-----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, MlZzvdnWoppxRbRWUBBbuI81K1hOQrz5BVCO6xrvXBmXV7/iU09jdt+q6bPuVVot 87CMhtpCCcpXO6zVTB2UxA== 0000915127-01-000004.txt : 20010223 0000915127-01-000004.hdr.sgml : 20010223 ACCESSION NUMBER: 0000915127-01-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 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: SEC FILE NUMBER: 000-22916 FILM NUMBER: 1545659 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 0001.txt 10-QSB FOR 2ND QUARTER 2001 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 - 2 - 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. - 4 - 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. - 5 - 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. - 6 - 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 - 7 - 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. - 14 - Signatures In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHC, Inc. Registrant Date: February 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 - 15 - 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: - 16 - (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. - 17 - 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] - 18 - 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] - 19 - 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 -----END PRIVACY-ENHANCED MESSAGE-----