-----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, Q/H6w/04LEORQw5rlfeFCFwJ7RSEf3CJISzvGY6JeA0kEsIFY9SPCGx5lr2EMCS/ rYDLFNxNfyH123FooA8ZFw== 0000915127-04-000024.txt : 20040213 0000915127-04-000024.hdr.sgml : 20040213 20040213152836 ACCESSION NUMBER: 0000915127-04-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040213 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: 04598522 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 q10q204.txt QUARTERLY REPORT 2ND QUARTER 2004 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 -- EX-31 3 exh31_1.txt CERTIFICATION OF CEO EXHIBIT 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation ; and c. disclosed in this report any change in the registrants internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially effected or is reasonably likely to materially effect, the registrant's internal control over financial reporting: and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information: and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 13, 2004 by: /s/ BRUCE A. SHEAR ______________________ Bruce A. Shear Chief Executive Officer -- 21 -- EX-31 4 exh31_2.txt CERTIFICATION OF CFO EXHIBIT 31.2 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrants internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially effected or is reasonably likely to materially effect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Date: February 13, 2004 by: /s/ PAULA C. WURTS _________________________ Paula C. Wurts Chief Financial Officer -- 22 -- EX-32 5 exh32_1.txt CERTIFICATION OF CEO AND CFO Exhibit 32.1 WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER The undersigned hereby certify that, to the best of the knowledge of the undersigned, the Quarterly Report on Form 10-QSB for the quarter ended December 31, 2003 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 13, 2004 By: /s/ Bruce A. Shear _________________________________ Bruce A. Shear, President and Chief Executive Officer Date: February 13, 2004 By: /s/ Paula C. Wurts _________________________________ Paula C. Wurts, Controller and Chief Financial Officer -- 23 -- -----END PRIVACY-ENHANCED MESSAGE-----