U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
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)
508-536-2777
(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_____ PHC,
Inc. became subject to the Exchange Act on March 3, 1994 .
Applicable only to corporate issuers
Number of shares outstanding of each class of common equity, as of October 31,
1996:
Class A Common Stock 2,327,624
Class B Common Stock 806,556
Class C Common Stock 199,816
Transitional Small Business Disclosure Format
(Check one):
Yes No X
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
PHC INC. AND SUBSIDIARIES UNAUDITED
CONSOLIDATED BALANCE SHEETS
Sept. 30 June 30
1996 1996
ASSETS (
Current assets:
Cash & Cash Equivalents........................ $6,547 $293,515
Accounts receivable, net of allowance for bad debts
of $1,591,393 at Sept. 30, 1996, 1,492,983 at June
30, 1996....................................... 10,116,730 8,866,065
Prepaid expenses............................. 407,780 259,893
Other receivables and advances............... 261,957 66,513
Deferred Income Tax Asset.................... 515,300 515,300
Total current assets....................... 11,308,314 10,001,286
Accounts Receivable, noncurrent................ 740,000 740,000
Loan Receivable................................. 113,805 113,805
Property and equipment, net..................... 7,987,527 7,884,063
Deferred income taxes 154,700 154,700
Deferred financing costs, net of amorization 698,445 702,948
Goodwill, net of accumulated amortization 894,951 709,573
Other assets....................................... 550,612 454,160
Net assets of operations held for sale............. 57,867 56,682
Total......................................... 2,506,221 $20,817,217
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. 3,379,769 3,127,052
Notes payable--related parties ................... 56,600 56,600
Notes payable-- bank.............................. 39,005
Current maturities of long term debt................ 1,101,679 403,894
Current portion of obligations under capital leases 114,329 88,052
Accrued Payroll, Payroll Taxes and Benefits........ 656,051 715,515
Accrued expenses and other liabilities............. 425,034 738,784
Total Current liabilities....................... 5,772,467 5,129,897
Construction Note Payable ---
Long-term debt...................................... 8,467,128 7,754,262
Obligations under capital lease..................... 1,614,053 1,468,475
Notes payable related parties........................ 39,496 47,394
Total noncurrent liabilities....................... 10,120,677 9,270,131
Total liabilities................................. 15,893,144 14,400,028
Stockholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued.......................... --- ---
Class A common stock, $.01 value; 10,000,000 shares
authorized, 2,327,624 and 2,293,568 shares issued
Sept. 96 and June 96............................ 23,276 22,936
Class B common stock, $.01 par value; 2,000,000
shares authorized, 806,556 and 812,237 issued
Sept. 96 and June 96 convertible into
one share of Class A common stock................ 8,066 8,122
Class C common stock, $.01 par value; 200,000 shares
authorized, 199,816 and 199,816 issued Sept. 96
and June 96.................................... 1,998 1,998
Additional paid-in capital........................ 8,208,245 8,078,383
Notes receivable related to purchase of 31,000 shares
of Class A common stock......................... (63,928) (63,928)
Accumulated Deficit............................... (1,564,580) (1,630,322)
Total Stockholders' Equity........................ 6,613,077 6,417,189
Total.............................................. 22,506,221 $20,817,217
See Notes to Consolidated Financial Statements
PHC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
September 30
1996 1995
Revenues:
Patient Care, net .............................. $5,784,856 $4,492,880
Management Fees. ............................... 133,204 36,557
Total revenue..................................... 5,918,060 4,529,437
Operating expenses:
Patient care expenses........................... 3,056,894 2,600,543
Cost of Management Contracts.................... 69,893 31,637
Administrative expenses......................... 2,469,444 1,651,550
Total operating expenses.......................... 5,596,231 4,283,730
Income from operations............................. 321,829 245,707
Other income (expense):
Interest income.................................. 2,650 2,763
Other income..................................... 81,464 49,746
Interest expense................................. (295,344) (147,998)
Gain (loss) from operations held for sale
Total other income (expense)....................... (211,954) (96,456)
Income before Provision for Taxes.................. 109,875 149,251
Provision for Income Taxes......................... 44,133 54,378
NET INCOME ........................................ 65,742 $94,873
Earnings per Share:
Net Income per share............................. .02 .04
Weighted average number
of shares outstanding............................ 3,117,915 2,404,933
See Notes to Consolidated Financial Statements
PHC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended
September 30
1996 1995
Cash flows from operating activities:
Net income ...................................... $65,742 94,873
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 138,872 91,691
(Increase) decrease in accounts receivable....... (1,446,109) (540,287)
Decrease (increase) in prepaid expenses and other
current assets................................ (147,887) (74,877)
(Increase) decrease in other assets.............. 124,945 (26,659)
(Increase) decrease in net assets of operations
held for sale................................. (1,185) (17,311)
Increase (decrease) in accounts payable.......... (93,288) 111,501
Increase (decrease) in accrued and withheld taxes 6,923 4,068
Increase (decrease) in accrued expenses and other
liabilities................................... (308,532) 6,866
Net cash provided by (used in) operating activities. (1,660,519) (290,135)
Cash flows from investing activities:
Costs related to Business acquistion.............. (420,007) ---
Acquisition of property and equipment............. (224,602) (897,511)
Net cash provided by (used in) investing activities. (644,609) (897,511)
Cash flows from financing activities:............... 130,147 ---
Issuance of common stock net debt activity........ 1,888,013 836,636
Net cash provided by (used in) financing activities. 2,018,160 836,636
NET INCREASE (DECREASE) IN CASH..................... (286,968) (351,010)
Beginning cash balance.............................. 293,515 586,738
ENDING CASH BALANCE................................. 6,547 235,728
PHC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE A - THE COMPANY
PHC, Inc. ("PHC") operates substance abuse treatment centers in several
locations in the United States, a psychiatric hospital in Michigan, out-patient
psychiatric centers in Nevada, Kansas and Michigan and a long-term care facility
in Massachusetts. The consolidated financial statements include PHC and its
subsidiaries, all of which are 100% owned (collectively the "Company"):
PHC's subsidiaries, PHC of Utah, Inc., ("PHU"), PHC of Virginia, Inc.
("PHV"), and PHC of Rhode Island , Inc. ("PHRI"), provide treatment of addictive
disorders and chemical dependency. PHC of Rhode Island, Inc. operates Good Hope
Center which was purchased on March 16, 1994. Quality Care Centers of
Massachusetts, Inc. ("Quality Care") operates a long-term care facility known as
the Franvale Nursing and Rehabilitation Center. PHC of Michigan, Inc. ("PHM"),
operates Harbor Oaks Hospital which was purchased on September 20, 1994. PHM
provides inpatient psychiatric care to children, adolescents and adults and
operates a partial hospitalization program that includes outpatient treatment
services. PHC of Nevada, Inc. ("PHN"), operates Harmony Healthcare which was
purchased on November 1, 1995. PHN provides outpatient psychiatric care to
children, adolescents and adults. PHC of Kansas, Inc. ("PHK"), operates Total
Concept EAP which was purchased on March 15, 1996. PHK operates Employee
Assistance Programs and provides outpatient behavioral health care to children,
adolescents and adults. North Point-Pioneer, Inc. ("NPP"), operates six out
patient behavioral health centers under the name of Pioneer Counseling Centers.
Four of the centers were purchased on August 31, 1996 for $110,000 and 15,000
shares of PHC Inc. Class A Common Stock. The other two centers were purchased on
September 6, 1996 for $150,000 of which payment of $100,000 is contingent on
completion of certain contracts. STL, Inc. ("STL") operated day care centers
prior to July, 1993. Since that time, PHC has been systematically phasing out
its day care center operations and the operating results of STL and its net
assets have been classified as "operations held for sale" in the Condensed
Consolidated Financial Statements. All significant intercompany transactions and
balances have been eliminated in consolidation.
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,
1996 are not indicative of the results that may be expected for the year ending
June 30, 1997. The accompanying financial statements should be read in
conjunction with the June 30, 1996 consolidated financial statements and
footnotes thereto included in the Company's 10-KSB filed on October 4, 1996.
NOTE C - SUBSEQUENT EVENTS
On October 7, 1996, PHC, Inc., (the "Company") issued $3,125,000 principal
amount of its 7% Convertible Debentures (the "Debentures") to two accredited
investors. For details regarding this transaction please refer to the company's
Form 8-K filed on November 5, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
PHC, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net patient care revenue increased 29% to $5,784,856 for the three months
ended September 30, 1996 from $4,492,880 for the three months ended September
30, 1995. This increase in revenue is due to the acquisitions in August and
September 1996 of North Point-Pioneer, Inc. and the increase in available beds
for the long term care facility. Net Income decreased 31% to $65,742 for the
three months ended September 30, 1996 from $94,873 for the three months ended
September 30, 1995. This decrease in net income is due primarily to costs
associated with the acquisition of the new outpatient psychiatric centers in
Michigan and expenses incurred in the re-engineering of the Good Hope Center's
operations after the loss of referrals from a state agency.
Net patient care revenue for the psychiatric and substance abuse
facilities increased to $4,212,872 for the quarter ended September 30, 1996 from
$3,375,350 for the same period in 1995. This increase in revenue is due
primarily to newly acquired psychiatric treatment facilities. Net patient care
revenue for the long term care facility increased to $1,571,984 for the three
months ended September 30, 1996 from $1,117,530 for the three months ended
September 30, 1995 due to an increase in net revenue per patient day and the
number of occupied beds. The long term care facility opened the thirty-seven bed
addition on September 29, 1995 which resulted in increased rates and census.
LIQUIDITY AND CAPITAL RESOURCES
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Accounts receivable related to
patient revenue increased during the quarter ended September 30, 1996 by
$1,250,665, approximately 13.0%, which contributed to cash used in operations
during the quarter of $1,660,519. This increase in accounts receivable is
primarily the result of an increase in revenues from new acquisitions and
increased beds at Franvale. The company continues to closely monitor its
accounts receivable balances and is working to reduce amounts due consistent
with growth in revenues.
The Company believes that it has the necessary liquidity and capital
resources and contingent funding commitments to sustain existing operations for
the foreseeable future. The Company also intends to expand its operations
through the acquisition or establishment of additional treatment facilities. The
Company's expansion plans will be dependent upon obtaining adequate financing as
such opportunities arise.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In connection with the trademark challenge by Pioneer Health Care, Inc.
(described in the company's 10 KSB for the year ended June 30, 1994 and the
company's 10-KSB for the year ended June 30, 1995) the company filed an appeal
on July 10, 1995 with the United States First Circuit Court of Appeals from an
unfavorable judgment of the Federal District Court. The company does not believe
that an adverse decision would have a material adverse effect on the company.
Item 5. Other Information
Effective November 1, 1996, the Company acquired Behavioral Stress Centers,
Inc. ("BSC"), a New York corporation which provides management and
administrative services to psychotherapy and psychological practices in the
greater New York City Metropolitan Area. The acquisition was consummated through
the merger of a newly formed wholly owned subsidiary of the Company, BSC-NY,
Inc., and BSC with BSC-NY, Inc. being the surviving company (the "Surviving
Company") pursuant to an Agreement and Plan of Merger (the "Merger") between the
Company, BSC, the subsidiary, and Messrs. Irwin Mansdorf and Yakov Burstein,
each a stockholder of BSC (collectively, Messrs. Mansdorf and Burstein are
referred to as the "Sellers"). In connection with the Merger, the Company issued
150,000 shares of its Class A Common Stock to the Sellers. The Agreement
provides that the Company is also obligated to pay the Sellers a portion of the
profits of the Surviving Company (not to exceed 49%) over the next three years.
The earn-out consideration is payable 50% in Class A Common Stock shares and 50%
in cash provided that the Sellers are not obligated to receive more than
$200,000 in the form of Class A shares based on its fair market value at time of
payment. Each Seller agreed not to compete directly or indirectly with the
Surviving Company during the four years following Closing.
At Closing, the Company and Perlow Physicians P.C., a professional
corporation (the "Professional Corporation") of which Gerald M. Perlow, M.D., a
director of the Company, is a principal stockholder, entered into an Asset
Purchase Agreement (the "Purchase Agreement") with the Sellers pursuant to which
the Company purchased certain assets of Clinical Associates, a partnership of
which the Sellers are the general partners ("CA"), and certain assets of
Mansdorf, which were used in a business operated by Mansdorf doing business as
Clinical Diagnostics ("CD"), for $1,500,000 and the Professional Corporation
purchased contracts between CA or CD and 31 nursing homes (the "Nursing Home
Contracts") under which CA and/or CD provides psychotherapy and psychological
consulting services to patients at the nursing homes for a $750,000 note of
which the Company is the maker. Also at Closing, the Professional Corporation
entered into a five year Management Agreement, renewable for five additional
years, with the Surviving Company pursuant to which the Surviving Company agreed
to provide management, administrative and billing services to the Professional
Corporation and will receive a fee in connection therewith plus reimbursement of
all the practice expenses (as defined in the Management Agreement) of the
Professional Corporation. The Management Agreement also requires the
Professional Corporation to repay up to $750,000, plus interest at 8% per annum,
to the extent payments are made on the $750,000 note issued to the Sellers under
the Purchase Agreement. The note is subject to pro rata reduction for each
nursing home which terminates its contract with the Professional Corporation
during the 90-day period following Closing.
Also at Closing, Dr. Burstein, who is a psychologist and has a Ph.D.
degree, entered into a three year employment agreement and Dr. Mansdorf, who is
a psychologist and has a Ph.D. degree, entered into a three year consulting
agreement with the Professional Corporation pursuant to which Dr. Burstein
agreed to continue to provide psychotherapy services to the Professional
Corporation and to be involved in its business and operations and Dr. Mansdorf
agreed to provide consulting services to the Professional Corporation. Dr.
Mansdorf will also provide psychotherapy services to the Professional
Corporation. The Professional Corporation also employs approximately 20
psychotherapists, psychologists and psychiatrists in the greater New York City
Metropolitan Area to provide psychiatric and psychotherapy services to patients,
in clinical settings including those at the nursing homes. CA and CD were
providing professional services in excessive of 30,000 patient visits per year
at more than 30 nursing homes and other institutions.
The foregoing is only a summary of the principal terms of the Merger
Agreement, the Purchase Agreement, the Employment Agreement, the Consulting
Agreement and the Management Agreement, and reference is made to the agreements,
copies of which accompany this filing, for additional information.
BSC, which has been in operation since 1978, provides management,
administrative and billing services to psychiatrists and psychologists,
including CA and CD, and furnishes them with office facilities, secretarial
assistance, billing and general support. It also provides assessment counseling
referral and follow-up services to governmental agencies or employee
associations, while CA and CD provide psychotherapy and psychological clinical
services to businesses, governmental entities and nursing home patients.
The Company intends to continue the business and operation of BSC and,
pursuant to the Management Agreement with the Professional Corporation, to
provide services to the Professional Corporation, and the Professional
Corporation intends to continue the business and operation of CA and CD.
For the seven month period ended July 31, 1996, the acquired companies had
aggregate net cash flow of approximately $970,000 on cash receipts of
approximately $2,100,000 and expenditures of approximately $1,130,000.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.84 Security Agreement by and between PHC, Inc., PHC of Rhode Island, Inc.,
PHC of Virginia, Inc., PHC of Nevada, Inc. and LINC Anthem Corporation
dated July 25, 1996.
10.85 Custodial Agreement by and between LINC Anthem Corporation and PHC,
Inc. and Choate, Hall and Stewart dated July 25, 1996.
10.86 Loan and Security Agreement by and between North Point-Pioneer, Inc.
and LINC Anthem Corporation dated July 25, 1996.
10.87 Corporate Guaranty by PHC, Inc., PHC of Rhode Island, Inc., PHC of
Virginia, Inc., PHC of Nevada, Inc. and LINC Anthem Corporation dated
July 25, 1996 for North Point-Pioneer, Inc.
10.88 Stock Pledge and Security Agreement by and between PHC, Inc. and LINC
Anthem Corporation.
10.89 Secured Promissory Note of North Point-Pioneer, Inc. in favor of LINC
Anthem Corporation dated July 25, 1996 in the amount of $500,000.
10.90 Lease Agreement by and between PHC, Inc. and 94-19 Associates dated
October 31, 1996 for BSC-NY, Inc.
10.91 Note by and between PHC Inc. and Yakov Burstein in the amount of
$180,000.
10.92 Note by and between PHC, Inc. and Irwin Mansdorf in the amount of
$570,000.
10.93 Employment Agreement by and between BSC-NY, Inc. and Yakov Burstein
dated November 1, 1996
10.94 Consulting Agreement by and between BSC-NY, Inc. and Irwi n Mansdorf
dated November 1, 1996
10.95 Agreement and Plan of Merger by and among PHC, Inc., BSC-NY, Inc.,
Behavioral Stress Centers, Inc., Irwin Mansdorf, and Yakov Burstein
dated October 31, 1996.
10.96 Assignment and Assumption Agreement dated October 31, 1996 by and
between Clinical Associates and Perlow Physicians, P.C.
10.97 Bill of Sale by and between Clinical Diagnostics and Perlow Physicians,
P.C.
E10.98 Employment Agreement by and between Perlow Physicians, P.C. and Yakov
Burstein dated November 1, 1996.
10.99 Agreement for Purchase and Sale of Assets by and between Clinical
Associates and Clinical Diagnostics and PHC, Inc., BSC-NY, Inc., Perlow
Physicians, P.C., Irwin Mansdorf, and Yakov Burstein dated October 31,
1996
10.100 Consulting Agreement by and between Perlow Physicians, P.C. and Irwin
Mansdorf dated November 1, 1996.
10.101 Option Agreement by and between Pioneer Healthcare and Gerald M. Perlow
M.D., dated November 15, 1996.
(b) There were no Current Reports filed on Form 8-K during the first
quarter of fiscal year 1997.
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 14, 1996 /s/ Bruce A. Shear
Bruce A. Shear
President
Chief Executive Officer
Date: November 14, 1996 /s/ Paula C. Wurts
Paula C. Wurts
Controller
Assistant Treasurer
EXHIBIT INDEX
Exhibit
Number Document
10.84 Security Agreement by and between PHC, Inc., PHC of Rhode Island, Inc.,
PHC of Virginia, Inc., PHC of Nevada, Inc. and LINC Anthem Corporation
dated July 25, 1996.
10.85 Custodial Agreement by and between LINC Anthem Corporation and PHC,
Inc. and Choate, Hall and Stewart dated July 25, 1996.
10.86 Loan and Security Agreement by and between North Point-Pioneer, Inc.
and LINC Anthem Corporation dated July 25, 1996.
10.87 Corporate Guaranty by PHC, Inc., PHC of Rhode Island, Inc., PHC of
Virginia, Inc., PHC of Nevada, Inc. and LINC Anthem Corporation dated
July 25, 1996 for North Point-Pioneer, Inc.
10.88 Stock Pledge and Security Agreement by and between PHC, Inc. and LINC
Anthem Corporation.
10.89 Secured Promissory Note of North Point-Pioneer, Inc. in favor of LINC
Anthem Corporation dated July 25, 1996 in the amount of $500,000.
10.90 Lease Agreement by and between PHC, Inc. and 94-19 Associates dated
October 31, 1996 for BSC-NY, Inc.
10.91 Note by and between PHC Inc. and Yakov Burstein in the amount of
$180,000.
10.92 Note by and between PHC, Inc. and Irwin Mansdorf in the amount of
$570,000.
10.93 Employment Agreement by and between BSC-NY, Inc. and Yakov Burstein
dated November 1, 1996
10.94 Consulting Agreement by and between BSC-NY, Inc. and Irwi n Mansdorf
dated November 1, 1996
10.95 Agreement and Plan of Merger by and among PHC, Inc., BSC-NY, Inc.,
Behavioral Stress Centers, Inc., Irwin Mansdorf, and Yakov Burstein
dated October 31, 1996.
10.96 Assignment and Assumption Agreement dated October 31, 1996 by and
between Clinical Associates and Perlow Physicians, P.C.
10.97 Bill of Sale by and between Clinical Diagnostics and Perlow Physicians,
P.C.
10.98 Employment Agreement by and between Perlow Physicians, P.C. and Yakov
Burstein dated November 1, 1996.
10.99 Agreement for Purchase and Sale of Assets by and between Clinical
Associates and Clinical Diagnostics and PHC, Inc., BSC-NY, Inc., Perlow
Physicians, P.C., Irwin Mansdorf, and Yakov Burstein dated October 31,
1996
10.100 Consulting Agreement by and between Perlow Physicians, P.C. and Irwin
Mansdorf dated November 1, 1996.
10.101 Option Agreement by and between Pioneer Healthcare and Gerald M. Perlow
M.D., dated November 15, 1996.
27 Financial Data Schedule