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, 2001.
| | 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)
Massachusett 04-260157
(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 29,
2002:
Class A Common Stock 9,113,076
Class B Common Stock 726,991
Transitional Small Business Disclosure Format
(Check one):
Yes No X
PHC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - December 31, 2001 and June 30,
2001.
Condensed Consolidated Statements of Operations - Three and six months
ended December 31, 2001 and December 31, 2000.
Condensed Consolidated Statements of Cash Flows - Six months ended
December 31, 2001 and December 31, 2000.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Plan of Operation
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
Signatures
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2001 2001
________________________
ASSETS
(Unaudited)
Current assets:
Cash and cash equivalents $ 91,040 $ 43,732
Accounts receivable, net of allowance for bad
debts of $2,732,491 at December 31, 2001 and
$2,632,525 at June 30, 2001 4,851,239 5,620,715
Prepaid expenses 214,175 63,940
Other receivables and advances 103,862 112,579
Deferred income tax asset 754,140 613,980
____________ ___________
Total current assets 6,014,456 6,454,946
Accounts receivable, noncurrent 605,000 600,000
Other receivable 126,745 104,863
Property and equipment, net 1,338,287 1,338,066
Deferred financing costs, net of amortization of
$91,555 at December 31, 2001
and $114,109 at June 30, 2001 16,000 20,000
Goodwill, net of accumulated amortization of
$270,105 at December 31, 2001 and June 30,
2001 (Note F) 969,099 969,099
Other assets 264,115 236,478
____________ ___________
Total assets $ 9,333,702 $ 9,723,452
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,732,975 $ 1,746,280
Notes payable--related parties 200,000 200,000
Current maturities of long-term debt 862,826 2,038,077
Revolving credit note 1,535,696 2,111,586
Current portion of obligations under capital
leases 12,650 16,725
Accrued payroll, payroll taxes and benefits 383,204 460,723
Accrued expenses and other liabilities 1,305,088 1,328,820
Convertible debentures 500,000 500,000
Net current liabilities of discontinued operations
(Note E) 935,839 960,552
____________ ___________
Total current liabilities 7,468,278 9,362,763
____________ ___________
Long-term debt 2,699,853 1,609,649
Obligations under capital leases 26,767 32,160
____________ ___________
Total noncurrent liabilities 2,726,620 1,641,809
____________ ___________
Total liabilities 10,194,898 11,004,572
____________ ___________
Stockholders' equity (deficit) :
Preferred stock, $.01 par value; 1,000,000 shares
authorized, 140,700 and 150,700 issued and
outstanding at December 31, 2001 and June 30,
2001, respectively 1,407 1,507
Class A common stock, $.01 par value; 20,000,000
shares authorized, 9,151,202 and 8,709,834 shares
issued at December 31, 2001 and June 30,
2001, respectively 91,512 87,098
Class B common stock, $.01 par value; 2,000,000
shares authorized, 726,991 issued and outstanding
at December 31, 2001 and June 30, 2001,
convertible into one share of Class A common
stock 7,270 7,270
Additional paid-in capital 18,716,992 18,696,779
Treasury stock, 38,126 shares at December 31,
2001 and 22,926 shares at June
30, 2001, at cost (30,988) (24,894)
Notes receivable, common stock (80,000) (80,000)
Accumulated deficit (19,567,389) (19,968,880)
____________ ___________
Total stockholders' equity (deficit) (861,196) (1,281,120)
____________ ___________
Total liabilities and stockholders' equity
(deficit) $ 9,333,702 $ 9,723,452
=========== ============
See Notes to Condensed Consolidated Financial Statements.
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
_______________________________________________
2001 2000 2001 2000
_______________________________________________
Revenues:
Patient care, net $5,052,946 $ 5,041,306 $10,372,090 $ 9,753,238
Management fees -- -- -- 345,111
Pharmaceutical studies 123,595 60,430 203,412 94,908
Website services 1,000 81 3,301 15,081
Contract support services 202,250 208,176 415,226 388,153
___________ _________ ___________ __________
Total revenues 5,379,791 5,309,993 10,994,029 10,596,491
___________ _________ ___________ __________
Operating expenses:
Patient care expenses 2,570,645 2,377,760 5,243,036 4,585,095
Cost of contract support
services 176,127 201,131 345,099 363,132
Provision for doubtful
accounts 299,100 797,997 415,539 1,624,907
Website expenses 77,258 350,602 158,205 737,889
Administrative expenses 2,100,966 1,822,062 4,028,313 3,447,128
Practice management
closing expenses (Note G) -- 4,855,966 -- 4,855,966
___________ _________ ___________ __________
Total operating
expenses 5,224,096 10,405,518 10,190,192 15,614,117
___________ _________ ___________ __________
Income (loss) from operations 155,695 (5,095,525) 803,837 (5,017,626)
___________ _________ ___________ __________
Other income (expense):
Interest income 3,706 6,586 7,048 14,486
Other income 31,763 6,171 51,090 22,127
Interest expense (183,303) (235,793) (401,133) (514,165)
___________ _________ ___________ __________
Total other expenses,
net (147,834) (223,036) (342,995) (477,552)
___________ _________ ___________ __________
Income (loss) before provision
for taxes 7,861 (5,318,561) 460,842 (5,495,178)
Provision for income taxes -- 44,450 -- 44,450
___________ _________ ___________ __________
Net income (loss) 7,861 (5,363,011) 460,842 (5,539,628)
Dividends (28,963) (148,772) (59,351) (321,685)
___________ _________ ___________ __________
Income (loss) applicable to
common shareholders $ (21,102) $(5,511,783) $ 401,491 $(5,861,313)
=========== ============ ========== ============
Basic income (loss) per
common share $ 0.00 $ (0.67) $ 0.04 $ (0.73)
Basic weighted average number
of shares outstanding 9,684,687 8,237,592 9,541,924 8,087,811
Fully diluted income (loss)
per common share $ 0.00 $ (0.67) $ 0.03 $ (0.73)
Fully diluted weighted
average number of shares
outstanding 9,684,687 8,237,592 14,510,271 8,087,811
See Notes to Condensed Consolidated Financial Statements.
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended
December 31
2001 2000
__________________________
Cash flows from operating activities:
Net income (loss) $ 460,842 $(5,539,628)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 98,376 128,788
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 32,607 11,186
Changes in:
Accounts receivable 751,311 387,271
Prepaid expenses (150,235) (46,269)
Other assets (167,797) (11,120)
Accounts payable (13,305) 746,443
Accrued expenses and other liabilities (148,207) (347,896)
Net liabilities of discontinued operations (24,713) (852,225)
____________ __________
Net cash provided by (used in) operating activities 838,879 (906,531)
____________ ___________
Cash flows from investing activities:
Acquisition of property and equipment (98,597) (137,507)
Web development -- (8,226)
____________ ___________
Net cash used in investing activities (98,597) (145,733)
____________ ___________
Cash flows from financing activities:
Revolving debt, net (575,890) 490,616
Proceeds (repayment) of debt, net (94,515) (71,854)
Deferred financing costs 4,000 18,286
Costs related to issuance of capital stock (20,775) (8,401)
Purchase of treasury stock (6,094) --
Issuance of common stock 300 --
Issuance of preferred stock at a discount -- 250,000
Notes issued for stock purchase -- (90,000)
____________ ___________
Net cash provided by (used in) financing activities (692,974) 588,647
____________ ___________
NET DECREASE IN CASH 47,308 (463,617)
Beginning cash balance 43,732 551,713
ENDING CASH BALANCE $ 91,040 $ 88,096
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 375,314 $ 511,411
Income taxes 9,718 71,550
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Accrued dividends $ 59,351 $ 65,185
Conversion of preferred stock to common stock 100,000 50,000
Issuance of common stock in lieu of cash for
dividends due 12,395 --
Preferred stock discount -- 90,000
Beneficial conversion feature of preferred stock -- 166,500
Common stock issued in earnout -- 297,500
See Notes to Condensed Consolidated Financial Statements.
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2001
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 Overland Park, Kansas operating as Total Concept and four locations operating
as Pioneer Counseling Center in the Detroit, Michigan metropolitan area);
(2) Behavioral health administrative services, including delivery of
management, administrative and help line services. PHC, Inc. provides management
and administrative services for its behavioral health treatment subsidiaries.
Pioneer Development and Support Services ("PDSS") provides help line services
primarily through contracts with major railroads. Pioneer Pharmaceutical
Research conducts studies of the effects of psychiatric pharmaceuticals on a
controlled population through contracts with major manufacturers of these
pharmaceuticals; and
(3) Behavioral health online services, are provided through Behavioral
Health Online, Inc., the Company's internet subsidiary, which provides Internet
support services for all other subsidiaries of the Company and provides
behavioral health education, training and products for the behavioral health
professional, through its website Wellplace.com.
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 matters.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended December 31, 2001
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2002. The accompanying financial statements should be read in
conjunction with the June 30, 2001 consolidated financial statements and
footnotes thereto included in the Company's 10-KSB filed on September 26, 2001.
Note C - Reclassifications
Certain December 31, 2000 amounts have been reclassified to conform with the
December 31, 2001 presentation.
Note D - Business Segment Information
The Company's behavioral health treatment services have similar economic
characteristics, services, patients and clients. Accordingly, all behavioral
health treatment services are reported on an aggregate basis under one segment.
The Company's segments are more fully described in Note A above. Residual income
and expenses from closed facilities are included in the administrative services
segment. The 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. 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,
2001
Revenues - external
customers $ 5,052,946 $ 325,845 $ 1,000 $ -- $ 5,379,791
Revenues - intersegment -- 474,000 75,000 (549,000) --
Net income (loss) 424,064 (345,640) (70,563) -- 7,861
For the 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 six months
ended December 31,
2001
Revenues - external
customers $10,372,090 $ 618,638 $ 3,301 $ -- $10,994,029
Revenues -
intersegment -- 948,000 150,000 (1,098,000) --
Net income (loss) 1,275,715 (665,664) (149,209) -- 460,842
Identifiable Assets 7,985,752 1,238,950 109,000 -- 9,333,702
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)
Identifiable Assets $ 8,847,346 1,554,344 74,360 -- 10,476,050
Note E - 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,
2001 2001
_____________________________
Debt forgiveness and reserve for
Contingencies $ 2,641,537 $ 2,641,537
Less legal and other expenses
incurred to date 1,705,699 1,680,986
____________ ____________
Net liabilities of discontinued
Operations $ 935,839 $ 960,552
============= ============
The recognition of gain, if any, has been deferred until final resolution of all
contingent liabilities related to the discontinued operations. Some additional
charges to this account are expected, however the extent of these charges cannot
be determined at this time.
Note F - New Accounting Standards
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations ("SFAS 141") and No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after July 1, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also may
require, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purpose of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidelines in SFAS 142. SFAS 142 is required to be applied
in fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company elected early adoption of SFAS 142 in the quarter ended September
30, 2001. The Company's net goodwill of $969,099 was evaluated as of July 1,
2001 and no amortizable intangible assets were identified. Accordingly, the
Company ceased amortization of goodwill resulting in a decrease in expenses of
$41,279 for the six months ended December 31, 2001.
The impact of the adoption of SFAS 142 is summarized as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
_______________________________________________
Reported net income (loss)
applicable to common
stockholders $ (21,102) $(5,511,783) $401,491 $(5,861,313)
Add back: Goodwill amortization -- 16,425 -- 41,279
__________ ___________ ________ ___________
Adjusted net income (loss) (21,102) (5,495,358) 401,491 (5,820,034)
========== ============ ========= ===========
Basic earnings per share:
Reported net income (loss)
applicable to common
stockholders $ .00 $ (.67) $ .04 $ (.73)
Goodwill amortization -- (.00) -- .01
__________ ___________ ________ ___________
Adjusted net income (loss) $ .00 $ (.67) $ .04 $ (.72)
========== ============ ========= ===========
Diluted earnings per share:
Reported net income (loss)
applicable to common
stockholders $ .00 $ (.67) $ .03 $ (.73)
Goodwill amortization -- $ (.00) $ -- $ .01
__________ ___________ ________ ___________
Adjusted net income (loss) $ .00 $ (.67) $ .03 $ (.72)
========== ============ ========= ===========
Note G - Practice Management Closing Expenses
In December 2000 the Board decided to close its' BSC-NY, Inc. practice
management operations due to deterioration of operating results. Revenues of
BSC-NY, Inc were dependent on the success of the professional corporation 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
has ceased 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
____________
Total $4,855,966
============
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 remained relatively stable at $5,052,946 for the three
months ended December 31, 2001 compared to $5,041,306 for the three months ended
December 31, 2000 and increased 6.0% to $10,372,090 for the six months ended
December 31, 2001 from $9,753,238 for the six months ended December 31, 2000.
This increase in revenue is due primarily to a 10.4% and 15.1% increase in
patient days for the three months and six months ended December 31, 2001,
respectively, over the same periods last year. Marketing efforts have continued
to aid in increasing the census at the 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.
Income before interest, taxes, depreciation, amortization, dividends and the New
York operations was $249,231 for the three months ended December 31, 2001 and
$974,117 for the six months ended December 31, 2001 compared to a loss of
$65,638 and income of $320,203 for the same periods last year.
Management fees of $345,111 for the six months ended December 31, 2000 were
related to the New York practice management Company, BSC-NY, Inc., which closed
in the quarter ended December 31, 2000.
Contract support services revenue provided by PDSS decreased 2.9% to $202,250
for the three months ended December 31, 2001 from $208,176 for the three months
ended December 31, 2000 and increased 7.0% to $415,226 for the six months ended
December 31, 2001 from $388,153 for the same period last year. The cost of
providing these services decreased 12.4% for the three months ended December 31,
2001 to $176,127 from $201,131 for the three months ended December 31, 2000 and
5.0% to $345,099 for the six months ended December 31, 2001 from $363,132 for
the same period last year. These changes in revenue and expenses are due
primarily to a short-term contract completed last year. This contract was labor
intensive and, in addition to providing additional revenue also carried with it
high costs which were booked during the quarter ended December 31, 2000.
Revenue from pharmaceutical studies increased 104.5% to $123,595 for the three
months ended December 31, 2001 from $60,430 for the three months ended December
31, 2000 and 114.3% to $203,412 for the six months ended December 31, 2001 from
$94,908 for the same period last year. This increase is due to the start up of
new studies and is expected to fluctuate from period to period based on the
number of studies in progress.
Administrative expenses increased 15.3% to $2,100,966 for the quarter ended
December 31, 2001 from $1,822,062 for the quarter ended December 31, 2000 and
16.9% to $4,028,313 for the six months ended December 31, 2001 from $3,447,128
for the same period last year. This increase is primarily due to the increases
in all administrative expenses for the pharmaceutical research operations, which
increased approximately 165% for the six months ended December 31, 2001 over the
same period last year due to general business start-up costs and an increase
number of active studies. Office expenses, including printing, increased
approximately 22% for the quarter ended December 31, 2001 and 33% for the six
month period ended December 31, 2001 as compared to the same periods last year.
During the last quarter of the fiscal year ended June 30, 2001, the Company
changed the focus of its internet services Company to provide internal support
to all PHC operations. As a result of this change, website services revenue from
outside sources decreased 78.1% to $3,301 for the six months ended December 31,
2001 from $15,081 for the six months ended December 31, 2000 and website
expenses decreased 78.6% to $158,208 for the six months ended December 31, 2001
from $737,889 for the same period last year.
Patient care expenses also increased by 8.1% to $2,570,645 for the three months
ended December 31, 2001 from $2,377,760 for the three months ended December 31,
2000 and 14.4% to $5,243,036 for the six months ended December 31, 2001 from
$4,585,095 for the six months ended December 31, 2000. These increases in
expenses are due primarily to the increase in patient days of greater than 10%
as noted above with the primary increases in expenses directly related to
patient census such as payroll, food, laundry, patient transportation, hospital
supplies and pharmacy.
Bad debt expense decreased 62.5% to $299,100 for the three months ended December
31, 2001 from $797,997 for the three months ended December 31, 2000 and 74.4% to
$415,539 for the six months ended December 31, 2001 from $1,624,907 for the same
period last year. This decrease is due primarily to the elimination of
approximately $500,000 in bad debt recorded for the closed New York operations
in the period ended September 30, 2000 and a significant bad debt expense
charged for the Michigan in-patient facility in the quarter ended December 31,
2000.
Interest expense decreased 22.3% to $183,303 for the three months ended December
31, 2001 from $235,793 for the three months ended December 31, 2000 and 21.6% to
$401,133 for the six months ended December 31, 2001 from $514,165 for the same
period last year. This decrease is due to the general decline in interest rates
and the refinancing of debt in November 2001 at a more favorable rate.
Other Income increased 414.7% to $31,763 for the three months ended December 31,
2001 from $6,171 for the three months ended December 31, 2000 and 130.9% to
$51,090 for the six months ended December 3,1 2001 from $22,127 for the same
period last year. This increase is due the receipt of approximately 12,000 in
two separate insurance settlements, one claim for electrical storm damage and
the other claim for internet "theft." We have also subleased the property
formerly used in the New York operations which is included at $11,500 each
quarter beginning with the quarter ended September 30, 2001.
The company has no provision for income taxes for the three months or six months
ended December 31, 2001 due to the utilization of net operating loss
carry-forward.
Preferred stock dividends decreased to $28,963 for the quarter ended December
31, 2001 from $148,772 for the quarter ended December 31, 2000. The decrease in
dividends is due primarily to the recording of the additional beneficial
conversion feature of the series C preferred stock of $115,500 during the period
ended December 31, 2000. There has also been a decrease, through conversion, in
the amount of preferred stock outstanding.
We continue to view receivables most conservatively by maintaining the ratio of
reserves for bad debt to receivables at approximately 30% on the total accounts
receivable balance, which decreased 8.6% to $8,188,730 at December 31, 2001 from
$8,956,545 at September 30, 2001. 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 $605,000 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 six months ended December 31, 2001 costs of $24,713 were incurred
related to discontinued operations. These costs represent additional legal fees
paid and accrued as a result of the ongoing expenses incurred to finalize the
closure of Quality Care Centers of Massachusetts, Inc. When the bankruptcy
proceedings of that subsidiary have been finalized any remaining net liabilities
of discontinued operations will result in a gain and an increase in
stockholders' equity.
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, 2001 by 12.2%, approximately
$764,000. This decrease is due in part to the seasonal decline in revenue
recorded during the quarter ended December 31 each year. 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, 2001 the Company met its cash flow needs
through ongoing accounts receivable financing and through debt and equity
transactions as follows:
In the quarter ended December 31, 2001 the Company issued 71,750 shares of class
A common stock as performance bonuses to the chief executive officers of high
performing facilities resulting in a non-cash compensation charge of
approximately $30,500.
In December 2001 the Company amended its Heller Healthcare Finance, Inc.
revolving credit debt for the Virginia facility and the term notes outstanding
totaling $2,575,542. The amended and restated Term Note requires monthly
principle payments of $45,000 for the first year beginning December 31, 2001 and
increasing to $50,000 in the second year and $55,000 in the third year with the
remaining balance due and payable on November 30, 2004 and carries an interest
rate of prime plus 3.5%. In conjunction with the refinancing the Company also
signed an amendment to the revolving credit note to exclude the Virginia
facility receivables from the borrowing base and to amend the mortgage and cross
collateralization documents to reflect the new terms and amounts. This
refinancing resulted in a decrease in the interest rate and a significant
decrease in the amount of monthly principle payments.
The Company also occasionally accesses an overline to fund short-term cash flow
needs. Principal payments on an overline are generally made weekly with payoffs
scheduled for less than three months. As of January 31, 2002 the balance of
overline debt was approximately $185,500 with the final payment due April 12,
2002.
We utilize our accounts receivable funding facilities to the maximum extent
available to meet current cash needs and sustain existing operations. Our
treatment facilities are operating at a profit and are collecting old
outstanding receivables, which resulted in positive cash flow from operations.
These additional funds were used primarily for the repayment of outstanding
debt. We continue to aggressively pursue payments on accounts receivable in
order to continue to reduce debt.
In addition to the debt due to Heller Healthcare as described above, the Company
also has $500,000 in outstanding convertible debentures, which include the
provision that the holders of the debentures may put all or any portion of the
debentures to the Company at the original purchase price plus unpaid interest
upon 30 days written notice beginning December 3, 2001. The Company does not
anticipate that the put provision will be exercised since the coupon rate is
paid quarterly at 12% per annum which is a higher rate than would be available
through other sources at this time.
The Company believes that, with the refinancing of the debt as described above
and its revolving credit facility through its primary lender, it will have
sufficient financing available to fund its growing operations for the
foreseeable future. The Company is concentrating on its core business and
expansion of its pharmaceutical research operations through additional
contracts, to continue increasing revenues and cash flows from operations.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on December 19, 2001.
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, 2002.
The stockholders also voted to amend the 1993 Employee Stock Purchase and
Option Plan to increase the number of shares of Class A Common Stock available
for issuance under the plan from 1,000,000 to 1,750,000 shares; to amend the
1995 Employee Stock Purchase Plan to increase the number of shares of Class A
Common Stock available for issuance under the plan from 150,000 to 250,000; to
amend the 1995 Non-Employee Director Stock Option Plan to increase the number of
shares available for issuance under the plan from 50,000 to 250,000 and increase
the annual grant of options under the plan from 2,000 options to 10,000 options.
Item 6 Exhibits
(a) Exhibit List
Exhibit No. Description
10.50 Amendment Number 3 dated December 6, 2001 to Loan and Security
Agreement dated February 18, 1998 by and between PHC of Michigan,
Inc., PHC of Utah, Inc., and PHC of Virginia, Inc. and Heller
Healthcare Finance, Inc. providing collateral for the Loan and
Security Agreement in the amount of $3,000,000.
10.51 Consolidating Amended and Restated Secured Term Note in the amount
of $2,575,542 dated December 6, 2001 by and between PHC of
Michigan, Inc. and Heller Healthcare Finance, Inc.
10.52 Amended and Restated Revolving Credit Note in the amount of
$3,000,000 dated December 6, 2001 by and between PHC of Michigan,
Inc., PHC of Utah, Inc. and PHC of Virginia, Inc. and Heller
Healthcare Finance, Inc.
10.53 Amended and Restated Consolidated Mortgage Note in the amount of
$5,688,598 dated December 6, 2001 by and between PHC of Michigan,
Inc and Heller Healthcare Finance, Inc.
10.54 Third Amended and Restated Cross-Collateralization and
Cross-Default Agreement dated December 6, 2001 by and between PHC,
Inc., PHC of Michigan, Inc., PHC of Utah, Inc. and PHC of
Virginia, Inc. and Heller Healthcare Finance, Inc.
10.55 Overline Credit Advance in the amount of $150,000 dated December
26, 2001 by and between PHC of Michigan, Inc., PHC of Utah, Inc.,
PHC of Virginia, Inc. and Heller Healthcare Finance, Inc.
10.56 Overline Credit Advance in the amount of $100,000 dated January
11, 2002 by and between PHC of Michigan, Inc., PHC of Utah, Inc.,
PHC of Virginia, Inc. and Heller Healthcare Finance, Inc.
Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PHC, Inc.
Registrant
Date: February 12, 2002 /s/ Bruce A. Shear
Bruce A. Shear
President
Chief Executive Officer
Date: February 12, 2002 /s/ Paula C. Wurts
Paula C. Wurts
Controller
Treasurer