-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QAF99ClB7mwx4wXbML8wKXx9kmTzPO09Aw13gwOuqb4+WsjRPcBaEzxUvYeOYpjO atUrM6361ALjKuPlwxEATg== 0000915127-03-000011.txt : 20030212 0000915127-03-000011.hdr.sgml : 20030212 20030212092023 ACCESSION NUMBER: 0000915127-03-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHC INC /MA/ CENTRAL INDEX KEY: 0000915127 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 042601571 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22916 FILM NUMBER: 03552559 BUSINESS ADDRESS: STREET 1: 200 LAKE ST STE 102 CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 9785362777 MAIL ADDRESS: STREET 1: 200 LAKE ST STREET 2: STE 102 CITY: PEABODY STATE: MA ZIP: 01960 10-Q 1 q2nd_203.txt FORM 10Q FOR QUARTER ENDED 12/31/02 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 - 1 - 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. - 3 - 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.
- 4 - 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. - 5 - 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: - 6 - 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. - 11 - 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. - 12 - 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. - 13 - 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. - 14 - 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 - 15 - EX-99 3 ex99_1.txt CERTIFICATION OF CEO/CFO PURSUANT TO SECTION 302 EXHIBIT 99.1 WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER Section 906 Certification The undersigned hereby certify that the Quarterly Report on Form 10-QSB for the quarter ended December 31, 2002 filed by PHC, Inc. with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer. Date: February , 2003 By: /s/ Bruce A. Shear Bruce A. Shear, President and Chief Executive Officer Date: February , 2003 By: /s/ Paula C. Wurts Paula C. Wurts, Controller and Chief Financial Officer EX-99 4 ex99_2.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 99.2 PHC, INC. CERTIFICATION OF CHIEF EXECUTIVE OFFICER Section 302 Certification I, Bruce A. Shear, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of PHC, Inc., a Massachusetts corporation (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February , 2003 by: /s/ Bruce A. Shear ------------------ Bruce A. Shear Chief Executive Officer EX-99 5 ex99_3.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 99.3 PHC, INC. CERTIFICATION OF CHIEF FINANCIAL OFFICER Section 302 Certification I, Paula C. Wurts, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of PHC, Inc., a Massachusetts corporation (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February , 2003 by: /s/ Paula C. Wurts ------------------ Paula C. Wurts Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----