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, 2000.
| | 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 February 13,
2001:
Class A Common Stock 7,623,093
Class B Common Stock 726,991
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(Check one):
Yes______ No X
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PHC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - December 31, 2000 and June 30,
2000.
Condensed Consolidated Statements of Operations - Three months ended
December 31, 2000 and December 31, 1999; Six months ended December 31,
2000 and December 31, 1999.
Condensed Consolidated Statements of Cash Flows - Six months ended
December 31, 2000 and December 31, 1999.
Notes to Condensed Consolidated Financial Statements - December 31,
2000.
Item 2. Management's Discussion and Analysis of Plan of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits
Signatures
- 3 -
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31 JUNE 30
2000 2000
(UNAUDITED)
____________________________
ASSETS
Current assets:
Cash & cash equivalents $ 88,096 $ 551,713
Accounts receivable, net of allowance for bad
debts of $2,687,187 at December 31, 2000,
$2,850,470 at June 30, 2000 5,637,329 6,286,490
Prepaid expenses 166,750 120,481
Other receivables and advances 130,400 148,554
Deferred income tax asset 459,280 459,280
Other receivables, related party 423,802 77,500
____________ __________
Total current assets 6,905,657 7,644,018
Accounts receivable, noncurrent 712,000 642,000
Other receivables, noncurrent, related party, net
of allowance for doubtful accounts of
$1,125,054 at June 30, 2000 -- 3,239,456
Other receivable 127,102 95,214
Property and equipment, net 1,379,878 1,327,630
Deferred income taxes 154,700 154,700
Deferred financing costs, net of amortization of
$105,840 at December 31, 2000 and
$87,555 at June 30, 2000 28,268 46,554
Goodwill, net of accumulated amortization of
$317,260 at December 31, 2000
and $296,907 at June 30, 2000 1,049,353 2,630,265
Other assets 119,092 107,972
____________ __________
Total assets $10,476,050 $15,887,809
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,528,990 $ 1,717,362
Notes payable--related parties 200,000 200,000
Current maturities of long-term debt 1,671,978 1,622,239
Revolving credit note 2,045,765 1,555,149
Current portion of obligations under capital
leases 25,870 45,482
Accrued payroll, payroll taxes and benefits 351,076 416,111
Accrued expenses and other liabilities 1,218,039 1,798,400
Net liabilities of discontinued operations
(Note F) 1,032,009 1,884,234
____________ __________
Total current liabilities 9,073,727 9,238,977
____________ __________
Long-term debt 2,401,508 2,508,715
Obligations under capital leases 18,034 12,808
Convertible debentures 500,000 500,000
____________ __________
Total noncurrent liabilities 2,919,542 3,021,523
____________ __________
Total liabilities 11,993,269 12,260,500
____________ __________
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized, 165,000 and 136,000
shares issued and outstanding December 31,
2000 and June 30, 2000, respectively 1,650 1,360
Class A common stock, $.01 par value;
20,000,000 shares authorized,
7,536,828 and 7,019,608 shares issued
December 31, 2000 and June 30, 2000,
respectively 75,368 70,196
Class B common stock, $.01 par value; 2,000,000
shares authorized,726,991 issued and outstanding
December 31, 2000 and June 30, 2000, convertible
into one share of Class A common stock 7,270 7,270
Additional paid-in capital 18,696,485 17,895,162
Treasury stock, 2,776 shares at cost (12,122) (12,122)
Notes receivable, common stock (90,000) --
Accumulated deficit (20,195,870) (14,334,557)
____________ __________
Total stockholders' equity (deficit) (1,517,219) 3,627,309
____________ ___________
Total liabilities and stockholders' equity
(deficit) $ 10,476,050 $15,887,809
============= ===========
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
2000 1999 2000 1999
____________________ ______________________
Revenues:
Patient care, net $5,041,306 $4,106,185 $9,753,238 $8,057,683
Management fees -- 227,831 345,111 493,235
Pharmaceutical studies 60,430 -- 94,908 --
Website services 81 -- 15,081 --
Contract support services 208,176 154,735 388,153 320,642
_____________________ ______________________
Total revenues 5,309,993 4,488,751 10,596,491 8,871,560
_____________________ ______________________
Operating expenses:
Patient care expenses 2,377,760 2,211,866 4,585,095 4,337,274
Cost of contract support
services 201,131 105,860 363,132 217,766
Provision for doubtful
accounts 797,997 630,036 1,624,907 1,068,388
Website expenses 350,602 213,785 737,889 347,840
Administrative expenses 1,822,062 1,848,759 3,447,128 3,477,268
Practice management
closing expenses (Note B) 4,855,966 -- 4,855,966 --
_____________________ ______________________
Total operating expenses 10,405,518 5,010,306 15,614,117 9,448,536
Loss from operations (5,095,525) (521,555) (5,017,626) (576,976)
_____________________ ______________________
Other income (expense)
Interest income 6,586 101,735 14,486 198,176
Other income 6,171 36,065 22,127 126,061
Interest expense (235,793) (194,410) (514,165) (385,278)
_____________________ ______________________
Total other expenses (223,036) (56,610) (477,552) (61,041)
_____________________ ______________________
Loss before provision for taxes (5,318,561) (578,165) (5,495,178) (638,017)
Provision for income taxes 44,450 -- 44,450 100
_____________________ ______________________
Net loss (5,363,011) (578,165) (5,539,628) (638,117)
Dividends (148,772) (43,733) (321,685) (56,196)
_____________________ ______________________
Loss applicable to common
shareholders $(5,511,783) $(621,898) $(5,861,313) $(694,313)
====================== =======================
Basic and diluted (loss) per
common share $ (0.67) $ (0.09) $ (0.73) $ (0.11)
Basic and diluted weighted
average number of shares
outstanding 8,237,592 6,380,958 8,087,811 6,359,254
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED
DECEMBER 31
2000 1999
___________________________
Cash flows from operating activities:
Net loss $(5,539,628) $(638,117)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 128,788 163,444
Goodwill impairment 1,545,609 --
Write down of accounts receivable, professional
corporation 3,071,310 --
Compensatory stock options and stock and warrants
issued for Obligations 11,186 67,797
Changes in:
Accounts receivable 387,271 722,855
Prepaid expenses and other current assets (46,269) (76,084)
Other assets (11,120) (21,124)
Accounts payable 811,628 (20,728)
Accrued expenses and other liabilities (645,396) (121,184)
Net liabilities of discontinued operations (852,225) (310,954)
____________ _________
Net cash used in operating activities (1,138,846) (234,095)
____________ _________
Cash flows from investing activities:
Acquisition of property and equipment (137,507) (52,345)
Web development (8,226) --
____________ _________
Net cash used in investing activities (145,733) (52,345)
Cash flows from financing activities:
Revolving debt, net 490,616 (621,963)
Proceeds (repayment) of debt, net (71,854) 558,044
Deferred financing costs 18,286 9,354
Preferred stock dividends (65,185) (4,809)
Issuance of preferred stock at a discount 250,000 --
Common stock issued in earnout 297,500 --
Costs related to issuance of capital stock (8,401) (10,322)
Notes issued for stock purchase (90,000) --
____________ _________
Net cash provided by (used in) financing activities 820,962 (69,696)
NET DECREASE IN CASH (463,617) (356,136)
Beginning cash balance 551,713 381,170
____________ _________
ENDING CASH BALANCE $ 88,096 $ 25,034
============ ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $511,411 $400,278
Income taxes 71,550 35,500
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of preferred stock to common stock $50,000 $50,000
Issuance of preferred stock in lieu of cash
for dividends due -- $18,000
Issuance of common stock in lieu of cash for
dividends due -- $33,386
Preferred stock discount $90,000 --
Beneficial conversion feature of preferred stock $166,500 --
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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;
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.
BSC-NY, Inc., a subsidiary of PHC, Inc., provided management services on behalf
of physician owned behavioral health practices in the greater New York City
metropolitan area (see below). Pioneer Development and Support Services ("PDSS")
provides help line services primarily through contracts with major railroads.
Pioneer Pharmaceutical Research conducts studies of the effects of FDA approved
psychiatric pharmaceuticals on a controlled population through contracts with
major manufacturers of these pharmaceuticals; and
(3) BEHAVIORAL HEALTH ONLINE SERVICES, which includes behavioral health
education, training and products for the behavioral health professional, through
its website wellplace.com formerly known as behavioralhealthonline.com.
In June, 1998 the Company's sub acute long-term care facility, Franvale
Nursing and Rehabilitation Center, in Braintree, Massachusetts was closed in a
state receivership action which was precipitated when the Company caused the
owner of the Franvale facility, Quality Care Centers of Massachusetts, Inc., to
institute a proceeding under Chapter 11 of the Federal Bankruptcy Code. The net
liabilities of this facility are shown as net liabilities of discontinued
operations in the accompanying financial statements. The liquidation of the
liabilities of Franvale may result in a non-cash financial statement gain. The
recognition of any gain has been deferred until final resolution of all
contingent liabilities.
NOTE B - PRACTICE MANAGEMENT CLOSING EXPENSES
In December 2000 the Board decided to close its' BSC-NY, Inc. practice
management operations due to recent deterioration of operating results. Revenues
of BSC-NY, Inc were dependent on the success of the professional corporation,
Rubenfaer Physician Services, P.C., for which it provided management services.
Although the New York practice management operations reported operating income
of approximately $131,000 for the fiscal year ended June 30, 2000, adverse
business conditions resulted in a loss of approximately $399,000 for the six
months ended December 31, 2000 before facility closing expenses of $4,855,966.
These adverse operating conditions were caused by the decline in revenues
produced by the professional corporation which is in the process of closing down
its' business operations. The table below outlines practice management closing
expenses.
Goodwill impairment $1,545,609
Write down of the receivable
due from the professional corporation 3,071,310
Lease termination and other expenses 239,047
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NOTE C - 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, 2000
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2001. The accompanying financial statements should be read in
conjunction with the June 30, 2000 consolidated financial statements and
footnotes thereto included in the Company's 10-KSB filed on September 29, 2000.
NOTE D - RECLASSIFICATIONS
Certain amounts have been reclassified to conform with the December 31,
2000 presentation.
NOTE E - BUSINESS SEGMENT INFORMATION
The Company's behavioral health treatment services have similar economic
characteristics, services, patients and clients. Accordingly, all behavioral
health treatment services are reported on an aggregate basis under one segment.
The Company's segments are more fully described in Note A above. Residual income
and expenses from closed facilities are included in the administrative services
segment. The administrative services segment for the quarter and six months
ended December 31, 2000 include $4,855,966 of facility closing expenses for the
New York operations as detailed above. 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, 2000
REVENUES - EXTERNAL
CUSTOMERS $5,041,306 $ 268,606 $ 81 $ -- $5,309,993
REVENUES -
INTERSEGMENT -- 478,698 8,697 (487,395) --
NET INCOME (LOSS) 242,709 (5,389,273) (216,447) -- (5,363,011)
FOR THE THREE MONTHS
ENDED DECEMBER 31, 1999
REVENUES - EXTERNAL
CUSTOMERS $4,106,185 $ 382,566 $ -- $ -- $4,488,751
REVENUES -
INTERSEGMENT -- 440,000 -- (440,000) --
NET INCOME (LOSS) (49,195) (390,185) (138,785) -- (578,165)
FOR THE SIX MONTHS
ENDED DECEMBER 31,
2000
REVENUES - EXTERNAL
CUSTOMERS $9,753,238 $ 828,172 $ 15,081 $ -- $10,596,491
REVENUES -
INTERSEGMENT -- 975,396 13,520 (988,916) --
NET INCOME (LOSS) 974,481 (6,058,800) (455,309) -- (5,539,628)
TOTAL ASSETS 8,847,346 24,261,287 74,360 (22,706,943) 10,476,050
FOR THE SIX MONTHS
ENDED DECEMBER 31, 1999
REVENUES - EXTERNAL
CUSTOMERS $8,057,683 $ 813,877 $ -- $ -- $ 8,871,560
REVENUES -
INTERSEGMENT -- 878,000 -- (878,000) --
NET INCOME (LOSS) 40,258 (480,535) (197,840) -- (638,117)
TOTAL ASSETS 8,945,322 24,971,658 16,040 (20,227,264) 13,705,756
- 8 -
NOTE F - NET LIABILITIES OF DISCONTINUED OPERATIONS
Net Liabilities of discontinued operations relates to the Franvale closure
in 1998 and consists of the following:
DECEMBER 31, JUNE 30,
2000 2000
______________________________
Debt forgiveness and reserve for
contingencies $2,641,537 $2,641,537
Less legal and other expenses
incurred to date 1,609,528 757,303
_____________ ____________
Net liabilities of discontinued
operations $1,032,009 $1,884,234
============= ============
The recognition of gain, if any, has been deferred until final resolution of all
contingent liabilities related to the discontinued operations.
- 9 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PHC, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net patient care revenue increased 22.8% to $5,041,306 for the three months
ended December 31, 2000 from $4,106,185 for the three months ended December 31,
1999 and 21.0% to $9,753,238 for the six months ended December 31, 2000 from
$8,057,683 for the six months ended December 31, 1999. This increase in revenue
is due primarily to a 10.1% and 11.7% increase in patient days for the three
months and six months ended December 31, 2000, respectively, over the same
periods last year. Marketing efforts have continued to aid in increasing the
census at all three in patient facilities.
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.
During the quarter ended December 31, 2000 the company decided to close the
New York practice management operations due to recent deterioration of operating
results. Although the operations recorded income from operations of
approximately $131,000 for the fiscal year ended June 30, 2000, adverse business
conditions, caused, in part, by the decline in revenues produced by the
professional corporation, resulted in a loss of approximately $399,000 for the
six months ended December 31, 2000 before practice management closing expenses
of $4,855,966 which consists of goodwill impairment of $1,545,609, write down of
the receivable due from the professional corporation of $3,071,310 and lease
termination and other expenses of $239,047. The practice management impaired
goodwill and a substantial portion of the accounts receivable relate to the
purchase of the operations which was partially paid through the issuance of PHC
class A common stock.
Income before interest, taxes, depreciation, amortization, dividends,
Behavioral Health Online and the New York operations was $145,545 for the three
months ended December 31, 2000 and $766,254 for the six months ended December
31, 2000 compared to a loss of $181,789 and $171,639 for the same periods last
year.
Contract support services revenue provided by PDSS increased 34.5% to
$208,176 for the three months ended December 31, 2000 from $154,735 for the
three months ended December 31, 1999 and 21.1% to $388,153 for the six months
ended December 31, 2000 from $320,642 for the same period last year. The cost of
providing these services increased 90.0% to $201,131 for the three months ended
December 31, 2000 from $105,860 for the three months ended December 31, 1999 and
66.7% to $363,132 for the six months ended December 31, 2000 from $217,766 for
the same period last year. These changes in revenue and expenses are due
primarily to the addition of a new contract, which is being serviced jointly by
PDSS and Behavioral Health Online, and carries with it high startup costs and an
increase in services provided under existing contracts.
- 10 -
The company also booked a small amount of revenue for website products and
services and is now providing an additional revenue producing service by
developing and hosting private label websites for individual therapists. The
company also booked pharmaceutical study revenue of $60,730 for the three months
ended December 31, 2000.
Administrative expenses remained relatively constant decreasing
approximately 1.4% for the quarter ended December 31, 2000 and increasing less
than one percent for the six months ended December 31, 2000 compared to the same
periods last year. The largest increases were in contract expenses related to
PDSS and our capitated rate contracts in Nevada and an 11.9% increase in
utilities. The largest decrease was in maintenance costs related to major
repairs made at our Virginia facility in 1999.
Website expenses include all costs relevant to the development and the
operations of the Wellplace.com website. Website expenses increased 63.0% to
$350,602 for the period ended December 31, 2000 from $213,785 for the three
months ended December 31, 1999 and 112.1% to $737,889 for the six months ended
December 31, 2000 from $347,840 for the same period last year. The company has
taken steps to reduce expenses for the internet company, largely through reduced
staffing, while pursuing equity financing. The revenue of the website will
include only commissions on the sale of products and services. A corresponding
liability will be recorded at the time of the sale for the cost of the product
or service due to the provider. This is necessary since the full amount of the
sale will be charged to the end user and processed by Wellplace.com. Wellplace
staff members will do the development of private label websites therefore; all
of the proceeds for this service will be recorded as revenue.
Patient care expenses also increased by 7.5% to $2,377,760 for the three
months ended December 31, 2000 from $2,211,866 for the three months ended
December 31, 1999 and 5.7% to $4,585,095 for the six months ended December 31,
2000 from $4,337,274 for the six months ended December 31, 1999. These increases
in expenses are due primarily to the increase in patient days of approximately
10% as noted above with the primary increases in expenses directly related to
patient census such as payroll, food, laundry, patient transportation and
pharmacy.
Bad debt expense increased 26.7% to $797,997 for the three months ended
December 31, 2000 from $630,036 for the three months ended December 31, 1999 and
52.1% to $1,624,907 for the six months ended December 31, 2000 from $1,068,388
for the same period last year. This increase is due primarily to increased
patient care revenues and the company's continued assessment of collection
exposures.
Interest expense increased 21.3% to $235,793 for the three months ended
December 31, 2000 from $194,410 for the three months ended December 31, 1999 and
52.1% to $514,165 for the six months ended December 31, 2000 from $385,278 for
the same period last year. This increase is due to increased utilization of the
accounts receivable revolving credit and additional interest paid to secure a
$330,000 Overline in December. Cash collections for the quarter ending in
December are typically lower than normal resulting in higher utilization of
credit lines.
- 11 -
Preferred stock dividends increased to $148,772 for the quarter ended
December 31, 2000 from $43,733 for the quarter ended December 31, 1999. The
increase in dividends is due primarily to the recording of the additional
beneficial conversion feature of the series C preferred stock of $115,500 per
agreement, which is recorded as additional dividends. This preferred stock also
carries a dividend rate of 8% per year, which accounts for the additional
dividends recorded during the three months ended December 31, 2000.
We continue to closely monitor accounts receivable collections and are
maintaining significant reserves for bad debts. The bad debt reserve was
approximately 29% of the accounts receivable balance which decreased 8.3% to
$6,349,329 at December 31, 2000 from $6,928,490 at June 30, 2000. The reserve
for bad debt is based on the current age of accounts receivable and is expected
to decrease as our more aggressive collection practices decrease the number of
days our patient receivables remain unpaid. In addition to decreasing the number
of days our patient receivables remain outstanding, our more timely follow-up
practice has resulted in fewer accounts charged to bad debt due to untimely
filing of claims since errors on claims are identified and corrected in a more
timely manner than in prior years. The $712,000 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.
During the three months ended December 31, 2000 costs of $752,923 were
incurred related to discontinued operations. These costs represent the $660,000
settlement of the Commonwealth of Massachusetts case against PHC, Inc. and it's
subsidiary Quality Care Centers of Massachusetts, Inc. in December and
additional legal fees paid and accrued as a result of the ongoing Quality Care
Centers of Massachusetts litigation and investigation as previously reported.
When the bankruptcy proceedings of that subsidiary have been finalized any
remaining net liabilities of the bankrupt subsidiary will result in increased
equity in that amount.
LIQUIDITY AND CAPITAL RESOURCES
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Net accounts receivable from
patient care decreased during the six months ended December 31, 2000 by 8.3%,
approximately $579,000. The Company continues to closely monitor its accounts
receivable balances and is working to reduce amounts due consistent with growth
in revenues.
During the quarter ended December 31, 2000 the Company met its cash flow
needs through ongoing accounts receivable financing and through debt and equity
transactions as follows:
In November 2000 the Company issued 18,900 shares of class A common stock
as performance bonuses to the chief executive officers of high performing
faciliies.
Also in November the Company issued 20,550 shares of class A common stock
as a bonus to all employees.
In December 2000 the Company signed an Overline Agreement with Heller
Healthcare Finance, Inc., in the amount of $330,000 calling for eight monthly
installments of $12,500 beginning January 5, 2001 and eight additional
installments of $28,750 beginning March 2, 2001. The agreement allows for the
advance of funds greater than indicated by the borrowing base agreement while
remaining below the total amount available as stipulated in the original
receivables financing agreement. The agreement required payment of an Overline
- 12 -
fee of $30,000 due at signing and interest of 2.5% over prime on the outstanding
balance due monthly. The agreement also called for the issuance of a warrant to
purchase 1% of the equity in the company's internet subsidiary, which warrant
was issued on February 5, 2001.
We utilize our accounts receivable funding facilities to the maximum extent
available to meet current cash needs and sustain existing operations. Although
our treatment facilities are operating at a profit, expenses incurred by our
non-revenue producing start-up company, Behavioral Health Online, Inc., and
losses incurred by the New York practice management company cause negative cash
flow from operations and create the need for additional financing. We are
currently aggressively pursuing financing for our website operations. In the
interim we have reduced expenses effective February 1, 2001 through staff
reductions. We are also in the process of closing the unprofitable New York
operations. If financing for our website operations does not become available in
the near future or should our existing operations result in unanticipated
losses, we may be required to borrow funds on less favorable terms than have
been available in the past.
- 13 -
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a consequence of Franvale's bankruptcy and subsequent receivership, a
number of claims were asserted against the Company.
On or about September 14, 1998, the Company and its wholly owned
subsidiary, Franvale, were each served with document subpoenas in connection
with an on going investigation of Franvale being conducted by the Commonwealth
of Massachusetts. In December 2000 the company finalized a settlement agreement
with the Commonwealth in this case, which calls for payment of $660,000 in three
installments between December 31, 2000 and June 30, 2001.
ITEM 6 EXHIBITS
(a) Exhibit List
Exhibit No. Description
10.80 The Overline Letter agreement with a maximum aggregate principal
amount of $330,000 made pursuant to the Loan and Security Agreement by
and among Heller Healthcare Finance, Inc., and PHC of Michigan, Inc.,
PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Rhode Island, Inc.
and Pioneer Counseling, Inc.
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995.
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Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PHC, Inc.
Registrant
Date: February 14, 2001 /s/ Bruce A. Shear
___________________
Bruce A. Shear
President
Chief Executive Officer
Date: February 14, 2001 /s/ Paula C. Wurts
___________________
Paula C. Wurts
Controller
Treasurer
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Exhibit 10.80
December 18, 2000
Heller Healthcare Finance, Inc.
Two Wisconsin Circle, Fourth Floor
Chevy Chase, Maryland 20815
Attention: David Moore, Senior Vice President
RE: LOAN AND SECURITY AGREEMENT BY AND AMONG HELLER HEALTHCARE FINANCE,
INC., F/K/A HCFP FUNDING, INC. AND PHC OF MICHIGAN, INC., ET AL
Dear Mr. Moore:
Reference is made to that certain Loan and Security Agreement dated as of
February 20, 1998 by and among PHC of Michigan, Inc., PHC of Utah, Inc., PHC of
Virginia, Inc., PHC of Rhode Island, Inc. and Pioneer Counseling of Virginia,
Inc. (collectively, "BORROWER") and Heller HCFP Funding, Inc., as amended by
that certain Amendment No. 1 to Loan and Security Agreement dated as of February
17, 2000 by and among Borrower and Heller Healthcare Finance, f/k/a/ HCFP
Funding, Inc. ("LENDER") (as amended thereby and as it may be further amended,
modified, supplemented or restated from time to time, the "LOAN AGREEMENT"). All
capitalized terms used but not defined in this letter agreement (this "LETTER
AGREEMENT") shall have the respective meanings given them in the Loan Agreement.
Borrower has asked Lender to make one or more additional Revolving Credit
Loans in the form of an overline facility (i.e., one or more advances that
exceed the Borrowing Base, the aggregate of amount of which advance(s) shall be
hereinafter referred to as the "OVERLINE LOAN"). Lender has agreed to provide
such additional credit to Borrower, subject to the terms and conditions set
forth herein. Accordingly, Borrower and Lender hereby agree as follows:
1. The maximum aggregate principal amount of the Overline Loan shall be
Three Hundred Thirty Thousand and No/100 Dollars ($330,000.00); PROVIDED that
Lender shall not be obligated to make the Overline Loan to Borrower unless and
until this Letter Agreement has been executed by both parties and all other
terms and conditions set forth in this Letter Agreement have been satisfied in
full in Lender's sole discretion.
2. Except as expressly modified by the terms of this Letter Agreement, the
Overline Loan shall be regarded as a Revolving Credit Loan under the Loan
Agreement, and all principal, interest, fees and other costs and expenses
relating to the Overline Loan (the "OVERLINE OBLIGATIONS") shall be deemed to
be, and shall be treated for all purposes as, Obligations evidenced by the Note
and secured by the Loan Agreement and the other Loan Documents. For purposes of
illustrating, and not in limitation of, the foregoing, Borrower acknowledges and
agrees that the Overline Obligations shall be secured by all of the collateral
pledged by Borrower pursuant to (a) the Loan Agreement and the other Loan
Documents, and (b) the other agreements by and among Lender and Borrower and/or
any entity comprising Borrower, each as described in that certain Amended and
Restated Cross-Collateralization and Cross-Default Agreement dated as of May 26,
2000 by and among Lender and Borrower (the "CROSS-COLLATERALIZATION AND
CROSS-DEFAULT AGREEMENT"), pursuant to which the Loan Agreement and all other
agreements then existing by and among Lender and Borrower were
cross-collateralized and cross-defaulted.
3. The Overline Loan shall bear interest at a rate equal to two and
one-quarter percent (2.25%) above the Prime Rate of Interest (for purposes
hereof, "PRIME RATE OF INTEREST" means that rate of interest designated as such
by Shawmut Bank, N.A., or any successor thereto, as the same may fluctuate from
time to time). Borrower promises to repay the Overline Loan by making:
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(a) eight (8) equal installment payments of Twelve Thousand Five
Hundred and No/100 Dollars ($12,500.00) each to Lender, such payments to
begin on January 5, 2001 (the "FIRST INSTALLMENT SERIES COMMENCEMENT
Date") and continue on a weekly basis thereafter through and including the
date that is seven (7) weeks after the First Installment Series
Commencement Date, such date being February 23, 2001; and
(b) eight (8) equal installment payments of Twenty-Eight Thousand
Seven Hundred Fifty and No/100 Dollars ($28,750.00) each to Lender, such
payments to begin on March 2, 2001 (the "SECOND INSTALLMENT SERIES
COMMENCEMENT DATE") and continue on a weekly basis thereafter through and
including the date that is seven (7) weeks after the Second Installment
Series Commencement Date, such date being April 20, 2001 (the "MATURITY
DATE").
In addition, on the Maturity Date, Borrower shall pay to Lender any unpaid
principal amount of the Overline Loan not previously paid to Lender, and any
unpaid interest, fees and charges relating to the Overline Loan.
4. Borrower shall pay to Lender an overline fee of Thirty Thousand and No/100
Dollars ($30,000.00) (the "OVERLINE FEE"). The Overline Fee shall be due and
payable on the date of execution of this Letter Agreement by both parties. The
Original Loan shall be inclusive of, and shall not be deemed to be increased by,
the Overline Fee. In addition, Lender shall receive, within five (5) days of the
date of execution hereof by the parties, a warrant to purchase a one percent
(1%) equity interest in Behavioral Health Online, Inc., a Massachusetts
corporation (the "WARRANT"), which Warrant shall be in substantially the form of
the warrant previously issued to Lender as consideration for Lender agreeing to
make that certain term loan available to Borrower as described in that certain
Secured Term Note dated May 26, 2000 previously delivered by PHC of Michigan,
Inc. to Borrower.
5. The failure of Borrower to (a) make any payment as or when required
under this Letter Agreement or (b) abide or fulfill by any covenant set forth in
this Letter Agreement shall constitute an Event of Default under the Loan
Agreement without further notice or action by Lender. On the occurrence of such
an Event of Default, Lender shall be entitled to exercise any rights and
remedies available to it under the Loan Agreement or the other Loan Documents,
or as provided in the Cross-Collateralization and Cross-Default Agreement.
6. The Maximum Loan Amount under the Loan Agreement shall be inclusive of,
and shall not be deemed to be increased by, the Overline Loan.
7. Except as specifically modified by this Letter Agreement, the Loan
Agreement and the other Loan Documents shall remain in full force and effect,
and are hereby ratified and confirmed.
8. The execution, delivery and effectiveness of this Letter Agreement
shall not, except as expressly provided in this Letter Agreement, operate as a
waiver of any right, power or remedy of Lender, nor constitute a waiver of any
provision of the Loan Agreement, or any other documents, instruments and
agreements executed or delivered in connection with the Loan Agreement and
furthermore, Lender does not waive any acts or omissions of Borrower, known or
unknown to Lender, which, with notice or the passage of time or both, could be
asserted as an Event of Default. Accordingly, except as expressly stated herein,
Lender hereby reserves all of its rights and remedies under the Loan Agreement
and the Loan Documents. By executing this Letter Agreement, Borrower hereby
releases Lender and its affiliates, officers, employees, directors and agents
from any and all claims or causes of action, known or unknown, at law or in
equity, which it has or may have based in whole or in part upon acts or
omissions of Lender and any of its officers, employees, directors, agents or
attorneys on or prior to the date of this Letter Agreement.
9. This Letter Agreement shall be governed by and construed in accordance
with the laws of the State of Maryland without regard to the otherwise
applicable conflicts of law provisions thereof.
10. This Letter Agreement may be executed in any number of counterparts,
including by facsimile signature, each of which shall be deemed an original, but
all of which together shall constitute but one instrument.
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If these conditions are acceptable to Lender, please so signify by signing
below where indicated.
Very truly yours,
WITNESS: PHC, INC.
a Massachusetts corporation
/s/ PAULA C. WURTS
Name:
/s/ JANET L. ESTERKES By: /s/ BRUCE A. SHEAR
Name: President
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
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WITNESS: PHC OF MICHIGAN, INC.
a Massachusetts corporation
/s/ PAULA C. WURTS
Name:
/s/ JANET L. ESTERKES By: /s/ BRUCE A. SHEAR
Name: President
WITNESS: PHC OF UTAH, INC.
a Massachusetts corporation
a Massachusetts corporation
/s/ PAULA C. WURTS
Name:
/s/ JANET L. ESTERKES By: /s/ BRUCE A. SHEAR
Name: President
WITNESS: PHC OF VIRGINIA, INC.
a Massachusetts corporation
a Massachusetts corporation
/s/ PAULA C. WURTS
Name:
/s/ JANET L. ESTERKES By: /s/ BRUCE A. SHEAR
Name: President
WITNESS: PHC OF RHODE ISLAND, INC.
a Massachusetts corporation
a Massachusetts corporation
/s/ PAULA C. WURTS
Name:
/s/ JANET L. ESTERKES By: /s/ BRUCE A. SHEAR
Name: President
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
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WITNESS: PIONEER COUNSELING OF VIRGINIA, INC.
a Massachusetts corporation
a Massachusetts corporation
/s/ PAULA C. WURTS
Name:
/s/ JANET L. ESTERKES By: /s/ BRUCE A. SHEAR
Name: President
LENDER:
HELLER HEALTHCARE FINANCE, INC.
a Delaware corporation
f/k/a HCFP Funding, Inc. and as assignee of
WITNESS: HCFP Funding II, Inc.
- --------------------------
Name:
__________________________ By: ______________________________
Name: Name:
Title:
THE FOREGOING IS ACKNOWLEDGED AND AGREED TO AS OF THE ___ DAY OF DECEMBER, 2000:
HELLER HEALTHCARE FINANCE, INC.,
a Delaware corporation
By: _____________________________
David G. Moore
Senior Vice President