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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 DECEMBER 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)
______________________________________________________________________________
(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 January 28,
2004:
Class A Common Stock 13,390,985
Class B Common Stock 726,991
Transitional Small Business Disclosure Format
(Check one): Yes __ No X
-- 1 --
PHC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2003 and June 30,
2003.
Condensed Consolidated Statements of Operations - Three and six months
ended December 31, 2003 and December 31, 2002.
Condensed Consolidated Statements of Cash Flows - Six months ended
December 31, 2003 and December 31, 2002.
Notes to Condensed Consolidated Financial Statements.
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 4. Submission of Matters to a Vote of Security Holders
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
December 31, June 30,
ASSETS 2003 2003
___________ ___________
Current assets:
Cash and cash equivalents $ 130,560 $ 494,991
Accounts receivable, net of
allowance for doubtful accounts of
$2,329,900 at December 31, 2003,
$2,348,445 at June 30, 2003 4,401,891 4,345,301
Prepaid expenses 376,438 69,541
Other receivables and advances 373,105 255,006
Deferred income tax asset 808,607 808,607
Other receivables, third party 172,043 172,043
____________ ____________
Total current assets 6,262,644 6,145,489
Accounts receivable, non-current 525,000 600,000
Other receivable 101,407 111,976
Property and equipment, net 1,311,159 1,295,113
Deferred financing costs, net of amortization
of $134,109 at December 31, 2003 and
$130,109 at June 30, 2003 -- 4,000
Goodwill 969,099 969,099
Other assets 290,523 286,046
___________ ___________
Total assets $9,459,832 $9,411,723
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,274,769 $860,952
Notes payable--related parties 100,000 100,000
Current maturities of long-term debt 924,146 883,659
Revolving credit note 1,287,605 1,103,561
Deferred revenue 160,592 160,720
Current portion of obligations under capital
leases 35,281 50,805
Accrued payroll, payroll taxes and benefits 1,009,604 1,016,088
Accrued expenses and other liabilities 639,287 958,527
Convertible debentures 250,000 275,000
___________ ___________
Total current liabilities 5,681,284 5,409,312
___________ ___________
Long-term debt 1,608,610 2,030,285
Obligations under capital leases 27,172 36,869
___________ ___________
Total noncurrent liabilities 1,635,782 2,067,154
___________ ___________
Total liabilities 7,317,066 7,476,466
___________ ___________
Stockholders' equity:
Class A common stock, $.01 par value;
20,000,000 shares authorized, 13,539,005
and 13,437,067 shares issued December 31,
2003 and June 30, 2003, respectively 135,390 134,371
Class B common stock, $.01 par value;
2,000,000 shares authorized, 726,991 issued
and outstanding December 31, 2003 and June
30, 2003, convertible into one share of Class
A common stock 7,270 7,270
Additional paid-in capital 19,251,997 19,147,604
Treasury stock, 132,920 shares at December 31,
2003 and 97,804 at June 30, 2003, at cost (106,091) (72,380)
Notes receivable, common stock -- (80,000)
Accumulated deficit (17,145,800) (17,201,608)
_____________ _____________
Total stockholders' equity 2,142,766 1,935,257
Total liabilities and stockholders'
equity $9,459,832 $9,411,723
============= ============
See Notes to Condensed Consolidated Financial Statements.
-- 3 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
____________ ____________ ____________ ____________
Revenues:
Patient care, net $5,547,404 $5,210,480 $10,739,964 $10,522,105
Pharmaceutical studies 201,410 213,378 344,892 575,267
Contract support services 740,014 252,312 1,507,139 550,185
____________ ____________ ____________ ____________
Total revenues 6,488,828 5,676,170 12,591,995 11,647,557
____________ ____________ ____________ ____________
Operating expenses:
Patient care expenses 3,017,610 2,762,880 5,832,114 5,519,593
Cost of contract support
services 623,445 220,268 1,177,374 501,230
Provision for doubtful
accounts 422,946 324,682 885,837 622,457
Website expenses 79,651 57,534 146,346 113,575
Administrative expenses 2,267,355 2,071,706 4,292,957 3,981,626
____________ ____________ ____________ ____________
Total operating expenses 6,411,007 5,437,070 12,334,628 10,738,481
Income from operations 77,821 239,100 257,367 909,076
____________ ____________ ____________ ____________
Other income (expense):
Interest income 2,458 4,010 5,182 7,824
Other income 36,643 26,194 51,414 52,376
Interest expense (113,142) (145,929) (247,034) (292,131)
____________ ____________ ____________ ____________
Total other expenses, net (74,041) (115,725) (190,438) (231,931)
____________ ____________ ____________ ____________
Income before provision for taxes 3,780 123,375 66,929 677,145
Provision for income taxes 1,121 10,000 11,121 10,000
____________ ____________ ____________ ____________
Net income applicable to common
Shareholders $ 2,659 $ 113,375 $ 55,808 $ 667,145
============ ============ ============ ============
Basic net income per common
Share $ 0.00 $ 0.01 $ 0.00 $ 0.05
============ ============ ============ ============
Basic weighted average number
of shares outstanding 14,043,665 14,064,801 14,038,877 13,896,229
============ ============ ============ ============
Fully diluted net income per
common share $ 0.00 $ 0.01 $ 0.00 $ 0.05
============ ============ ============ ============
Fully diluted weighted average
number of shares outstanding 14,921,550 14,667,728 14,804,158 14,517,434
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
-- 4 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
December 31
2003 2002
___________ ___________
Cash flows from operating activities:
Net income $ 55,808 $ 667,145
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation 131,977 83,060
Non-cash stock-based compensation 126,592 (12,170)
Changes in:
Accounts receivable (89,120) 221,282
Prepaid expenses (306,897) (219,579)
Other assets (45,733) (71,076)
Accounts payable 413,817 (148,052)
Accrued expenses and other liabilities (303,232) (209,338)
___________ ___________
Net cash provided by (used in) operating activities (16,788) 311,272
___________ ___________
Cash flows from investing activities:
Acquisition of property and equipment (106,767) (137,696)
___________ ___________
Net cash used in investing activities (106,767) (137,696)
___________ ___________
Cash flows from financing activities:
Revolving credit note, net 184,044 258,551
Repayment of debt, net (431,409) (457,608)
Deferred financing costs 4,000 4,000
Costs related to issuance of capital stock -- (7,212)
Issuance of common stock 36,200 73,174
Purchase of treasury stock (33,711) --
___________ ___________
Net cash used in financing activities (240,876) (129,095)
___________ ___________
Net increase (decrease) in cash and cash
equivalents (364,431) 44,481
Beginning cash and cash equivalents 494,991 204,564
___________ ___________
Ending cash and cash equivalents $ 130,560 $ 249,045
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 236,684 $ 295,047
Income taxes 18,713 87,089
See Notes to Condensed Consolidated Financial Statements.
-- 5 --
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 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 eight 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 adjustments) considered necessary for a fair
presentation have been included. Operating results for the six months ended
December 31, 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 50,000 at December 31, 2003 and are
subject to variable accounting from the date of the modification through the
-- 6 --
date of exercise or expiration. Compensation expense relating to vested repriced
options at December 31, 2003 was $16,711 for the six months ended December 31,
2003 compared to a reversal of compensation expense of $12,825 for the six
months ended December 31, 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:
Note C- Stock Based Compensation (Continued)
Three Months Ended Six Months Ended
December 31, December 31,
2003 2002 2003 2002
__________ __________ __________ __________
Net income, as reported $ 2,659 $ 113,375 $ 55,808 $ 667,145
Add: Stock-based employee
compensation expense included in
reported netincome, net of related
tax effects 16,259 -- 102,482 (12,825)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (31,897) (8,763) (147,520) (8,638)
__________ __________ __________ _________
Pro forma net income (loss) $ (12,979) $104,612 $ 10,770 $ 645,682
========== ========== ========== ==========
Earnings (loss) per share:
Basic - as reported $ 0.00 $ 0.01 $ 0.00 $ 0.05
========== ========== ========== ==========
Basic - pro forma $ 0.00 $ 0.01 $ 0.00 $ 0.05
========== ========== ========== ==========
Diluted - as reported $ 0.00 $ 0.01 $ 0.00 $ 0.05
========== ========== ========== ==========
Diluted - pro forma $ 0.00 $ 0.01 $ 0.00 $ 0.04
========== ========== ========== ==========
Note D - Reclassifications
Certain December 31, 2002 amounts have been reclassified to be consistent
with the December 31, 2003 presentation.
-- 7 --
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:
BEHAVIORAL HEALTH
TREATMENT ADMINISTRATIVE ONLINE
SERVICES SERVICES SERVICES ELIMINATIONS TOTAL
________________________________________________________________
For the three months ended
December 31, 2003
Revenues - external customers $ 5,547,404 $ 941,424 $ -- $ -- $ 6,488,828
Revenues - intersegment 69,940 733,860 75,000 (878,800) --
Net income (loss) 579,400 (497,090) (79,651) -- 2,659
For the three months ended
December 31, 2002
Revenues - external customers $ 5,210,480 $ 465,690 $ -- $ -- $ 5,676,170
Revenues - intersegment 95,500 656,556 75,000 (827,056) --
Net income (loss) 666,748 (495,839) (57,534) -- 113,375
For the six months ended
December 31, 2003
Revenues - external customers $10,750,064 $1,841,931 $ -- $ -- $12,591,995
Revenues - intersegment 110,340 1,467,720 150,000 (1,728,060) --
Net income (loss) 1,110,742 (908,588) (146,346) -- 55,808
Identifiable Assets 7,705,251 1,709,401 45,180 -- 9,459,832
For the six months ended
December 31, 2002
Revenues - external customers $10,522,105 $1,125,452 $ -- $ -- $11,647,557
Revenues - intersegment 249,100 1,313,112 150,000 (1,712,212) --
Net income (loss) 1,720,587 (939,867) (113,575) -- 667,145
Identifiable Assets 8,120,093 1,423,524 94,489 -- 9,638,106
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.
-- 8 --
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.
Note G - 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 clinician. 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
clinician declared bankruptcy and was not a party to the proceeding. After
numerous successful motions by the Company to reduce the amount of the verdict,
a judgment in the amount of $3,079,741 was entered on October 24, 2003. The
Company has filed post judgment motions for an appeal on the judgment or, in the
alternative for a new trial. The Company believes that substantial error was
committed at trial. If the post judgment motions are denied the Company intends
to appeal. 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. A decision was rendered against
the insurance carrier. The Company has filed motions to require this carrier to
meet its obligations under such policy.
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 has recovered a small
portion of the legal fees expended to date on this matter and will continue to
-- 9 --
seek further reimbursement. Numerous meetings and discussions have been held
with all parties in this matter, including the parameters for an arbitrated
settlement.
Note H - Subsequent Events
In January 2004, the Company signed a definitive purchase agreement to
acquire Pivotal Research Centers, LLC ("Pivotal"). Pivotal, which is based in
Phoenix, AZ, performs all phases of clinical research for Phase I-IV drugs under
development through two dedicated research sites. Pivotal completed 2003 with
approximately $4 million in revenues and net profit margins in excess of 20
percent.
The purchase agreement calls for the Company to deliver $1.5 million in
cash and $500,000 in PHC, Inc. common stock at closing. In addition, the Company
is obligated to deliver payment on three performance based notes over the next
five years aggregating $2,500,000 if fully earned. The agreement will be
completed when the Company's financing arrangements have been finalized. The
Company intends to use both debt and equity to complete the transaction and has
already initiated a transaction, which will provide $800,000 in the sale of
common stock. Management anticipates the acquisition will be accretive to its
earnings during fiscal 2004. For further information regarding the acquisition
see the Company's report on form 8-K filed on January 20, 2004.
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 illnesses.
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.
-- 10 --
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.
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 are 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 their inpatient and outpatient behavioral
health needs of the insurance carrier's enrollees in Nevada for a fixed monthly
fee per member per month. Revenues are recorded monthly based on this formula
and the expenses related to providing the services under this contract are
recorded as incurred. The Company provides most of the outpatient care directly
and, through utilization review, monitors closely, and pre-approves all
inpatient and outpatient services not provided directly. The contract is
considered "at-risk" because the payments to third-party providers for services
rendered could equal or exceed the total amount of the revenue recorded.
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and accepted
based on study criteria and billable units of service are provided. Where a
contract requires completion of the study by the patient, no revenue is
recognized until the patient completes the study program.
Contract support service revenue is a result of fixed 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
-- 11 --
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.
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 14.3% to $6,488,828 for the
three months ended December 31, 2003 from $5,676,170 for the three months ended
December 31, 2002 and 8.1% to $12,591,995 for the six months ended December 31,
2003 from $11,647,557 for the six months ended December 31, 2002.
Net patient care revenue increased 6.5% to $5,547,404 for the three months
ended December 31, 2003 from $5,210,480 for the three months ended December 31,
2002 and 2.1% to $10,739,964 for the six months ended December 31, 2003 from
$10,522,105 for the six months ended December 31, 2002. This increase in revenue
is due primarily to a 3.7% increase in patient days for the three months ended
December 31, 2003 over the same period last year.
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 5.6% to $201,410 for the
three months ended December 31, 2003 from $213,378 for the three months ended
December 31, 2002 and 40.0% to $344,892 for the six months ended December 31,
2003 from $575,267 for the same period last year. This decrease is due to the
ending of some inpatient studies and the slow start of new studies. The revenue
for the three months ended December 31, 2003 represents a 40.3% increase over
the three months ended September 30, 2003. This revenue is expected to fluctuate
from period to period based on the number of studies in progress and the number
of patients enrolled in each study.
Contract support services revenue provided by Wellplace increased 193.3%
to $740,014 for the three months ended December 31, 2003 from $252,312 for the
three months ended December 31, 2002 and increased 173.9% to $1,507,139 for the
-- 12 --
six months ended December 31, 2003 from $550,185 for the same period last year.
The cost of providing these services increased 183.0% to $623,445 for the three
months ended December 31, 2003 from $220,268 for the three months ended December
31, 2002 and 134.9% to $1,177,374 for the six months ended December 31, 2003
from $501,230 for the same period last year. These increases in revenue and
expenses are due to the inclusion of the Michigan call center contract in the
current year and start up costs related to a smoking cessation contract for the
State of Kansas.
Patient care expenses also increased by 9.2% to $3,017,610 for the three
months ended December 31, 2003 from $2,762,880 for the three months ended
December 31, 2002 and increased 5.7% to $5,832,114 for the six months ended
December 31, 2003 from $5,519,593 for the six months ended December 31, 2002.
The increases in expenses for the quarter is due primarily to the increase in
patient days noted above with the primary increases in expenses directly related
to patient census such as payroll, food, laundry, patient transportation,
hospital supplies and pharmacy.
Website expenses increased 38.4% to $79,651 for the three months ended
December 31, 2003 from $57,534 for the three months ended December 31, 2002 and
28.9% to $146,346 for the six months ended December 31, 2003 from $113,575 for
the six months ended December 31, 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 3%.
Administrative expenses increased 9.4% to $2,267,355 for the quarter ended
December 31, 2003 from $2,071,706 for the quarter ended December 31, 2002 and
7.8% to $4,292,957 for the six months ended December 31, 2003 from $3,981,626
for the same period last year. 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). Legal fees for the quarter ended December 31, 2003
were $160,250 as compared to a reversal of legal fees of $13,020 for the same
period last year. Legal fees for the six months ended December 31, 2003 were
$258,755 as compared to $2,290 for the same period last year. These expenses
were offset by the first reimbursement received from the insurance company of
$25,000. Compensation expenses recorded as a result of the repriced options and
the stock purchase agreements recorded in the six months ended December 31, 2003
was $16,711 as compared to a reversal of $12,825 for the same period last year.
Other expenses for services were also recorded as a result of stock and warrants
issued to non-employees totaling $52,501 for the six months ended December 31,
2003 as compared to $655 for the same period last year. General insurance
expense increased approximately 57% for the quarter ended December 31, 2003 and
47% for the six-month period ended December 31, 2003 as compared with the same
periods last year. This is due to general increases in property and professional
liability insurance and the implementation of a "terrorist acts" surcharge on
all policies. Employee benefit and insurance costs increased approximately 21%
for the quarter ended December 31, 2003 and 15% for the six month period ended
December 31, 2003 as compared with the same periods last year. This is primarily
due to increases implemented by insurance carriers for health, dental, life and
workers compensation insurance.
Interest expense decreased 22.4% to $113,142 for the three months ended
December 31, 2003 from $145,929 for the three months ended December 31, 2002 and
15.4% to $247,034 for the six months ended December 31, 2003 from $292,131 for
the same period last year. This decrease is due to the general decline in
interest rates and repayment of approximately 13% of long-term debt.
The Company's provision for income taxes of $11,121 for the six month
periods ended December 31, 2003 is significantly below the Federal statutory
-- 13 --
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 IRS rules that may limit the accessibility
of the loss carry-forwards.
Provision for doubtful accounts increased 30.3% to $422,946 for the three
months ended December 31, 2003 from $324,682 for the three months ended December
31, 2002 and 42.3% to $885,837 for the six months ended December 31, 2003 from
$622,457 for the six months ended December 31, 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 less then 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 $16,788 for the six
months ended December 31, 2003 compared to cash provided by operating activities
of $311,272 for the same period last year. Cash flow from operations in the six
months ended December 31, 2003 consists of net income of $55,808 plus
depreciation and amortization of $131,977, increase in accounts receivable of
$89,120, increase in prepaid expenses of $306,897, decrease in accrued expenses
of $303,232, and increase in accounts payable of $413,817, an increase in other
assets of $45,733 and non-cash equity based charges of $126,592.
Cash used in investing activities in the six months ended December 31, 2003
consisted of $106,767 in capital expenditures compared to $137,696 in capital
expenditures in the same period last year.
Cash used in financing activities in the six months ended December 31, 2003
primarily consisted of $247,365 in net debt repayments compared to $199,057 in
net debt repayments for the same period last year. During the six months ended
December 31, 2003 the Company received $34,200 in cash and issued 60,000 shares
of class A common stock in the exercise of outstanding warrants. The Company
also repurchased 35,116 shares of class A common stock at a cost of $33,711,
which are being held as treasury 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
0.3% to $4,926,891 on December 31, 2003 from $4,945,301 on June 30, 2003. The
minimal 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
-- 14 --
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 twelve
consecutive quarters. Without the legal costs related to litigation, the
company's operating results for the quarter ended December 31, 2003 would have
surpassed last year's operating results by approximately 25%. 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 are listed below. There have been no material changes in these
obligations.
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
=========== ========== ========== ==========
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.
-- 15 --
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.
-- 16 --
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 clinician. 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
clinician declared bankruptcy and was not a party to the proceeding. After
numerous successful motions by the Company to reduce the amount of the verdict,
a judgment in the amount of $3,079,741 was entered on October 24, 2003. The
Company has filed post judgment motions for an appeal on the judgment or, in the
alternative for a new trial. The Company believes that substantial error was
committed at trial. If the post judgment motions are denied the Company intends
to appeal. 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. A decision was rendered against
the insurance carrier. The Company has filed motions to require this carrier to
meet its obligations under such policy.
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 has recovered a small
portion of the legal fees expended to date on this matter and will continue to
seek further reimbursement. Numerous meetings and discussions have been held
with all parties in this matter, including the parameters for an arbitrated
settlement.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on December 30, 2003.
In addition to the election of directors (with regards to which (i) proxies were
solicited pursuant to Regulation 14A under the Securities and Exchange Act of
1934, as amended, (ii) there was no solicitation in opposition to the
management's nominees as listed on the proxy statement, and (iii) all of such
nominees were elected), the stockholders ratified the selection by the Board of
Directors of BDO Seidman, LLP as the Company's independent auditors for the
fiscal year ending June 30, 2004.
The stockholders also voted on and approved a new stock option and purchase
plan to replace the former plan, which expired on August 26, 2003. Under the new
plan 1,300,000 shares of Class A Common Stock are available for issuance at the
discretion of the Board of Directors.
-- 17 --
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.
-- 18 --
Reports on Form 8-K
The Company filed one report on form 8-K during the quarter ended December
31, 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.
-- 19 --
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: February 13, 2004 /s/ Bruce A. Shear
__________________________
Bruce A. Shear
President
Chief Executive Officer
Date: February 13, 2004 /s/ Paula C. Wurts
__________________________
Paula C. Wurts
Controller
Treasurer
-- 20 --