements - September 30,
2003.
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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
September 30, June 30,
ASSETS 2003 2003
______________ ___________
Current assets: (unaudited)
Cash and cash equivalents $ 138,066 $ 494,991
Accounts receivable, net of allowance for
doubtful accounts of $2,413,891 at
September 30, 2003, $2,348,445 at June 30,
2003 4,421,742 4,345,301
Prepaid expenses 378,861 69,541
Other receivables and advances 543,091 255,006
Deferred income tax asset 808,607 808,607
Other receivables, third party 172,043 172,043
______________ ___________
Total current assets 6,462,410 6,145,489
Accounts receivable, non-current 575,000 600,000
Other receivable 106,454 111,976
Property and equipment, net 1,272,877 1,295,113
Deferred financing costs, net of amortization
of $132,109 at September 30, 2003 and
$130,109 at June 30, 2003 2,000 4,000
Goodwill 969,099 969,099
Other assets 259,417 286,046
______________ ___________
Total assets $9,647,257 $9,411,723
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,321,046 $860,952
Notes payable--related parties 100,000 100,000
Current maturities of long-term debt 969,189 883,659
Revolving credit note 1,286,406 1,103,561
Deferred revenue 160,531 160,720
Current portion of obligations under capital
leases 44,754 50,805
Accrued payroll, payroll taxes and benefits 901,662 1,016,088
Accrued expenses and other liabilities 751,439 958,527
Convertible debentures 250,000 275,000
______________ ___________
Total current liabilities 5,785,027 5,409,312
______________ ___________
Long-term debt 1,734,374 2,030,285
Obligations under capital leases 30,607 36,869
______________ ___________
Total noncurrent liabilities 1,764,981 2,067,154
______________ ___________
Total liabilities 7,550,008 7,476,466
______________ ___________
Stockholders' equity:
Class A common stock, $.01 par value;
20,000,000 shares authorized, 13,440,017
and 13,437,067 shares issued September 30,
2003 and June 30, 2003, respectively 134,400 134,371
Class B common stock, $.01 par value; 2,000,000
shares authorized, 726,991 issued and
outstanding September 30, 2003 and June 30,
2003, convertible into one share of Class A
common stock 7,270 7,270
Additional paid-in capital 19,176,418 19,147,604
Treasury stock, 97,804 shares at September 30,
2003 and June 30, 2003, at cost (72,380) (72,380)
Notes receivable, common stock -- (80,000)
Accumulated deficit (17,148,459) (17,201,608)
______________ ___________
Total stockholders' equity 2,097,249 1,935,257
Total liabilities and stockholders' equity $9,647,257 $9,411,723
============== ===========
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30,
2003 2002
______________ ___________
Revenues:
Patient care, net $ 5,192,560 $ 5,311,625
Pharmaceutical studies 143,482 361,889
Contract support services 767,125 297,873
______________ ___________
Total revenue 6,103,167 5,971,387
______________ ___________
Operating expenses:
Patient care expenses 2,694,015 2,910,223
Cost of contract support services 553,929 280,962
Provision for doubtful accounts 462,891 297,775
Website expenses 66,695 56,041
Administrative and other operating expenses 2,146,091 1,756,410
______________ ___________
Total operating expenses 5,923,621 5,301,411
______________ ___________
Income from operations 179,546 669,976
______________ ___________
Other income (expense):
Interest income 2,724 3,814
Other income, net 14,771 26,182
Interest expense (133,892) (146,202)
______________ ___________
Total other expense, net (116,397) (116,206)
______________ ___________
Income before provision for taxes 63,149 553,770
Provision for income taxes 10,000 --
______________ ___________
Net income $ 53,149 $ 553,770
============== ===========
Basic income per common share $ .00 $ .04
============== ===========
Basic weighted average number of shares
outstanding 14,069,204 13,727,657
============== ===========
Fully diluted income per common share $ .00 $ .04
============== ===========
Fully diluted weighted average number of shares
outstanding 14,789,056 14,352,963
============== ===========
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
September 30,
2003 2002
______________ ___________
Cash flows from operating activities:
Net income $ 53,149 $ 553,770
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 63,088 39,771
Non cash stock-based compensation 86,223 (12,170)
Changes in:
Accounts receivable (334,004) 105,047
Prepaid expenses (309,320) (156,345)
Other assets 6,001 (41,399)
Accounts payable 460,094 (300,237)
Accrued expenses and other liabilities (299,083) 8,455
______________ ___________
Net cash provided by (used in) operating
activities (273,852) 196,892
______________ ___________
Cash flows from investing activities:
Acquisition of property and equipment (20,224) (93,365)
______________ ___________
Net cash used in investing activities (20,224) (93,365)
______________ ___________
Cash flows from financing activities:
Revolving debt, net 182,845 (117,865)
Principal payments on long-term debt (247,694) (211,438)
Deferred financing costs 2,000 2,000
Costs related to issuance of capital stock -- (7,212)
Issuance of common stock -- 57,625
______________ ___________
Net cash used in financing activities (62,849) (276,890)
______________ ___________
NET DECREASE IN CASH AND CASH EQUIVALENTS (356,925) (173,363)
Beginning cash and cash equivalents 494,991 204,564
______________ ___________
ENDING CASH AND CASH EQUIVALENTS $ 138,066 $ 31,201
============== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 130,041 $ 130,669
Income taxes 24,492 48,910
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2003
Note A - The Company
PHC, Inc. (the "Company") is a national health care Company, which operates
subsidiaries specializing in behavioral health services including the treatment
of substance abuse, which includes alcohol and drug dependency and related
disorders and the provision of psychiatric services. The Company also 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 seven psychiatric treatment locations which include Harbor
Oaks Hospital, a 64-bed psychiatric hospital located in New Baltimore, Michigan
and six outpatient behavioral health locations (two in Las Vegas, Nevada
operating as Harmony Healthcare, one in Shawnee Mission, Kansas operating as
Total Concept and three 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.
Wellplace, formerly known as Pioneer Development and Support Services ("PDSS"),
provides help line services primarily through contracts with major railroads,
smoking cessation contracts with the states of Nebraska and Kansas 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 operations, 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 three months ended September 30,
2003 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2004. The accompanying financial statements should be read
in conjunction with the June 30, 2003 consolidated financial statements and
footnotes thereto included in the Company's 10-KSB filed on September 19, 2003.
Note C- Stock Based Compensation
The Company re-priced 791,500 options in January 2001 of which 103,500
remained outstanding at June 30, 2003 and September 30, 2003 and are subject to
variable accounting from the date of the modification. Compensation expense
relating to 43,500 vested repriced options at June 30, 2003 was $2,505 for the
fiscal year ended June 30, 2003 and the compensation expense relating to 43,500
vested repriced options at September 30, 2003 was $3,915 for the three month
period ended September 30, 2003 compared to a reversal of compensation expense
of $12,825 for the three months ended September 30, 2002.
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:
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Note C- Stock Based Compensation (Continued)
Three Months Ended
September 30,
2003 2002
__________ ___________
Net income, as reported $ 53,149 $ 553,770
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
86,223 (12,170)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (97,773) (530)
__________ ___________
Pro forma net income $ 41,599 $ 541,070
========== ===========
Earnings per share:
Basic - as reported $ 0.00 $ 0.04
=========== ==========
Basic - pro forma $ 0.00 $ 0.04
=========== ==========
Diluted - as reported $ 0.00 $ 0.04
=========== ==========
Diluted - pro forma $ 0.00 $ 0.04
=========== ==========
Note D - Reclassifications
Certain September 30, 2002 amounts have been reclassified to be consistent
with the September 30, 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:
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BEHAVIORAL HEALTH
TREATMENT ADMINISTRATIVE ONLINE ELIMINATIONS TOTAL
SERVICES SERVICES SERVICES
For the three months ended
September 30, 2003
Revenues - external customers $5,202,660 $ 900,507 $ -- $ -- $ 6,103,167
Revenues - intersegment 40,400 733,860 75,000 (849,260) --
Net income (loss) 531,342 (411,498) (66,695) -- 53,149
Identifiable assets 7,813,800 1,766,523 66,934 -- 9,647,257
For the three months ended
September 30, 2002
Revenues - external customers $ 5,311,625 $ 659,762 $ -- $ -- $ 5,971,387
Revenues - intersegment 153,600 656,556 75,000 (885,156) --
Net income (loss) 909,039 (299,228) (56,041) -- 553,770
Identifiable assets 8,090,946 1,258,899 94,699 -- 9,444,544
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Note F - New Accounting Standards
In January 2003, the Financial Accounting Standards Board ("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 adoption of FIN 46 did not have a material effect on
the Company's financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS No. 150 is the first phase
of the FASB's project on liabilities and equity. SFAS No. 150 provides guidance
on how an entity classifies and measures certain financial instruments with
characteristics of both liabilities and equity. For publicly held companies,
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003. SFAS No. 150 requires companies to record the cumulative
effect of financial instruments existing at the adoption date. The adoption of
SFAS 150 did not have a significant effect on the Company's operations,
financial position or cash flows.
In November 2002, the EITF reached consensus on EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Revenue arrangements with multiple
deliverables include arrangements that provide for the delivery or performance
of multiple products, services and/or rights to use assets where performance may
occur at different points in time or over different periods of time. The
adoption of EITF No. 00-21 did not have a significant effect on the Company's
operations, financial position or cash flows.
- 9 -
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
The Company presently provides behavioral health care services through two
substance abuse treatment centers, a psychiatric hospital and six 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 Company's research subsidiary, 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. If
passed, this legislation will improve access to the Company's programs. Managed
care has had a profound impact on the Company's operations, in the form of
shorter lengths of stay, extensive certification of benefits requirements and,
in some cases, reduced payment for services.
Critical Accounting Policies
The preparation of our financial statements in accordance with accounting
principles generally accepted in the United States of America, requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. On an on-going
basis, we evaluate our estimates and assumptions, including but not limited to
those related to revenue recognition, accounts receivable reserves and the
impairment of long-lived assets and goodwill. 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.
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.
- 10 -
Provisions for estimated third party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
provided and subsequent settlements are recorded in operations in the year of
settlement. Amounts due as a result of cost report settlements is recorded and
listed separately on the consolidated balance sheets as "Other receivables,
third party". The provision for contractual allowances is deducted directly from
revenue and the net revenue amount is recorded as accounts receivable. The
allowance for doubtful accounts does not include the contractual allowances.
The Company currently has one "at-risk" contract. The contract calls for
the Company to provide for all of the 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 or exceed the total amount of the revenue recorded.
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and accepted
based on study criteria and billable units of service are provided. Where a
contract requires completion of the study by the patient, no revenue is
recognized until the patient completes the study program.
Contract support service revenue is a result of fixed 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.
Income Taxes:
The Company follows the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
prescribes an asset and liability approach, which requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of the
assets and liabilities. The Company's policy is to record a valuation allowance
against deferred tax assets unless it is more likely than not that such assets
will be realized in future periods. The Company considers estimated future
taxable income or loss and other available evidence when assessing the need for
its deferred tax valuation allowance.
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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 increased 2.2% to $6,103,167 for the
three months ended September 30, 2003 from $5,971,387 for the three months ended
September 30, 2002 due to new contracts signed by Wellplace during the third
quarter of last year for the Michigan call center and the Kansas smoking
cessation contract that began this quarter.
Net patient care revenue decreased 2.2% to $5,192,560 for the three months
ended September 30, 2003 from $5,311,625 for the three months ended September
30, 2002. This decrease is a result of a decline in census at our Michigan
psychiatric facility. The Company has experienced increased census at its
Michigan psychiatric hospital and it's Utah hospital during the month of
October.
Two of 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
results in higher census, which coupled with a more favorable payor mix (more
patients with higher paying insurance contracts or paying privately) usually
results in higher profitability. Therefore, patient census and payor mix are
monitored very closely.
Revenue from pharmaceutical studies decreased 60.3% to $143,482 for the
three months ended September 30, 2003 from $361,889 for the three months ended
September 30, 2002. This decrease is due to the ending of some inpatient studies
and the slow start of new studies due to slow enrollment. This revenue is
expected to fluctuate from period to period based on the number of studies
currently in progress and the number of participants in each study. Revenue from
this division has also increased substantially in October.
Contract support services revenue provided by Wellplace increased 157.5% to
$767,125 for the three months ended September 30, 2003 from $297,873 for the
three months ended September 30, 2002. The cost of providing these services
increased 97.1% to $553,929 for the three months ended September 30, 2003 from
$280,962 for the three months ended September 30, 2002. This is due to routine
Michigan call center expenses and expenses related to the new smoking cessation
contract for the State of Kansas.
Patient care expenses decreased 7.4% to $2,694,015 for the three months
ended September 30, 2003 from $2,910,223 for the three months ended September
30, 2002. This decrease is directly related to the decline in patient census and
is found primarily in variable costs such as food, lab fees, laundry, patient
activities, patient transportation and other patient related expenses. The
Company continues to look for new ways to cut costs through operating
efficiencies without sacrificing patient care.
Web development expenses increased 19.0% to $66,695 for the three months
ended September 30, 2003 from $56,041 for the three months ended September 30,
2002. This is a result of increased depreciation expense based on a revision of
the estimated remaining useful life of the asset. Without this change, web
expenses would have declined approximately 13%.
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Administrative expenses increased 22.2% to $2,146,091 for the three months
ended September 30, 2003 from $1,756,410 for the three months ended September
30, 2002. This increase is due to the increase in legal fees as a result of the
litigation as indicated in this report (See, Part II, Item 3 Legal Proceedings)
and the one time expense of $80,000 related to certain stock purchase agreements
dated August 2000. These agreements called for the forgiveness of debt related
to loans provided to officers and directors to purchase stock provided their
relationship with the Company was not severed prior to the third anniversary of
the debt. Increases in insurance rates resulted in a 34.0% increase in insurance
expense to $81,647 in the current quarter from $60,917 for the same period last
year. Rent expense increased 10.3% to $242,060 for the three months ended
September 30, 2003 from $219,488 for the three months ended September 30, 2002.
This increase is due incremental increases built into current leases. The
Company also experienced a 8.7% increase in cost of employee benefits to
$107,713 for the three months ended September 30, 2003 from $99,125 for the
three months ended September 30, 2002. The Company is actively pursuing
acquisitions to expand its core business, which resulted in increased travel,
consultant and legal expenses recorded in the current quarter.
Interest expense decreased 8.4% to $133,892 for the three months ended
September 30, 2003 from $146,202 for the three months ended September 30, 2002.
This decrease in interest is due to the decrease in interest rates on the
Company's long-term debt and a decrease of approximately $210,000 in long-term
debt for the period ended September 30, 2003 as compared to the period ended
September 30, 2002.
The Company's provision for income taxes of $10,000 for the quarter ended
September 30, 2003 is significantly below the Federal statutory rate of 34%
primarily due to the availability of net operating loss carry-forwards. Total
income tax expense for the quarter represents state income taxes for certain
subsidiaries with no available net operating loss carry-forwards. The Company
has provided a significant valuation allowance against its deferred tax asset
due to potential changes in IRS rules that may limit the accessibility of the
loss carry-forwards.
Provision for doubtful accounts increased 55.47% to $462,891 for the three
months ended September 30, 2003 from $297,775 for the three months ended
September 30, 2002. This is a result of the Company's policy to maintain a
higher reserve against certain older receivables.
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 improved cash collections. Although the
Company's receivables have increased only one percent over the past three
months, 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 used in operating activities was $273,852 for the
quarter ended September 30, 2003 compared to cash provided by operating
activities of $196,892 for the quarter ended September 30, 2002. Cash flow from
operations in the quarter ended September 30, 2003 consists of net income of
$53,149 plus depreciation and amortization of $63,088, increase in accounts
receivable of $334,004, increase in prepaid expenses of $309,320, decrease in
accrued expenses of $299,083, and increase in accounts payable of $460,094, an
increase in other assets of $6,001 and non-cash equity based charges of $86,223.
- 13 -
Cash used in investing activities in the quarter ended September 30, 2003
consisted of $20,224 in capital expenditures compared to $93,365 in capital
expenditures in the quarter ended September 30, 2002.
Cash used in financing activities in the quarter ended September 30, 2003
primarily consisted of $64,849 in net debt repayments compared to $329,303 in
net debt repayments for the quarter ended September 30, 2002.
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Current accounts receivable from
patient care, net of allowance for doubtful accounts, increased approximately
1.0% to $5,996,742 on September 30, 2003 from $5,945,301 on June 30, 2003. This
increase is due in part to the delay in payment of receivables by one of our
State payors due to budget constraints. The Company was advised in advance of
the reduction in payment for two months with pay back slated for the current
quarter. To date the Company has received one-third of the payment reduction as
promised. The minimal increase 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.
The Company has operated ongoing operations profitably for eleven
consecutive quarters. The current positive business environment towards
behavioral health treatment and the new business opportunities give us
confidence to foresee continued improved results.
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes for each fiscal year ending
as of June 30, 2003 are listed below. There have been no material changes in
these obligations through September 30, 2003.
Year Ending Term Capital Operating
June 30, Notes Leases Leases Total
____________________________________________________________________
2004 $ 883,659 $55,954 $ 845,972 $1,785,585
2005 1,680,415 18,832 745,767 2,445,014
2006 47,598 12,825 499,244 559,667
2007 32,306 7,788 437,680 477,774
2008 35,337 649 326,396 362,382
Thereafter 234,629 -- 142,913 377,542
__________ _______ ___________ __________
Total minimum
payments $ 2,913,944 $ 96,048 $2,997,972 $6,007,964
=========== ======== =========== ==========
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New accounting standards
In January 2003, the Financial Accounting Standards Board ("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 adoption of FIN 46 did not have a material effect on
the Company's financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." SFAS No. 150 is the first phase
of the FASB's project on liabilities and equity. SFAS No. 150 provides guidance
on how an entity classifies and measures certain financial instruments with
characteristics of both liabilities and equity. For publicly held companies,
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003. SFAS No. 150 requires companies to record the cumulative
effect of financial instruments existing at the adoption date. The adoption of
SFAS 150 did not have a significant effect on the Company's operations,
financial position or cash flows.
In November 2002, the EITF reached consensus on EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Revenue arrangements with multiple
deliverables include arrangements that provide for the delivery or performance
of multiple products, services and/or rights to use assets where performance may
occur at different points in time or over different periods of time. The
adoption of EITF No. 00-21 did not have a significant effect on the Company's
operations, financial position or cash flows.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified within the
SEC's Rules and Forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management was necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures to meet the
criteria referred to above. Based on the foregoing, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective.
Change in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluations.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
A medical malpractice claim was filed by a former patient against North
Point Mental Health Associates, the Company's subsidiary, North Point-Pioneer,
Inc., and Pioneer Counseling Centers in the Circuit Court for the County of
Wayne, State of Michigan (Case No. 00-017768-NH, November 21, 2000), alleging
sexual abuse by a former clinical psychologist. At trial in December 2002, a
jury returned a verdict in favor of the plaintiff in the amount of approximately
$9 million plus interest and taxable costs and attorney's fee for conduct that
first manifested itself prior to the Company's acquisition of the subsidiary in
1996. The clinical psychologist declared bankruptcy and was not a party to the
proceeding. A judgment in the amount of $3,079,741 was entered on October 24,
2003. The Company is filing post judgment motions. The Company believes that
substantial error was committed at trial and intends to appeal the judgment.
Upon appeal, a bond or other marketable collateral may be required to be posted
in an amount up to one and one-half times the current value of the judgment.
The Company's subsidiary, North Point-Pioneer, Inc., is covered by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company, which is insolvent and is being administered by the State of New York,
with the result that Frontier's ability to pay any judgment is unknown. If
Frontier formally goes into liquidation, the Company may have a claim against
the Michigan Property and Casualty Guaranty Fund, which could avail itself of
defenses available to Frontier and to Michigan statutory defenses. The entity
whose assets were acquired by the Company's subsidiary also carried malpractice
insurance in the amount of $1 million. Such carrier has, however, refused
coverage and filed an action in Michigan seeking a declaratory judgment to the
effect that it is not liable under such policy. The Company will take all steps
available to require this carrier to meet its obligations under such policy.
To date, there have been no meaningful settlement discussions. In December
2002, Plaintiff's counsel demanded the payment of $1,000,000 within 10 days,
which demand was not met. At a meeting on September 3, 2003, representatives of
Frontier's receiver acknowledged to the Company, Frontier's obligations under
the policy but acknowledged that payment of such obligations is subject to the
unresolved insolvency proceedings referred to above. The Company may recover a
portion of the legal fees expended to date on this matter.
Item 6. Exhibits and reports on Form 8-K.
Exhibit List
Exhibit No. Description
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The Company filed one report on form 8-K during the quarter ended September
30, 2003. This report provided the same earnings information to the public as
shown in the Company's quarterly press release as required by Item 12 of the
instructions for form 8-K.
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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: November 13, 2003 /s/ Bruce A. Shear
Bruce A. Shear
President
Chief Executive Officer
Date: November 13, 2003 /s/ Paula C. Wurts
Paula C. Wurts
Controller
Treasurer
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