10-Q 1 q10q1st.txt FOR FOR 10Q FOR 1ST QUARTER 09/30/01 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 SEPTEMBER 30, 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) 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 October 31, 2001 Class A Common Stock 8,908,917 Class B Common Stock 726,991 Transitional Small Business Disclosure Format (Check one): Yes______ No X - 1 - PHC, Inc. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 2001 and June 30, 2001. Condensed Consolidated Statements of Operations - Three months ended September 30, 2001 and September 30, 2000. Condensed Consolidated Statements of Cash Flows - Three months ended September 30, 2001 and September 30, 2000. Notes to Condensed Consolidated Financial Statements - September 30, 2001. Item 2. Management's Discussion and Analysis or Plan of Operation Signatures - 2 - PART I. FINANCIAL INFORMATION Item 1 Financial Statements PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, June 30, ASSETS 2001 2001 __________ ___________ Current assets: Cash and cash equivalents $ 138,709 $ 43,732 Accounts receivable, net of allowance for bad debts of $2,750,799 at September 30, 2001, $2,632,525 at June 30, 2001 5,605,746 5,620,715 Prepaid expenses 208,400 63,940 Other receivables and advances 97,755 112,579 Deferred income tax asset 613,980 613,980 ____________ ___________ Total current assets 6,664,590 6,454,946 Accounts receivable, noncurrent 600,000 600,000 Other receivable 128,661 104,863 Property and equipment, net 1,340,915 1,338,066 Deferred financing costs, net of amortization of $89,555 at September 30, 2001 and $114,109 at June 30, 2001 18,000 20,000 Goodwill, net of accumulated amortization of $270,105 at September 30, 2001 and June 30, 2001 969,099 969,099 Other assets 250,042 236,478 ____________ ___________ Total assets $ 9,971,307 $ 9,723,452 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,882,403 $ 1,866,631 Notes payable--related parties 200,000 200,000 Current maturities of long-term debt 2,158,669 2,038,077 Revolving credit note 2,081,209 2,111,586 Current portion of obligations under capital leases 14,471 16,725 Accrued payroll, payroll taxes and benefits 379,981 460,723 Accrued expenses and other liabilities 1,308,419 1,208,469 Convertible debentures 500,000 500,000 Net current liabilities of discontinued operations 957,585 960,552 ____________ ___________ Total current liabilities 9,482,737 9,362,763 ____________ ___________ Long-term debt 1,334,668 1,609,649 Obligations under capital leases 29,493 32,160 ____________ ___________ Total noncurrent liabilities 1,364,161 1,641,809 ____________ ___________ Total liabilities 10,846,898 11,004,572 ____________ ___________ Stockholders' equity (deficit): Preferred stock, $.01 par value; 1,000,000 shares authorized, 150,700 issued and outstanding September 30, 2001 and June 30, 2001 1,507 1,507 Class A common stock, $.01 par value; 20,000,000 shares authorized, 8,711,084 and 8,709,834 shares issued September 30, 2001 and June 30, 2001, respectively 87,111 87,098 Class B common stock, $.01 par value; 2,000,000 shares authorized, 726,991 issued and outstanding September 30, 2001 and June 30, 2001, convertible into one share of Class A common stock 7,270 7,270 Additional paid-in capital 18,685,796 18,696,779 Treasury stock, 38,126 shares at September 30,2001 and 22,926 shares at June 30, 2001, at cost (30,988) (24,894) Notes receivable, common stock (80,000) (80,000) Accumulated deficit (19,546,287) (19,968,880) ____________ ___________ Total stockholders' equity (deficit) (875,591) (1,281,120) ____________ ___________ Total liabilities and stockholders' equity (deficit) $ 9,971,307 $ 9,723,452 ============ =========== See Notes to Condensed Consolidated Financial Statements. - 3 - PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended September 30, 2001 2000 ____________ ____________ Revenues: Patient care, net $ 5,319,144 $ 4,711,932 Management fees -- 345,111 Pharmaceutical studies 79,817 34,478 Website services 2,301 15,000 Contract support services 212,976 179,977 ____________ ____________ Total revenue 5,614,238 5,286,498 ____________ ____________ Operating expenses: Patient care expenses 2,672,391 2,207,335 Cost of contract support services 168,972 162,001 Provision for doubtful accounts 116,439 826,910 Website expenses 80,947 253,787 Administrative and other operating expenses 1,927,347 1,758,566 ____________ ____________ Total operating expenses 4,966,096 5,208,599 ____________ ____________ Income from operations 648,142 77,899 ____________ ____________ Other income (expense): Interest income 3,342 7,900 Other income, net 19,327 15,956 Interest expense (217,830) (278,372) ____________ ____________ Total other expense, net (195,161) (254,516) ____________ ____________ Income (loss) before provision for taxes 452,981 (176,617) Provision for income taxes -- -- ____________ ____________ Net income (loss) 452,981 (176,617) Dividends (30,388) (172,913) ____________ ____________ Income (loss) applicable to common stockholders $ 422,593 $ (349,530) ============ ============ Basic income (loss) per common share $ .04 $ (.04) Basic weighted average number of shares outstanding 9,399,161 7,938,029 Fully diluted income (loss) per common share $ .03 $ (.04) Fully diluted weighted average number of shares outstanding 14,530,625 7,938,029 See Notes to Condensed Consolidated Financial Statements. - 4 - PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended September 30, 2001 2000 ____________ ____________ Cash flows from operating activities: Net income (loss) $ 452,981 $ (176,617) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 56,214 65,033 Compensatory stock options and stock and warrants issued for obligations 2,110 -- Changes in: Accounts receivable 5,995 91,399 Prepaid expenses (144,460) (77,328) Other assets (22,579) (17,441) Accounts payable (14,616) 335,091 Accrued expenses and other liabilities 19,208 (590,471) Net liabilities of discontinued operations (2,967) (99,300) ____________ ____________ Net cash provided by (used in) operating activities 351,886 (469,634) Cash flows from investing activities: Acquisition of property and equipment (50,048) (66,726) Website development costs -- (3,832) ____________ ____________ Net cash used in investing activities (50,048) (70,558) ____________ ____________ Cash flows from financing activities: Revolving debt, net (30,377) (24,850) Payments on debt (159,310) (58,000) Deferred financing costs 2,000 10,091 Costs related to issuance of capital stock (13,380) (6,566) Purchase of treasury stock (6,094) -- Issuance of common stock 300 -- Issuance of preferred stock at a discount -- 250,000 Notes receivable for stock purchase -- (90,000) ____________ ____________ Net cash provided by (used in) financing activities (206,861) 80,675 ____________ ____________ NET INCREASE (DECREASE) IN CASH 94,977 (459,517) Beginning cash balance 43,732 551,713 ENDING CASH BALANCE $ 138,709 $ 92,196 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 211,679 $ 246,148 Income taxes 500 57,050 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Accrued dividends on series C preferred stock $ 30,388 $ 31,913 Conversion of preferred stock to common stock -- 50,000 Preferred stock discount -- 90,000 Beneficial conversion feature of preferred stock -- 51,000 Common stock issued in earnout -- 297,500 See Notes to Condensed Consolidated Financial Statements. - 5 - PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 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 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 three months ended September 30, 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. - 6 - Note C - Reclassifications Certain September 30, 2000 amounts have been reclassified to conform with the September 30, 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 following summarizes the company's segment data: BEHAVIORAL HEALTH TREATMENT ADMINISTRATIVE ONLINE SERVICES SERVICES SERVICES ELIMINATIONS TOTAL ________________________________________________________ For the three months ended September 30, 2001 Revenues - external customers $5,319,144 $ 292,793 $ 2,301 $ -- $5,614,238 Revenues - intersegment -- 474,000 75,000 (549,000) -- Net income (loss) 932,089 (400,462) (78,646) -- 452,981 Identifiable assets 8,653,165 1,202,862 115,280 -- 9,971,307 For the three months ended September 30, 2000 Revenues - external customers $4,711,932 $ 559,566 $ 15,000 $ -- $5,286,498 Revenues - intersegment -- 496,698 4,823 (501,521) -- Net income (loss) 731,772 (669,527) (238,862) -- (176,617) Identifiable assets 9,288,080 6,042,601 96,415 -- 15,427,096 Note E - Net liabilities of discontinued operations Net liabilities of discontinued operations relates to the Franvale closure in 1998 and consists of the following: September 30, June 30, 2001 2001 ____________ ____________ Debt forgiveness and reserve for contingencies $ 2,641,537 $ 2,641,537 Less legal and other expenses incurred to date 1,683,952 1,680,986 ____________ ____________ Net liabilities of discontinued operations $ 957,585 $ 960,552 ============= ============= The recognition of gain, if any, has been deferred until final resolution of all contingent liabilities related to the discontinued operations. - 7 - 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 has 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 of expenses of approximately $16,400 for the quarter ended September 30, 2001. The impact of the adoption of SFAS 142 is summarized as follows: For the Quarter ended September 30, 2001 2000 ____ ____ Reported net income (loss)applicable to common stockholders $ 422,593 $ (349,530) Add back: Goodwill amortization -- 24,854 Adjusted net income (loss) 422,593 (324,676) ========== =========== Basic earnings per share: Reported net income (loss) applicable to common stockholders $ (.04) $ .04 Goodwill amortization -- (.00) Adjusted net income (loss) $ .04 $ (.04) ========== =========== Diluted earnings per share: Reported net income (loss) applicable to common stockholders $ .03 $ (.04) Goodwill amortization -- (.00) Adjusted net income (loss) $ .03 $ (.04) ========== =========== - 8 - Item 2. Management's Discussion and Analysis or Plan of Operation Results of Operations Net patient care revenue increased 12.9% to $5,319,144 for the three months ended September 30, 2001 from $4,711,932 for the three months ended September 30, 2000. This increase in revenue is due primarily to a 7.9% increase in patient days for the period ended September 30, 2001 over the same period last year. Marketing efforts have aided in increasing the census at all three inpatient facilities. Income before interest, taxes, depreciation, amortization and dividends was $720,025 for the three months ended September 30, 2001 compared to $164,064 for the three months ended September 30, 2000. Two of the key indicators of profitability of inpatient facilities are patient days, or census, and payor mix. Patient days is the product of the number of patients times length of stay. Increases in the number of patient days 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. Management fees of $345,111 for the three months ended September 30, 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 increased 18.3% to $212,976 for the three months ended September 30, 2001 from $179,977 for the three months ended September 30, 2000. The cost of providing these services increased 4.3% to $168,972 for the three months ended September 30, 2001 from $162,001 for the three months ended September 30, 2000. This is due to changes in contract rates and increased services provided. Revenue from pharmaceutical studies increased 131.5% to $79,817 for the three months ended September 30, 2001 from $34,478 for the three months ended September 30, 2000. 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 currently in progress. 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 84.6% to $2,301 for the three months ended September 30, 2001 from $15,000 for the three months ended September 30, 2000 and website expenses decreased 68.1% to $80,947 for the three months ended September 30, 2001 from $253,787 for the period ended September 30, 2000. Administrative expenses increased 9.6% to $1,927,347 for the three months ended September 30, 2001 from $1,758,566 for the three months ended September 30, 2000. This increase is primarily due to the increase in salaries, marketing and office expenses indirectly related to the increases in census. Rent expense decreased 4.5% to $192,725 for the three months ended September 30, 2001 from $201,912 for the three months ended September 30, 2000. This decrease is due to the elimination of the space originally leased to accommodate the company's internet subsidiary. The internet company now occupies space at the corporate offices. The company also experienced a 30.4% increase in cost of insurance and other employee benefits to $86,254 for the three months ended September 30, 2001 from $66,103 for the three months ended September 30, 2000. - 9 - Patient care expenses increased by 21.1% to $2,672,391 for the three months ended September 30, 2001 from $2,207,335 for the three months ended September 30, 2000. These increases in expenses are due primarily to the 7.9% increase in patient days as noted above with the primary increases in expenses directly related to patient census such as payroll, consultants, food, hospital supplies, medical records and pharmacy. Bad debt expense decreased 85.9% to $116,439 for the three months ended September 30, 2001 from $826,910 for the three months ended September 30, 2000. This is due primarily to the closing of the practice management company, which accounted for the majority of the bad debt expense for the three months ended September 30, 2000. Interest expense decreased 21.7% to $217,830 for the three months ended September 30, 2001 from $278,372 for the three months ended September 30, 2000. This decrease in interest is due to the decrease of approximately $600,000 in long-term debt for the period ended September 30, 2001 as compared to the period ended September 30, 2000. The company has no provision for income taxes due to the utilization of net operating loss carry forwards. Preferred stock dividends decreased to $30,388 for the quarter ended September 30, 2001 from $172,913 for the quarter ended September 30, 2000. This decrease in dividends is due primarily to the issuance of additional series C preferred stock in the quarter ended September 30, 2000, which carried with it a discount of $90,000 and a beneficial conversion feature of $51,000, which were recorded as additional dividends. We continue to view receivables most conservatively by maintaining the ratio of reserves for bad debt to receivables at approximately 30% on an accounts receivable balance, which increased 1.0% to $8,956,545 at September 30, 2001 from $8,853,240 at June 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 debts due to untimely filing of claims since errors on claims are identified and corrected in a more timely manner than in prior years. The $600,000 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 September 30, 2001 costs of $2,967 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 the bankrupt subsidiary will result in increased equity in that amount. - 10 - Liquidity and Capital Resources Our day-to-day business was, like that of many other companies, negatively impacted by the National tragedy of September 11, 2001. Many clients who normally travel by way of commercial airline to our facilities were reluctant to do so after airline service was restored. For a period of time, these clients chose local treatment centers instead of traveling to Pioneer facilities. We also anticipate a decline in membership for our casino capitated rate contracts due to the escalated unemployment rates in that industry. Some of these decreases may be offset by increases in individual and group out patient services provided to assist clients in coping with Post Traumatic Stress Disorder. We cannot predict, at this time, the effect these changes may have on the company's operations and profitability. 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 remained relatively stable during the quarter ended September 30, 2001 with an increase in accounts receivable of approximately $103,000 and an increase in reserves of approximately $118,000. 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 September 30, 2001 the company met its cash flow needs through ongoing accounts receivable financing and through debt and equity transactions as follows: During the quarter ended September 30, 2001 the company issued warrants to purchase 12,000 shares of class a common stock valued at $1,785 in exchange for consultant services. Also during the quarter ended September 30, 2001 the company issued 1,250 shares of class A common stock upon the exercise of 1,250 stock options at $.25 each. 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 for the repayment of outstanding debt. We continue to aggressively pursue payments on accounts receivable in order to continue to reduce debt. The company also has approximately $2,000,000 in long-term debt due in the fiscal year ending June 30, 2002. This debt is primarily due to Heller Healthcare Financial, its primary lender. The company has already begun the process of renewing this debt. 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 renewal of the debt mentioned 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, which should increase revenues and provide for increased cash from operations. - 11 - 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: November 8, 2001 /s/ Bruce A. Shear Bruce A. Shear President Chief Executive Officer Date: November 8, 2001 /s/ Paula C. Wurts Paula C. Wurts Controller Treasurer