-----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, P/xuO3hdgZTG4vAbqX8d3IONKmx3M+Q/sKZB3XWhFshNO7oIx1uS03Z4USN0aiDh BOjtK2G/AWgQxgU0m7DInQ== 0000915127-02-000009.txt : 20020510 0000915127-02-000009.hdr.sgml : 20020510 ACCESSION NUMBER: 0000915127-02-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020510 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: 1934 Act SEC FILE NUMBER: 000-22916 FILM NUMBER: 02641157 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 q10q3q51002.txt FORM 10-QBS FOR PERIOD ENDING 03/31/02 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 MARCH 31, 2002. |_| 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) - ------------------------------------------------------------------------------ Indicate by check mark 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_ __ Number of shares outstanding of each class of common equity, as of May 8, 2002: Class A Common Stock 12,108,948 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 - March 31, 2002 and June 30, 2001. Condensed Consolidated Statements of Operations - Three and nine months ended March 31, 2002 and March 31, 2001. Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2002 and March 31, 2001. Notes to Condensed Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Plan of Operation PART II. OTHER INFORMATION Signatures - 2 - PART I. FINANCIAL INFORMATION Item 1 Financial Statements PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, June 30, 2002 2001 ____________ ____________ ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 138,487 $ 43,732 Accounts receivable, net of allowance for bad debts of $2,765,930 at March 31, 2002 and $2,632,525 at June 30, 2001 5,305,990 5,620,715 Prepaid expenses 135,038 63,940 Other receivables and advances 79,161 112,579 Deferred income tax asset 754,139 613,980 ___________ __________ Total current assets 6,412,815 6,454,946 Accounts receivable, noncurrent 710,000 600,000 Other receivable 122,960 104,863 Property and equipment, net 1,293,197 1,338,066 Deferred financing costs, net of amortization of $120,109 at March 31, 2002 and $114,109 at June 30, 2001 14,000 20,000 Goodwill, net of accumulated amortization of $270,105 at March 31, 2002 and June 30, 2001 (Note F) 969,099 969,099 Other assets 259,659 236,478 ___________ __________ Total assets $ 9,781,730 $ 9,723,452 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,711,693 $ 1,746,280 Notes payable--related parties 300,000 200,000 Current maturities of long-term debt 761,230 2,038,077 Revolving credit note 1,842,334 2,111,586 Current portion of obligations under capital leases 11,745 16,725 Accrued payroll, payroll taxes and benefits 421,688 460,723 Accrued expenses and other liabilities 1,192,930 1,328,820 Convertible debentures 500,000 500,000 Net current liabilities of discontinued operations (Note E) 935,576 960,552 ___________ __________ Total current liabilities 7,677,196 9,362,763 ___________ __________ Long-term debt 2,506,790 1,609,649 Obligations under capital leases 23,984 32,160 ___________ __________ Total noncurrent liabilities 2,530,774 1,641,809 ___________ __________ Total liabilities 10,207,970 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 March 31, 2002 and June 30, 2001, respectively 1,407 1,507 Class A common stock, $.01 par value; 20,000,000 shares authorized, 9,182,300 and 8,709,834 shares issued at March 31, 2002 and June 30, 2001, respectively 91,823 87,098 Class B common stock, $.01 par value; 2,000,000 shares authorized, 726,991 issued and outstanding at March 31, 2002 and June 30, 2001, convertible into one share of Class A common stock 7,270 7,270 Additional paid-in capital 18,735,206 18,696,779 Treasury stock, 38,126 shares at March 31, 2002 and 22,926 shares at June 30, 2001, at cost (30,988) (24,894) Notes receivable, common stock (80,000) (80,000) Accumulated deficit (19,150,958) (19,968,880) ___________ __________ Total stockholders' equity (deficit) (426,240) (1,281,120) ___________ __________ Total liabilities and stockholders' equity (deficit) $9,781,730 $9,723,452 ========== ========== See Notes to Condensed Consolidated Financial Statements. - 3 - PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended March 31, March 31, ______________________ _______________________ 2002 2001 2002 2001 Revenues: Patient care, net $5,502,673 $5,763,309 $15,874,763 $15,516,547 Management fees -- -- -- 345,111 Pharmaceutical study 184,985 115,196 388,397 210,104 Website services 544 1,405 3,845 16,486 Contract support services 201,727 334,945 616,953 723,098 __________ __________ ___________ ___________ Total revenues 5,889,929 6,214,855 16,883,958 16,811,346 __________ __________ ___________ ___________ Operating expenses: Patient care expenses 2,720,445 2,555,605 7,963,481 7,140,700 Cost of management contracts 180,377 288,470 525,476 651,602 Provision for doubtful accounts 139,007 289,687 554,546 1,914,594 Website expenses 74,478 365,946 232,683 1,103,835 Administrative expenses 2,172,484 1,980,646 6,200,797 5,427,774 Practice management closing expenses -- -- -- 4,855,966 __________ __________ ___________ ___________ Total operating expenses 5,286,791 5,480,354 15,476,983 21,094,471 __________ __________ ___________ ___________ Income (loss)from operations 603,138 734,501 1,406,975 (4,283,125) __________ __________ ___________ ___________ Interest income 1,134 8,288 8,182 22,774 Other income 16,015 24,663 67,105 46,790 Interest expense (176,101) (268,661) (577,264) (782,826) __________ __________ ___________ ___________ Total other expenses (158,952) (235,710) (501,947) (713,262) __________ __________ ___________ ___________ Income (loss) before provision for taxes 444,186 498,791 905,028 (4,996,387) Provision for income taxes -- -- -- 44,450 __________ __________ ___________ ___________ Net income (loss) $ 444,186 $ 498,791 $ 905,028 $(5,040,837) ========== ========== ========== ============= Net income (loss) $ 444,186 $ 498,791 $ 905,028 $(5,040,837) Preferred stock dividends (27,755) (31,613) (87,106) (180,385) __________ __________ ___________ ___________ Income (loss) applicable to common shareholders $ 416,431 $ 467,178 $ 817,922 $(5,221,222) ========== ========== ========== ============= Basic income (loss)per common share $ 0.04 $ 0.05 $ 0.08 $ (0.63) Basic weighted average number of shares outstanding 9,851,124 8,655,613 9,643,486 8,264,481 Diluted income (loss) per common share $ 0.03 $ 0.05 $ 0.06 $ (0.63) Diluted weighted average number of shares outstanding 14,195,971 9,743,334 14,111,929 8,264,481 See Notes to Condensed Consolidated Financial Statements - 4 - PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended March 31, 2002 2001 ____________ ____________ Cash flows from operating activities: Net income (loss) $ 905,028 $(5,040,837) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 161,965 187,942 Goodwill impairment -- 1,545,609 Write down of accounts receivable, professional corporation -- 3,071,310 Compensatory stock options, stock and warrants issued for obligations 36,572 22,630 Changes in: Accounts receivable 220,046 121,681 Prepaid expenses (71,098) 8,088 Other assets (163,340) (19,312) Accounts payable (222,748) 900,517 Accrued expenses and other liabilities (52,931) (511,848) Net liabilities of discontinued operations (24,976) (919,021) ___________ ___________ Net cash provided by (used in) operating activities 788,518 (633,241) ___________ ___________ Cash flows from investing activities: Acquisition of property and equipment (117,100) (154,796) Web development -- (70,226) Disposition of property, equipment and intangibles -- 3,689 ___________ ___________ Net cash used in investing activities (117,100) (221,333) ___________ ___________ Cash flows from financing activities: Revolving debt, net (269,252) 305,618 Proceeds (repayment) of debt, net (292,862) (272,299) Deferred financing costs 6,000 24,554 Preferred stock dividends -- (93,292) Issuance of preferred stock at a discount -- 250,000 Common stock issued in earnout -- 297,500 Issuance of common stock 300 -- Purchase of treasury stock (6,094) -- Cost related to issuance of capital stock (14,755) (43,901) Notes issued for stock purchase -- (90,000) ___________ ___________ Net cash provided by (used in) financing activities (576,663) 378,180 ___________ ___________ NET INCREASE (DECREASE) IN CASH AND CASH EQUILIVANTS 94,755 (476,394) BEGINNING CASH 43,732 551,713 ___________ ___________ ENDING CASH $ 138,487 $ 75,319 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $531,956 $780,072 Income taxes 9,718 94,780 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Accrued dividends $ 87,106 $180,385 Conversion of preferred stock to common stock 100,000 143,000 Issuance of common stock in lieu of cash dividends 12,395 3,506 See Notes to Condensed Consolidated Financial Statements - 5 - PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2002 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, which has recently begun a treatment program for psychiatric patients; 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, which is expected to occur in the quarter ending June 2002. 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 nine months ended March 31, 2002 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 March 31, 2001 amounts have been reclassified to conform with the March 31, 2002 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 nine months ended March 31, 2001 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 March 31, 2002 Revenues - external customers $ 5,502,673 $ 386,712 $ 544 -- $ 5,889,929 Revenues - intersegment 54,198 474,000 75,000 $ (603,198) -- Net income (loss) 1,003,168 (485,048) (73,934) -- 444,186 For the three months ended March 31, 2001 Revenues - external customers $ 5,763,309 $ 450,141 $ 1,405 $ -- $ 6,214,855 Revenues - intersegment -- 478,698 17,928 (496,626) -- Net income (loss) 1,173,941 (440,241) (234,909) -- 498,791 For the nine months ended March 31, 2002 Revenues - external customers $15,874,763 $ 780,350 $ 3,845 $ -- $ 16,883,958 Revenues - intersegment 54,198 1,647,000 225,000 (1,701,198) -- Net income (loss) 2,278,883 (1,150,712) (223,143) -- 905,028 Identifiable Assets at March 31, 2002 8,339,229 1,339,705 102,796 -- 9,781,730 For the nine months ended March 31, 2001 Revenues - external customers $15,516,547 $ 1,278,313 $ 16,486 $ -- $ 16,811,346 Revenues - intersegment -- 1,454,094 31,448 (1,485,542) -- Net income (loss) 2,148,422 (6,499,041) (690,218) -- (5,040,837) Identifiable Assets at March 31, 2001 8,932,971 1,638,660 130,505 -- 10,702,136
Note E - Net Liabilities of Discontinued Operations Net liabilities of discontinued operations relates to the Franvale closure in 1998 and consists of the following: - 7 - March 31, June 30, 2002 2001 ___________ __________ Debt forgiveness and reserve for contingencies $2,641,537 $2,641,537 ___________ __________ Less legal and other expenses incurred to date $1,705,963 $1,680,986 ___________ __________ Net liabilities of discontinued operations $ 935,576 $ 960,552 =============== ============== The recognition of gain, if any, has been deferred until final resolution of all contingent liabilities related to the discontinued operations. (See note G.) 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 relating to the treatment services segment of the Company was evaluated as of July 1, 2001. There were no impairment issues or amortizable intangible assets identified. Accordingly, the Company ceased amortization of goodwill resulting in a decrease in expenses of $57,704 for the nine months ended March 31, 2002. - 8 - The impact of the adoption of SFAS 142 is summarized as follows: Three Months Ended Nine Months Ended March 31, March 31, 2002 2001 2002 2001 Reported net income (loss) applicable to common stockholders $ 416,431 $ 467,178 $817,922 $(5,221,222) Add back: Goodwill amortization -- 16,425 -- 57,704 __________ ________ _________ ____________ Adjusted net income (loss) 416,431 483,603 817,922 (5,163,518) __________ ________ _________ ____________ Basic earnings per share: Reported net income (loss) applicable to common stockholders $ .04 $ .05 $ .08 $ (.63) Goodwill amortization -- .00 -- .01 __________ ________ _________ ____________ Adjusted net income (loss) $ .04 $ .05 $ .08 $ (.62) __________ ________ _________ ____________ Diluted earnings per share: Reported net income (loss) applicable to common stockholders $ .03 $ .05 $ .06 $ (.63) Goodwill amortization -- .00 -- .01 __________ ________ _________ ____________ Adjusted net income (loss) $ .03 $ .05 $ .06 $ (.62) __________ ________ _________ ____________
Note G - Subsequent Events During the quarter ended March 31, 2002 the Company was notified that the bankruptcy hearing for Franvale Nursing and Rehabilitation center would be held on April 30, 2002. On April 26, 2002 the Company was notified by its bankruptcy attorney that, there being no claims or objections presented, the hearing was cancelled and the bankruptcy discharge will be finalized within the next 30 days. Also subsequent to the end of the quarter the holder of the series C convertible preferred stock sold 103,570 shares of series C convertible preferred stock with a stated value of $10.00 per share, to a number of individuals who converted the shares into 2,301,556 shares of class A common stock. The conversion price was $0.45 per share. The Company also issued an aggregate of 449,760 shares of class A common stock in payment of all accrued and unpaid dividends on the series C preferred stock to the original holder. Following these transactions, the original holder has agreed to convert the balance of the preferred stock into 747,333 shares of class A common stock at $0.45 a share, which transaction is in process. Upon completion of these transactions all of the series C convertible preferred stock will be retired. - 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 decreased 4.5% to $5,502,673 for the three months ended March 31, 2002 from $5,763,309 for the three months ended March 31, 2001 and increased 2.3% to $15,874,763 for the nine months ended March 31, 2002 from $15,516,547 for the nine months ended March 31, 2001. The decrease in revenue for the quarter was primarily due to slow increases in census after the holidays causing low January census at our inpatient facilities. The lower January census may be partially related to the September 11th tragedy. The census increased in February and was at a record level for the month of March 2002. 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 $666,391 for the three months ended March 31, 2002 and $1,617,917 for the nine months ended March 31, 2002 compared to $848,058 and $1,233,218 for the same periods last year. Management fees of $345,111 for the nine months ended March 31, 2001 were related to the New York practice management Company, BSC-NY, Inc., which closed in the quarter ended December 31, 2000. Revenue from pharmaceutical studies increased 60.5% to $184,985 for the three months ended March 31, 2002 as compared to $115,196 for the three months ended March 31, 2001 and 84.9% to $388,397 for the nine months ended March 31, 2002 from $210,104 for the same period last year. These substantial increases are expected during this start up phase of the operation. Future revenues are expected to fluctuate quarterly with the completion of studies, addition of new studies and increased participation of study clients. Contract support services revenue provided by PDSS decreased 39.8% to $201,727 for the three months ended March 31, 2002 from $334,945 for the three months ended March 31, 2001 and 14.7% to $616,953 for the nine months ended March 31, 2002 from $723,098 for the same period last year. The cost of providing these services decreased 37.5% to $180,377 for the three months ended March 31, 2002 from $288,470 for the three months ended March 31, 2001 and 19.4% to $525,476 for the nine months ended March 31, 2002 from $651,602 for the same period last year. These decreases 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, carried with it high costs. 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 76.7% to $3,845 for the nine months ended March 31, 2002 from $16,486 for the same period last year. Website expenses decreased 78.9% to $232,683 for the nine months ended March 31, 2002 from $1,103,835 for the same period last year also due to the change in direction of the internet company. - 10 - Patient care expenses increased by 6.5% to $2,720,445 for the three months ended March 31, 2002 from $2,555,605 for the three months ended March 31, 2001 and 11.5% to $7,963,481 for the nine months ended March 31, 2002 from $7,140,700 for the nine months ended March 31, 2001. These increases in expenses are due primarily to increased acuity in patient census resulting in higher expenses directly related to patient care such as payroll, food, laundry, laboratory and pharmacy and the increase in the costs related to pharmacy study patients. Administrative expenses increased approximately 9.7% to $2,172,484 for the quarter ended March 31, 2002 from $1,980,646 for the quarter ended March 31, 2001 and 14.3% to $6,200,797 for the nine months ended March 31, 2002 from $5,427,774 compared to the same periods last year. The largest increases were in salary expenses, with the addition of administrative staff for the collection of pharmaceutical study data, marketing expenses and advertising expenses. Bad debt expense decreased 52.0% to $139,007 for the three months ended March 31, 2002 from $289,687 for the three months ended March 31, 2001 and 71.0% to $554,546 for the nine months ended March 31, 2002 from $1,914,594 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 34.5% to $176,101 for the three months ended March 31, 2002 from $268,661 for the three months ended March 31, 2001 and 26.3% to $577,234 for the nine months ended March 31, 2002 from $782,826 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 8.2% to $75,287 for the nine months ended March 31, 2002 from $69,564 for the same period last year. This increase is primarily due to the sublease of the property formerly used in the New York operations. The Company has no provision for income taxes for the three months or nine months ended March 31, 2002 due to the utilization of net operating loss carry-forward. We continue to closely monitor accounts receivable collections and are maintaining significant reserves for bad debts. The bad debt reserve was approximately 31% of the accounts receivable balance, which decreased approximately 1% to $8,781,920 at March 31, 2002 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 $710,000 shown as non-current patient accounts receivable is presented at estimated 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. 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 nine months ended March 31, 2002 by approximately 1%, $71,320. The Company continues to closely monitor its accounts receivable balances and is working to reduce amounts due consistent with growth in revenues. - 11 - During the quarter ended March 31, 2002 the Company met its operating needs through ongoing accounts receivable financing and through debt and equity transactions as follows: During the quarter ended March 31, 2002 the Company issued warrants to purchase 41,000 shares of class A common stock in payment for corporate marketing services resulting in a non-cash marketing charge of approximately $2,700. During the quarter ended March 31, 2002 the Company issued 25,871 shares of class A common stock under the Employee Stock Purchase Plan resulting in a non-cash salaries charge of approximately $ 1,300. 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 March 31, 2002, $20,000 remained to be paid on the overline. The Company currently has no overline balance remaining. During the quarter ended March 31, 2002 the Company borrowed $150,000 from a related party to supplement cash collections and accounts receivable funding. This debt carries an interest rate of 12% per annum and is payable on demand with 30 days notice. The outstanding balance of this Note at March 31, 2002 was $100,000. The current balance is $75,000. 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. - 12 - PART II OTHER INFORMATION Signatures In accordance wth 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: May 10, 2002 /s/ Bruce A. Shear President Chief Executive Officer Date: May 10, 2002 /s/ Paula C. Wurts Controller Treasurer -----END PRIVACY-ENHANCED MESSAGE-----