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