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, 2002.
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ___________
Commission file number 0-22916
PHC, INC.
(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 24,
2003:
Class A Common Stock 13,364,771
Class B Common Stock 726,991
Transitional Small Business Disclosure Format
(Check one):
Yes______ No X
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PHC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2002 (unaudited)
and June 30, 2002.
Condensed Consolidated Statements of Operations (unaudited) - Three
and six months ended December 31, 2002 and December 31, 2001.
Condensed Consolidated Statements of Cash Flows (unaudited) - Six
months ended December 31, 2002 and December 31, 2001.
Notes to Condensed Consolidated Financial Statements - December 31, 2002.
Item 2. Management's Discussion and Analysis of Plan of Operation
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
Signatures
- 2 -
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 2002 2002
(unaudited)
________________________
Current assets:
Cash and cash equivalents $ 249,045 $ 204,564
Accounts receivable, net of allowance for
doubtful accounts of $2,543,384 at
December 31, 2002, $2,715,760 at June 30, 2002 4,638,300 5,078,419
Prepaid expenses 286,231 66,652
Other receivables and advances 94,359 137,032
Deferred income tax asset 808,607 766,793
__________ __________
Total current assets 6,076,542 6,253,460
Accounts receivable, non-current 900,000 690,000
Other receivable 143,578 92,068
Property and equipment, net 1,318,315 1,259,648
Deferred financing costs, net of amortization of
$126,109 at December 31, 2002 and $122,109
at June 30, 2002 8,000 12,000
Goodwill, net of accumulated amortization of
$270,105 at December 31, 2002 and June 30, 2002 969,099 969,099
Other assets 222,572 197,340
__________ __________
Total assets $9,638,106 $9,473,615
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,135,337 $1,283,389
Notes payable--related parties 125,000 200,000
Current maturities of long-term debt 784,322 765,415
Revolving credit note 1,727,195 1,468,644
Deferred revenue 160,943 129,258
Current portion of obligations under capital leases 51,348 11,020
Accrued payroll, payroll taxes and benefits 390,201 452,177
Accrued expenses and other liabilities 1,103,910 1,597,642
Convertible debentures 425,000 500,000
_________ __________
Total current liabilities 5,903,256 6,407,545
_________ __________
Long-term debt 2,031,907 2,428,945
Obligations under capital leases 51,335 21,140
_________ __________
Total noncurrent liabilities 2,083,242 2,450,085
__________ __________
Total liabilities 7,986,498 8,857,630
__________ __________
Stockholders' equity
Class A common stock, $.01 par value; 20,000,000
shares authorized, 13,387,670 and 12,919,042
shares issued December 31, 2002 and June
30, 2002, respectively 133,877 129,190
Class B common stock, $.01 par value; 2,000,000
shares authorized, 726,991 issued and outstanding
December 31, 2002 and June 30, 2002,
convertible into one share of Class A
common stock 7,270 7,270
Additional paid-in capital 19,133,654 18,769,863
Treasury stock, 38,126 shares at December 31,2002
and June 30, 2002, at cost (30,988) (30,988)
Notes receivable, common stock (80,000) (80,000)
Accumulated deficit (17,512,205) (18,179,350)
__________ __________
Total stockholders' equity 1,651,608 615,985
__________ __________
Total liabilities and stockholders' equity $9,638,106 $9,473,615
========== ===========
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
___________ __________ _____________ ___________
Revenues:
Patient care, net $ 5,210,480 $5,052,946 $10,522,105 $10,372,090
Pharmaceutical studies 213,378 123,595 575,267 203,412
Website services -- 1,000 -- 3,301
Contract support services 252,312 202,250 550,185 415,226
___________ __________ _____________ ___________
Total revenues 5,676,170 5,379,791 11,647,557 10,994,029
___________ __________ _____________ ___________
Operating expenses:
Patient care expenses 2,762,880 2,570,645 5,238,541 5,243,036
Cost of contract support services 220,268 176,127 501,230 345,099
Provision for doubtful accounts 324,682 299,100 622,457 415,539
Website expenses 57,534 77,258 113,575 158,205
Administrative expenses 2,071,706 2,100,966 4,262,678 4,028,313
___________ __________ ____________ ___________
Total operating expenses 5,437,070 5,224,096 10,738,481 10,190,192
___________ __________ ____________ ___________
Income from operations 239,100 155,695 909,076 803,837
___________ __________ ____________ ___________
Other income (expense):
Interest income 4,010 3,706 7,824 7,048
Other income 26,194 31,763 52,376 51,090
Interest expense (145,929) (183,303) (292,131) (401,133)
___________ __________ ____________ ___________
Total other expenses, net (115,725) (147,834) (231,931) (342,995)
___________ __________ ____________ ___________
Income before provision for taxes 123,375 7,861 677,145 460,842
Provision for income taxes 10,000 -- 10,000 --
___________ __________ ____________ ___________
Net income 113,375 7,861 667,145 460,842
Dividends -- (28,963) -- (59,351)
___________ __________ ____________ ___________
Income (loss) applicable to common
shareholders $ 113,375 $ (21,102) $ 667,145 $ 401,491
============= ========== =========== ===========
Basic income (loss) per common share $ 0.01 $ 0.00 $ 0.05 $ 0.04
Basic weighted average number of shares
outstanding 14,064,801 9,684,687 13,896,229 9,541,924
Fully diluted income (loss) per common
share $ 0.01 $ 0.00 $ 0.05 $ 0.03
Fully diluted weighted average number of
shares outstanding 14,667,728 9,684,687 14,517,434 14,510,271
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended
December 31
2002 2001
_____________________________
Cash flows from operating activities:
Net income $ 667,145 $ 460,842
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 83,060 98,376
Amortization of financing costs 4,000 4,000
Compensatory Stock options (12,825) --
Stock options and stock and warrants
issued for obligations 655 32,607
Changes in:
Accounts receivable 221,282 751,311
Prepaid expenses (219,579) (150,235)
Other assets (71,076) (167,797)
Accounts payable (148,052) (13,305)
Accrued expenses and other liabilities (209,338) (148,207)
Net liabilities of discontinued operations -- (24,713)
___________ ____________
Net cash provided by operating activities 315,272 842,879
___________ ____________
Cash flows from investing activities:
Acquisition of property and equipment (137,696) (98,597)
___________ ____________
Net cash used in investing activities (137,696) (98,597)
___________ ____________
Cash flows from financing activities:
Revolving debt, net 258,551 (575,890)
Proceeds (repayment) of debt, net (457,608) (94,515)
Costs related to issuance of capital stock (7,212) (20,775)
Issuance of common stock 73,174 300
Purchase of treasury stock -- (6,094)
___________ ____________
Net cash used in financing activities (133,095) (696,974)
___________ ____________
Net increase in cash and cash equivalents 44,481 47,308
Beginning cash and cash equivalents 204,564 43,732
___________ ____________
Ending cash and cash equivalents $ 249,045 $ 91,040
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 295,047 $ 375,314
Income taxes 87,089 9,718
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock for options $ 302,516 $ --
Accrued dividends on Series C preferred
stock -- 59,351
Conversion of preferred stock to common
stock -- 100,000
Issuance of common stock in lieu of cash for
dividends due -- 12,395
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2002
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 and
a smoking cessation contract with the State of Nebraska. 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 six months ended December 31, 2002
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.
Note C - Reclassifications
Certain December 31, 2001 amounts have been reclassified to conform with
the December 31, 2002 presentation.
Note D - 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
SERVICES SERVICES SERVICES ELIMINATIONS TOTAL
____________________________________________________________________________
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 three months ended
December 31, 2001
Revenues - external customers $ 5,052,946 $ 325,845 $ 1,000 $ -- $ 5,379,791
Revenues - intersegment -- 474,000 75,000 (549,000) --
Net income (loss) 424,064 (345,640) (70,563) -- 7,861
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
For the six months ended
December 31, 2001
Revenues - external customers $10,372,090 $ 618,638 $ 3,301 $ -- $10,994,029
Revenues - intersegment -- 948,000 150,000 (1,098,000) --
Net income (loss) 1,275,715 (665,664) (149,209) -- 460,842
Identifiable Assets 7,985,752 1,238,950 109,000 -- 9,333,702
- 7 -
Note E - New Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," and APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business." SFAS No. 144 becomes effective for the fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144 in the
quarter ended September 30, 2002 with no impact to its financial position or
results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
cost associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS 146 will be
applied prospectively to any exit or disposal activities initiated after
December 31, 2002.
The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net loss, as the options granted under those plans had an
exercise price equal to, or greater than, the market value of the underlying
common stock on the date of the grant. In accordance with FASB Statement No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure,
beginning in the quarter ending March 31, 2003, the Company will adopt the
disclosure requirements of FASB No. 148.
- 8 -
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 seven outpatient
psychiatric centers (collectively called "treatment facilities"). The company's
revenue for providing behavioral health services through these facilities is
derived from contracts with managed care companies, Medicare, Medicaid, state
agencies, railroads, gaming industry corporations and individual clients. The
profitability of the company is largely dependent on the level of patient census
and the payor mix at these treatment facilities. Patient census is measured by
the number of days a client remains overnight at an inpatient facility or the
number of visits or encounters with clients at out patient clinics. Payor mix is
determined by the source of payment to be received for each client being
provided billable services. The company's administrative expenses do not vary
greatly as a percentage of total revenue but the percentage tends to decrease
slightly as revenue increases. Although the company has changed the focus and
reduced expenses of its' internet operation, Behavioral Health Online, Inc., to
provide technology and internet support for the company's other operations, it
also continues to provide behavioral health information and education through
its web site at Wellplace.com. The company's most recent addition, Pioneer
Pharmaceutical Research, contracts with major manufacturers of psychiatric
pharmaceuticals to assist in the study of the effects of certain pharmaceuticals
in the treatment of specific mental illness.
The healthcare industry is subject to extensive federal, state and local
regulation governing, among other things, licensure and certification, conduct
of operations, audit and retroactive adjustment of prior government billings and
reimbursement. In addition, there are on going debates and initiatives regarding
the restructuring of the health care system in its entirety. The extent of any
regulatory changes and their impact on the company's business is unknown. The
current administration has put forth proposals to mandate equality in the
benefits available to those individuals suffering from mental illness (the
Parity Act). If passed this legislation will improve access to the companies
programs. Managed care has had a profound impact on the company's operations, in
the form of shorter lengths of stay, extensive certification of benefits
requirements and, in some cases, reduced payment for services.
Critical Accounting Policies
The preparation of our financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. On an on-going basis, we evaluate
our estimates and assumptions, including but not limited to those related to
revenue recognition, accounts receivable reserves and the impairment of
long-lived assets, goodwill and other intangible assets. We base our estimates
on historical experience and various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue recognition and accounts receivable:
Patient care revenues and accounts receivable are recorded at established
billing rates or at the amount realizable under agreements with third-party
payors, including Medicaid and Medicare. Revenues under third-party payor
agreements are subject to examination and contractual adjustment, and amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
provided and subsequent settlements are recorded in operations in the year of
settlement. The provision for contractual allowances is deducted directly from
revenue and the net revenue amount is recorded as accounts receivable. The
allowance for doubtful accounts does not include the contractual allowances.
- 9 -
Allowance for doubtful accounts:
Reserves for bad debt are maintained at a percentage of outstanding
accounts receivable based on the company's historic collection results, the age
of the receivable and other relevant information.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the assets using accelerated and straight-line
methods.
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 5.5% to $5,676,170 for the
three months ended December 31, 2002 from $5,379,791 for the three months ended
December 31, 2001 and 5.9% to $11,647,557 for the six months ended December 31,
2002 from $10,994,029 for the six months ended December 31, 2001.
Net patient care revenue increased 3.1% to $5,210,480 for the three months
ended December 31, 2002 from $5,052,946 for the three months ended December 31,
2001 and 1.5% to $10,522,105 for the six months ended December 31, 2002 from
$10,372,090 for the six months ended December 31, 2001. This increase in revenue
is due primarily to a 9.9% and 3.0% increase in patient days for the three
months and six months ended December 31, 2002, respectively, over the same
periods last year. Marketing efforts have continued to aid in increasing the
census at the in patient facilities.
Income before interest, taxes, depreciation amortization and dividends was
$312,593 for the three months ended December 31, 2002 compared to $244,356 for
the three months ended December 31, 2001 and $1,052,336 for the six months ended
December 31, 2002 compared to $964,381 for the six months ended December 31,
2001.
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.
Revenue from pharmaceutical studies increased 72.6% to $213,378 for the
three months ended December 31, 2002 from $123,595 for the three months ended
December 31, 2001 and 182.8% to $575,267 for the six months ended December 31,
2002 from $203,412 for the same period last year. This increase is due to the
start up of new studies and 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.
- 10 -
Patient care expenses also increased by 7.5% to $2,762,880 for the three
months ended December 31, 2002 from $2,570,645 for the three months ended
December 31, 2001 and remained relatively stable at $5,238,541 for the six
months ended December 31, 2002 from $5,243,036 for the six months ended December
31, 2001. 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.
Contract support services revenue provided by Wellplace increased 24.8% to
$252,312 for the three months ended December 31, 2002 from $202,250 for the
three months ended December 31, 2001 and increased 32.5% to $550,185 for the six
months ended December 31, 2002 from $415,226 for the same period last year. The
cost of providing these services increased 25.1% to $220,268 for the three
months ended December 31, 2002 from $176,127 for the three months ended December
31, 2001 and 45.2% to $501,230 for the six months ended December 31, 2002 from
$345,099 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.
Bad debt expense increased 8.6% to $324,682 for the three months ended
December 31, 2002 from $299,100 for the three months ended December 31, 2001 and
49.8% to $622,457 for the six months ended December 31, 2002 from $415,539 for
the same period last year. These increases are due to increases in revenue and
the usual decreases in collections during the fourth quarter of the calendar
year.
Web development expenses decreased 25.5% to $57,534 for the three months
ended December 31, 2002 from $77,258 for the three months ended December 31,
2001 and 28.2% to $113,575 for the six months ended December 31, 2002 from
$158,205 for the six months ended December 31, 2001. This decrease is due to the
change in focus of the Internet company to internal support of the other
operating locations. Website expenses are expected to continue at this level
while the Internet company's focus remains internal.
Administrative expenses decreased 1.4% to $2,071,706 for the quarter ended
December 31, 2002 from $2,100,966 for the quarter ended December 31, 2001 and
increased 5.8% to $4,262,678 for the six months ended December 31, 2002 from
$4,028,313 for the same period last year. This increase for the six months is
primarily due to the increases in all administrative expenses for the
pharmaceutical research operations, which increased approximately 66.9% for the
six months ended December 31, 2002 over the same period last year due to an
increase number of active studies and study participants. Marketing expense
increased approximately 106% for the quarter ended December 31,2002 and 99% for
the six month period ended December 31, 2002 as compared with the same periods
last year. General insurance expense increased approximately 39% for the quarter
ended December 31, 2002 and 18% for the six-month period ended December 31, 2002
as compared with the same periods last year.
Interest expense decreased 20.4% to $145,929 for the three months ended
December 31, 2002 from $183,303 for the three months ended December 31, 2001 and
27.2% to $292,131 for the six months ended December 31, 2002 from $401,133 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.
Other income decreased 17.5% to $26,194 for the three months ended December
31, 2002 from $31,763 for the three months ended December 31, 2001. This
decrease is due to the receipt of an insurance claim in the quarter ended
December 31, 2001. Other income increased 2.5% to $52,376 for the six months
ended December 31, 2002 from $51,090 for the same period last year. This
increase is primarily due to an increased request for medical records at our
treatment facilities.
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The company has no provision for federal income taxes for the three months
or six months ended December 31, 2002 due to the utilization of net operating
loss carry-forwards. Total income tax expense for the quarter ended December 31,
2002 represents state income taxes for certain subsidiaries with no available
net operating loss carry-forwards.
The company has had no preferred stock outstanding during the current
fiscal year and no stock dividends were paid during the six months ended
December 31, 2002.
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 view receivables most conservatively
by maintaining the ratio of reserves for bad debt to total patient receivables
at approximately 32% on an accounts receivable balance, which decreased 4.3% to
$8,115,062 at December 31, 2002 from $8,484,179 at June 30, 2002. The $900,000
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.
Liquidity and Capital Resources
The company`s net cash provided by operating activities was $315,272 for
the six months ended December 31, 2002 compared to $842,879 for the six months
ended December 31,2001. Cash flow from operations in the six months ended
December 31, 2002 consists of net income of $667,145 plus depreciation and
amortization of financing costs of $87,060, decrease in accounts receivable of
$221,282 and non-cash equity based charges of $655 less cash used for net
changes in other operating assets and liabilities of $660,870.
Cash used in investing activities in the six months ended December 31, 2002
consisted of $137,696 in capital expenditures compared to $98,597 in capital
expenditures during the same period last year.
Cash used in financing activities in the six months ended December 31, 2002
primarily consisted of $199,057 in debt repayments compared to $670,405 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
4.0% to $5,538,300 on December 31, 2002 from $5,768,419 on June 30, 2002. This
decrease is a result of better accounts receivable management due to increased
staff, standardization of some procedures for collecting receivables and a more
aggressive collection policy. The increased staff has allowed the company to
concentrate on current accounts receivable and resolve any problem issues before
they become uncollectable. The company's collection policy calls for earlier
contact with insurance carriers with regard to payment, use of fax and
registered mail to follow-up or resubmit claims and earlier employment of
collection agencies to assist in the collection process. Our collectors will
also seek assistance through every legal means, including the State Insurance
Commissioner's office, when appropriate, to collect claims. At the same time,
the company continues to closely monitor reserves for bad debt based on
potential insurance denials and past difficulty in collections.
The company has operated ongoing operations profitably for eight
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 October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," and APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business." SFAS No. 144 becomes effective for the fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144 in the
quarter ended September 30, 2002 with no impact in its financial position or
results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
cost associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS 146 will be
applied prospectively to any exit or disposal activities initiated after
December 31, 2002.
The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net loss, as the options granted under those plans had an
exercise price equal to, or greater than, the market value of the underlying
common stock on the date of the grant. In accordance with FASB Statement No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure,
beginning in the quarter ending March 31, 2003, the Company will adopt the
disclosure requirements of FASB No. 148.
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PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on December 19, 2002.
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, 2003.
The stockholders also voted to amend the 1993 Employee Stock Purchase and
Option Plan to increase the number of shares of Class A Common Stock available
for issuance under the plan from 1,750,000 to 2,000,000 shares; to amend the
1995 Employee Stock Purchase Plan to increase the number of shares of Class A
Common Stock available for issuance under the plan from 250,000 to 500,000; to
amend the 1995 Non-Employee Director Stock Option Plan to increase the number of
shares available for issuance under the plan from 250,000 to 350,000.
options.
Item 6 Exhibits
(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.
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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: February 12, 2003 /s/ Bruce A. Shear
--------------------------
Bruce A. Shear
President
Chief Executive Officer
Date: February 12, 2003 /s/ Paula C. Wurts
-------------------------
Paula C. Wurts
Controller
Treasurer
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