U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 | | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ___________ Commission file number 0-23524 PHC, INC. _____________________________________________________________________________ (Exact name of small business issuer as specified in its charter) Massachusetts 04-2601571 _______________ __________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Lake Street, Suite 102, Peabody MA 01960 ______________________________________________________________________________ (Address of principal executive offices) (Zip Code) 978-536-2777 ______________________________________________________________________________ (Issuer's telephone number) (Former Name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _ No X In a no action letter, the U. S. Securities and Exchange Commission indicated that the company's failure to file a report on Form 8-K in connection with its acquisition of Behavioral Stress Centers, Inc. in November 1, 1996 will not preclude stockholders from selling under Rule 144. Applicable only to corporate issuers Number of shares outstanding of each class of common equity, as of October 27, 1997: Class A Common Stock 4,689,304 Class B Common Stock 730,331 Class C Common Stock 0 Transitional Small Business Disclosure Format (Check one): Yes _____ No X PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 1997 and June 30, 1997. Condensed Consolidated Statements of Operations - Three months ended September 30, 1997 and September 30, 1996. Condensed Consolidated Statements of Cash Flows - Three months ended September 30, 1997 and September 30, 1996. Notes to Condensed Consolidated Financial Statements - September 30, 1997. Item 2. Management's Discussion and Analysis or Plan of Operation PART II. OTHER INFORMATION Item 1. Legal Proceedings. Signatures PART I. FINANCIAL INFORMATION Item 1 Financial Statements PHC INC. AND SUBSIDIARIES (UNAUDITED) CONSOLIDATED BALANCE SHEETS Sept. 30 June 30 __________ _________ 1997 1997 ASSETS Current assets: Cash & Cash Equivalents............................ $ 144,645 $ 905,692 Accounts receivable, net of allowance for bad debts of $3,219,992 at Sept. 30, 1997, $2,982,138 at June 30, 1997................................. 10,266,259 10,650,368 Prepaid expenses................................... 208,276 375,382 Other receivables and advances..................... 156,878 260,212 Deferred Income Tax Asset.......................... 515,300 515,300 Other Receivables, related party................... 110,000 80,000 __________ __________ Total current assets............................ 11,401,358 12,786,954 Accounts Receivable, noncurrent...................... 645,000 605,000 Loan Receivable...................................... 118,284 134,284 Property and equipment, net.......................... 8,315,963 8,408,211 Deferred income taxes................................ 154,700 154,700 Deferred financing costs, net of amortization........ 756,006 751,325 Goodwill, net of accumulated amortization............ 1,719,629 1,644,252 Restricted deposits and funded reserves.............. 175,616 170,874 Other assets......................................... 134,906 222,032 Other receivables, noncurrent, related party........ 3,328,062 2,983,177 ___________ ___________ Total............................................$26,749,524 $27,860,809 ___________ ___________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................... 4,149,005 $ 4,171,334 Notes payable--related parties..................... 51,600 51,600 Current maturities of long term debt............... 574,278 580,275 Revolving credit note and secured term note........ 1,525,022 1,789,971 Current portion of obligations under capital leases............................................ 150,530 139,948 Accrued Payroll, Payroll Taxes and Benefits........ 577,365 703,842 Accrued expenses and other liabilities............. 480,217 587,024 ___________ ___________ Total Current liabilities....................... 7,508,017 8,023,994 ___________ ___________ Long-term debt....................................... 9,596,305 9,759,601 Obligations under capital lease...................... 1,563,275 1,594,562 Notes payable related parties........................ 15,796 23,696 Convertible debenture................................ -- 2,734,375 ___________ ___________ Total noncurrent liabilities....................... 11,175,376 14,112,234 ___________ ___________ Total liabilities.................................. 18,683,393 22,136,228 ___________ ___________ Stockholders' Equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, 500 shares issued and outstanding June 30, 1997 (liquidation preference $504,333).............................. -- 5 Class A common stock, $.01 value; 20,000,000 shares authorized, 4,643,280 and 2,877,836 shares issued Sept. 97 and June 97....................... 46,433 28,778 Class B common stock, $.01 par value; 2,000,000 shares authorized, 730,331 and 730,360 issued Sept. 97 and June 97 convertible into one share of Class A common stock.................................... 7,303 7,304 Class C common stock, $.01 par value; 200,000 shares authorized, 199,816 issued and outstanding June 97........................................... -- 1,998 Additional paid-in capital......................... 13,643,167 10,398,630 Treasury stock, 8,656 shares at cost............... (37,818) (37,818) Accumulated Deficit................................ (5,592,954) (4,674,316) ___________ ___________ Total Stockholders' Equity......................... 8,066,131 5,724,581 ___________ ___________ Total.............................................. 26,749,524 $27,860,809 ___________ ___________ See Notes to Consolidated Financial Statements PHC INC. AND SUBSIDIARIES (UNAUDITED) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended September 30 _____________ 1997 1996 Revenues: Patient Care, net............................ $5,903,995 $5,784,856 Management Fees.............................. 233,283 -- Other........................................ 173,477 133,204 __________ __________ Total revenue................................ 6,310,755 5,918,060 Operating expenses: Patient care expenses........................ 3,622,231 3,056,894 Cost of Management Contracts................. 102,400 69,893 Provision for doubtful accounts............. 483,778 269,943 Administrative expenses...................... 2,692,035 2,199,501 ___________ __________ Total operating expenses.... 6,900,444 5,596,231 ___________ __________ Income (Loss) from operations................... (589,689) 321,829 ___________ __________ Other income (expense): Interest income............................... 97,676 2,650 Other income.................................. 69,385 81,464 Interest expense.............................. (488,010) (295,344) Gain from operations held for sale............ -- (724) ___________ __________ Total other income (expense).................... (320,949) (211,954) ___________ __________ Income (Loss) before Provision for Taxes........ (910,638) 109,875 Provision for Income Taxes...................... 8,000 44,133 __________ __________ Net Income (Loss)............................... $ (918,638) $ 65,742 ___________ __________ Income (Loss) per Share: Net Income (Loss) per share................... $ (.21) $ .02 Weighted average number of shares outstanding......................... 4,444,706 3,117,915 See Notes to Consolidated Financial Statements PHC INC. AND SUBSIDIARIES (UNAUDITED) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended September 30, _____________ 1997 1996 Cash flows from operating activities: Net income (loss).......................... $(918,638) $65,742 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............. 161,975 138,872 Warrants issued for services.............. 46,131 -- (Increase) decrease in accounts receivable.............................. 88,558 (1,446,109) Decrease (increase) in prepaid expenses and other current assets................ 167,106 (147,887) (Increase) decrease in other assets....... 11,456 124,945 (Increase) decrease in net assets of operations held for sale................ -- (1,185) Increase (decrease) in accounts payable................................. (163,555) (93,288) Increase (decrease) in accrued and withheld taxes.......................... -- 6,923 Increase (decrease) in accrued expenses and other liabilities................... (92,058) (308,532) __________ __________ Net cash provided by (used in) operating activities.................................. (699,025) (1,660,519) Cash flows from investing activities: Costs related to business acquisition..... (8,390) (344,407) Acquisition of property and equipment..... (39,084) (224,602) ___________ __________ Net cash provided by (used in) investing activities.................................. (47,474) (569,009) ___________ __________ Cash flows from financing activities: Issuance of common stock: Exercise of Options.................... -- 54,547 Private Placement...................... 448,299 -- Net debt activity...................... (462,847) 1,888,013 ___________ __________ Net cash provided by (used in) financing activities................................. (14,548) 1,942,560 ___________ __________ NET INCREASE (DECREASE) IN CASH.............. (761,047) (286,968) Beginning cash balance...................... 905,692 293,515 ___________ __________ ENDING CASH BALANCE.......................... 144,645 6,547 ___________ __________ NON-CASH TRANSACTIONS Conversion of Debt to Common Stock....... $2,734,375 Conversion of Preferred Stock to Common Stock.................................. $ 584,587 Stock issued for North Point Acquisition............................ $ 31,383 $ 75,600 See Notes to Consolidated Financial Statements PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 1997 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, Michigan and Virginia and a long-term care facility in Massachusetts. PHC also manages a psychiatric practice in New York through BSC-NY, Inc. The consolidated financial statements include PHC and its subsidiaries, all of which are 100% owned except Pioneer Counseling of Virginia, Inc. which is owned 80% by PHC, Inc.(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. 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. 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 five outpatient behavioral health centers under the name of Pioneer Counseling Centers. Three of the centers were purchased on August 31, 1996 for $110,000 and 15,000 shares of PHC, Inc. Class A Common Stock. During the current quarter 15,000 additional shares of PHC, Inc. Class A Common Stock were issued in connection with this acquisition. The other two centers were purchased on September 6, 1996 for $150,000. BSC-NY, Inc. ("BSC"), is a provider of management and administrative services to psychotherapy and psychological practices in the greater New York City Metropolitan Area. Pioneer Counseling of Virginia, Inc., ("PCV") provides psychiatric services to adults, adolescents and children through an outpatient clinic located in Salem, Virginia. Pioneer Counseling of Virginia, Inc. is owned 80% by PHC, Inc., 10% by Dr. H. Patel and 10% by Dr. M. Patel. STL, Inc. ("STL") operated day care centers prior to July, 1993. Since that time, PHC has phased out its day care center operations and the operating results of STL have been classified as "gain from operations held for sale" in the Condensed Consolidated Financial Statements. 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, 1997 are not necessarily indicative of the results that may be expected for the year ending June 30, 1998. The accompanying financial statements should be read in conjunction with the June 30, 1997 consolidated financial statements and footnotes thereto included in the Company's 10-KSB filed on October 14, 1997 and amended on October 29, 1997. Note C - Subsequent Events On October 1, 1997, the Company purchased the assets of an outpatient clinic in Blacksburg, Virginia for 26,024 shares of Class A Common Stock and $50,000 in cash. The clinic's operations will be included in Pioneer Counseling of Virginia, Inc. On November 5, 1997 the Company filed a Post-Effective Amendment on Form SB-2/A2 to update information in the Registration Statement filed on Form SB-2 which became effective in June 1997. No additional Securities are being registered with this Post-Effective Amendment. 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 2% to $5,903,995 for the three months ended September 30, 1997 from $5,784,856 for the three months ended September 30, 1996. This increase in revenue is due to the acquisition of Pioneer Counseling of Virginia in January 1997. This amount does not include $203,283 in management fees generated by BSC-NY, Inc. which was acquired in November 1996. The company recorded a loss of $918,638 for the three months ended September 30, 1997 as compared to net income of $65,742 for the three months ended September 30, 1996. This decrease in net income is due in part to a decline in census in the chemical dependency facilities and an overall increase in provision for bad debts. Good Hope, the Company's chemical dependency facility in Rhode Island, continues to operate at a loss because of a decline in length of stay and lower reimbursements from third party payors. However, the Company's management team is focused on reducing expenses, increasing revenue and enhancing programming and has recently established new contracts which should help to stabilize the patient census. Also contributing to the decline in Net Income is the continued low census at the Company's long-term care facility. The occupancy rate for the long-term care facility for the three months ended September 30, 1997 was 67.0% as compared to 94.1% for the same period last year. The Company's intention is to sell Franvale allowing management to focus its efforts on its core business. Net patient care revenue for Pioneer's core behavioral healthcare business increased to $5,177,495 for the quarter ended September 30, 1997 from $4,346,076 for the same period in 1996. This increase in revenue is due primarily to newly acquired psychiatric practice in Virginia and the Management fees generated by BSC-NY, Inc. Net patient care revenue for the long term care facility decreased to $1,133,260 for the three months ended September 30, 1997 from $1,571,984 for the three months ended September 30, 1996 due to the decline in patient 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 decreased during the quarter ended September 30, 1997 by approximately $88,500. This small decrease in receivables is due to continued success in the collection of the receivables of new acquisitions. The Company continues to closely monitor its accounts receivable balances and implement procedures and policies, including more aggressive collection techniques, to manage receivables growth and keep it 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 behavioral healthcare related businesses. The Company's expansion plans will be dependent upon obtaining adequate financing as such opportunities arise. During the current quarter the company issued 172,414 Shares of Unregistered Class A Common Stock to ProFutures Special Equities Fund, L. P. resulting in proceeds to the Company of approximately $445,000. PART II OTHER INFORMATION Item 1. Legal Proceedings. The Company received a notice from Pioneer Health Care, Inc., a Massachusetts non-profit corporation demanding that the Company discontinue use of its PIONEER HEALTHCARE trademark upon the grounds that mark infringes the rights of Pioneer Health Care, Inc. under applicable law. Pioneer Health Care, Inc. threatened to proceed with the necessary legal action to prevent the Company from using the PIONEER HEALTHCARE mark, and to seek a cancellation of the registration that has been issued by the U.S. Patent Trademark Office (the "PTO") to the Company for the PIONEER HEALTHCARE mark, unless the Company complied with this demand. The Company refused to comply with this demand, whereupon Pioneer Health Care, Inc. filed a petition in the PTO seeking the cancellation of the Company's registration of its PIONEER HEALTHCARE trademark. The Company thereupon commenced litigation in the United States District Court for the District of Massachusetts seeking a declaratory judgment that its use of the PIONEER HEALTHCARE trademark does not infringe any rights of Pioneer Health Care, Inc. under applicable law, and that it has the right to maintain its registration of that mark. Pioneer Health Care, Inc. has filed a counterclaim in that litigation seeking injunctive and monetary relief against the Company upon claims of trademark infringement, trademark dilution and unfair competition. The Company is defending itself vigorously against those claims. Proceedings upon the petition filed by Pioneer Health Care, Inc. in the PTO seeking the cancellation of the Company's registration of its PIONEER HEALTHCARE trademark have been stayed pending the resolution of the litigation between the parties. Although the Company regards Pioneer Health Care, Inc.'s counterclaims as being without merit, an adverse decision could result in money damages against the Company and required discontinuance by the Company of the PIONEER HEALTHCARE mark could result in costs to the Company which could have a material adverse effect on the Company. In January 1996, the Company received notice that Mullikin Medical Center, A Medical Group, Inc., located in Artesia, California, filed a petition with the PTO seeking cancellation of the registration of the PIONEER HEALTHCARE mark. This cancellation proceeding has been suspended pending the outcome of the litigation described above. 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 18, 1997 /s/ Bruce A. Shear Bruce A. Shear President Chief Executive Officer Date: November 18, 1997 /s/ Paula C. Wurts Paula C. Wurts Controller Assistant Treasurer