U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 [FEE REQUIRED] for the fiscal year ended June 30, 1997
[ ] Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from
______ to _____
Commission file number: 0-23524
PHC, INC.
(Name of small business issuer in its charter)
MASSACHUSETTS 04-2601571
(State or other jurisdiction of R.S. Employer Identification No.)
incorporation or organization)
200 LAKE STREET, SUITE 102, PEABODY, MA 01960
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (978) 536-2777
Securities registered under Section 12(b) of the Act:
NONE.
Securities registered under Section 12(g) of the Act:
Units (each unit consisting of one share of CLASS A COMMON
STOCK AND ONE CLASS A WARRANT
(Title of class)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
CLASS A WARRANTS TO PURCHASE ONE SHARE OF CLASS A COMMON STOCK
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The issuer's revenues for the fiscal year ended June 30, 1997 were $
27,234,372.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of September 15, 1997, was $13,351,977. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At September 15, 1997, 4,470,866 shares of the issuer's Class A Common Stock,
730,331 shares of the issuer's Class B Common Stock and 199,816 shares of the
issuer's Class C Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following listing of Exhibits filed with 10K-SB for Fiscal Year ended June
30, 1997 was omitted from the Edgar filing in error:
Exhibit Index:
4.23 Warrant Agreement by and between Brean Murray & Company and PHC., Inc.
dated 07/31/97 (See 10.125).
4.24 Subscription Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. to purchase PHC, Inc. Units dated 09/19/97.
4.25 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. for up to 86,207 shares of Class A Common Stock
dated 09/19/97.
10.122 Agreement between Family Independence Agency and Harbor Oaks Hospital
effective January 1, 1997.
10.123 Master Contract by and between Family Independence Agency and Harbor
Oaks Hospital effective January 1, 1997.
10.124 Deed, Deed of Trust and Deed Trust Note in the amount of $540,000 by
and between Dillon and Dillon Associates and Pioneer Counseling of
Virginia, Inc. (Related to Exhibit 10.109).
10.125 Financial Advisory Agreement, Indemnification Agreement and Form of
Warrant by and between Brean Murray & Company and PHC, Inc. dated
06/10/97.
10.126 Employment Agreement by and between Harbor Oaks Hospital and Sudhir
Lingnurkar, and Pioneer Counseling Center and Sudhir Lingnurkar dated
August 1, 1997.
10.127 Asset Purchasing Agreement, Restrictive Covenants Agreement and Lease
with Option to Purchase by and between Pioneer Counseling of Virginia,
Inc. and Dianne Jones-Freeman dated August _____, 1997.
10.128 Employment Agreement by and between Pioneer Counseling of Virginia,
Inc. and Dianne Jones-Freeman dated August _____, 1997.
In the listing of Exhibits, the following misprints occurred:
4.8 Should read "Form of Warrant Agreement by and among the
Company, American Stock Transfer & Trust Company and
AmeriCorp Securities, Inc. executed in connection with the
Private Placement."
4.24 Incorrectly listed date of Units as 1/19/97. The correct
date is 9/19/97.
10.128 Listed as "10128"
There were two descriptions for footnotes ##. These should read:
## Filed as an exhibit to the Company's report on Form 10-KSB,
filed with the Securities and Exchange Commission on
September 28, 1994.
### Filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the securities and Exchange Commission
(Commission File number 0-23524) on November 5, 1996.
(b) Reports on Form 8-K
Omitted - should read "No reports on Form 8-K were filed by the Company during
the last quarter of the period covered by this report."
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Additional Information.
During the first three quarters of the fiscal year ended June 30, 1997, the
Company provided for allowances for bad debts based on historical experience
supplemented by certain other current information. During the preparation of
the annual financial statements for fiscal 1997, it was determined that the
allowances were understated based on a detailed analysis of accounts
receivable data. The Company reviewed the year-end adjustments to determine
if some of the adjustments should have been made in the prior fiscal quarters
of fiscal 1997.
The Company has concluded that it is not possible to determine what
adjustments, if any, should have been made to allowance reserves in prior
fiscal quarters of 1997 because the information on which the year-end
analysis was based is not available on a quarterly basis.
The Company has changed its internal systems to make such information
available on a quarterly basis in the future and will analyze such data to
determine the adequacy of its reserves for future quarterly financial
statements commencing with the quarter ended September 30, 1997.
ITEM 7 - FINANCIAL STATEMENTS
Many typographical errors were identified in the Financial Statement printing.
Note I - Segment Information was changed to show net revenues from PDSS
operations. Note K - Certain capital transactions were changed to show the
effect of dilution activity through June 30, 1997. Financial Statements are
being resubmitted in their entirety to avoid confusion.
<PAGE>
PHC, INC. AND SUBSIDIARIES
Contents
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheets as of June 30, 1997 and 1996 F-3
Statements of operations for the years ended
June 30, 1997 and 1996 F-4
Statements of changes in stockholders' equity for the
years ended June 30, 1997 and 1996 F-5
Statements of cash flows for the years ended June 30, F-6
1997 and 1996
Notes to financial statements F-7
F-1
<PAGE>
Richard A. Eisner & Company, LLP
Accountants and Consultants
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheets of PHC, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated financial position
of PHC, Inc. and subsidiaries at June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
September 19, 1997
F2
University Place, 124 Mt. Auburn Street, Suite 200, Harvard Square,
Cambridge, MA 02138 Telephone (617) 576-5790, Fax (617) 497-5490
New York, NY Melville, NY Cambridge, MA Florham Park, NJ
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets June 30,
_________________
1997 1996
_____________________________
Current assets:
Cash and cash equivalents $ 905,692 $ 293,515
Accounts receivable, net of allowance for
bad debts of $2,982,138 at June 30, 1997 and
$1,492,983 at June 30, 1996
(Notes A, C and M) 10,650,368 8,866,065
Prepaid expenses 375,382 259,893
Other receivables and advances 260,212 66,513
Deferred income tax asset (Note F) 515,300 515,300
Other receivables, related party (Note L) 80,000
____________ ____________
Total current assets 12,786,954 10,001,286
Accounts receivable, noncurrent 605,000 740,000
Loans receivable 134,284 113,805
Property and equipment, net (Notes A and B) 8,408,211 7,884,063
Deferred income tax asset (Note F) 154,700 154,700
Deferred financing costs, net of amortization 751,325 772,823
Goodwill, net of accumulated amortization (Note A) 1,644,252 841,413
Restricted deposits and funded reserves 170,874
Other assets (Note A) 222,032 252,445
Net assets of operations held for sale (Note J) 56,682
Other receivables, noncurrent, related party
(Note L) 2,983,177
____________ ____________
$27,860,809 $20,817,217
____________ ____________
LIABILITIES
Current liabilities:
Accounts payable $ 4,171,334 $ 3,127,052
Notes payable - related parties (Note E) 51,600 56,600
Current maturities of long-term debt (Note C) 580,275 403,894
Revolving credit note and secured term note 1,789,971
Current portion of obligations under capital
leases (Note D) 139,948 88,052
Accrued payroll, payroll taxes and benefits 703,842 715,515
Accrued expenses and other liabilities 587,024 738,784
____________ ____________
Total current liabilities 8,023,994 5,129,897
____________ ____________
Long-term debt and accounts payable (Note C) 9,759,601 7,754,262
Obligations under capital leases (Note D) 1,594,562 1,468,475
Notes payable - related parties (Note E) 23,696 47,394
Convertible debentures ($3,125,000 less discount
$390,625)(Note C) 2,734,375
____________ ____________
Total noncurrent liabilities 14,112,234 9,270,131
____________ _____________
Total liabilities 22,136,228 14,400,028
____________ _____________
Commitments and contingent liabilities
Notes A, G, H, K, L and M)
STOCKHOLDERS' EQUITY (Notes H and K)
Preferred stock, $.01 par value; 1,000,000
shares authorized, 500 shares issued and
outstanding in 1997 (liquidation preference
$504,333) 5
Class A common stock, $.01 par value; 20,000,000
shares authorized, 2,877,836 and 2,293,568 shares
issued and outstanding in 1997 and 1996,
respectively 28,778 22,936
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 730,360 and 812,237 issued and
outstanding in 1997 and 1996, respectively .
convertible into one share of Class A common stock 7,304 8,122
Class C common stock, $.01 par value; 200,000 shares
authorized, 199,816 shares issued and outstanding
in 1997 and 1996 1,998 1,998
Additional paid-in capital 10,398,630 8,078,383
Notes receivable related to purchase of 31,000
shares of Class A common stock (63,928)
Treasury stock, 8,656 shares at cost (37,818)
Accumulated deficit (4,674,316) (1,630,322)
____________ ____________
Total stockholders' equity 5,724,581 6,417,189
____________ ____________
$27,860,809 $20,817,217
____________ ____________
See notes to financial statements F-3
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended
June 30,
_______________________
1997 1996
_______________________
Revenues:
Patient care, net (Note A) $26,007,333 $21,569,594
Management fees (Note L) 597,278
Other 629,761 233,164
___________ ___________
Total revenue 27,234,372 21,802,758
___________ ___________
Operating expenses:
Patient care expenses 14,436,784 12,004,383
Cost of management contracts 324,440 146,407
Provision for doubtful accounts 3,397,693 1,894,087
Administrative expenses 10,341,973 7,800,715
___________ ___________
Total operating expenses 28,500,890 21,845,592
___________ ___________
Loss from operations (1,266,518) (42,834)
__________ __________
Other income (expense):
Interest income 201,286 14,486
Other income, net 490,327 211,292
Start-up costs (Note A) (128,313)
Interest expense (2,094,301) (863,484)
Gain from operations held for Sale (Note J) 26,853 11,947
___________ ___________
Total other expense (1,375,835) (754,072)
___________ ___________
Loss before income taxes (benefit) (2,642,353) (796,906)
Income taxes (benefit) (Note F) 197,311 (211,591)
___________ ___________
Net Loss $(2,839,664) $(585,315)
___________ ___________
Net loss per share (Note A) $(.87) $(.22)
___________ ___________
Weighted average number of shares outstanding 3,270,175 2,709,504
___________ ___________
See notes to financial statements
F-4
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
Class A Class B Class C
Common Stock Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30,
1995 1,504,662 $15,047 898,795 $8,988 199,966 $2,000
Payment of notes
receivable
Conversion of shares 86,554 866 (86,558) (866) (150) (2)
Exercise of options 22,500 225
Issuance of stock
for obligations in
lieu of cash 6,600 66
Exercise of bridge
loan warrants 33,509 335
Sale of stock in
connection with
private placement 493,750 4,937
Costs related to
private placement
Exercise of IPO 21,493 215
warrants
Issuance of shares
with acquisitions 87,000 870
Exercise of private
placement warrants 37,500 375
Amount paid for
options, not yet
issued
Compensatory stock
options
Net loss, year ended ________ ________ _______ _______ _______ _______ _______ ______
June 30, 1996
Balance - June 30,
1996 2,293,568 22,936 812,237 8,122 199,816 1,998
Costs related to
private placements
Issuance of shares
with acquisitions 229,500 2,295
Exercise of options 13,475 135
Payment of notes
receivable
Conversion of shares 81,877 818 (81,877) (818)
Issuance of employee
stock purchase plan
shares ` 9,452 94
Issuance of shares
in connection with
consulting agreement 20,000 200
Issuance of warrants
with convertible
debentures
Cancellation of
notes receivable
Payment of notes
receivable
Issuance of
preferred stock 1,000 $10
Adjustment related
to beneficial
conversion
Conversion of
preferred stock 229,964 2,300 (500) (5)
Dividend on
preferred stock
Net loss, year ended ________ ________ _______ _______ _______ _______ ________ ______
June 30, 1997
Balance - June 30,
1997 2,877,836 $28,778 730,360 $7,304 199,816 $1,998 500 $ 5
</TABLE>
See notes to financial statements
<PAGE>
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Additional
Paid-in Notes
Capital, Receivable Treasury Shares Accumulated
Common Stock for Stock Shares Amount Deficit Total
____________ _________ ________ ______ ___________ ____________
Balance - June 30,
1995 $5,554,874 $(75,362) $(1,045,007) $4,460,540
Payment of notes
receivable 11,434 11,434
Conversion of shares 2 -0-
Exercise of options 113,575 113,800
Issuance of stock
for obligations in
lieu of cash 36,184 36,250
Exercise of bridge
loan warrants 153,617 153,952
Sale of stock in
connection with
private placement 1,970,063 1,975,000
Costs related to
private placement (442,395) (442,395)
Exercise of IPO
warrants 137,785 138,000
Issuance of shares
with acquisitions 392,678 393,548
Exercise of private
placement warrants 149,625 150,000
Amount paid for
options, not yet
issued 9,375 9,375
Compensatory stock
options 3,000 3,000
Net loss, year ended
June 30, 1996 (585,315) (585,315)
_________ _______ _______ _________ ___________ _________
Balance - June 30,
1996 8,078,383 (63,928) (1,630,322) 6,417,189
Costs related to
private placements (141,295) (141,295)
Issuance of shares
with acquisitions 838,524 840,819
Exercise of options 59,709 59,844
Payment of notes
receivable 662 662
Conversion of shares -0-
Issuance of employee
shares stock
purchase plan 30,530 30,624
Issuance of shares
in connection with
consulting agreement 79,800 80,000
Issuance of warrants
with convertible
debentures 125,000 125,000
Cancellation of
notes receivable 37,818 8,656 $(37,818) -0-
Payment of notes
receivable 25,448 25,448
Issuance of
preferred stock 999,990 1,000,000
Adjustment related
to beneficial
conversion
feature of
convertible preferred
stock
and convertible
debentures 330,284 (200,000) 130,284
Conversion of
preferred stock (2,295) -0-
Dividend on
preferred stock (4,330) (4,330)
Net loss, year ended
June 30, 1997 (2,839,664) (2,839,664)
____________ _________ _______ _________ ___________ __________
Balance - June 30,
1997 $10,398,630 -0- 8,656 $(37,818) $(4,674,316) $5,724,518
</TABLE>
See notes to financial statements F-5
<PAGE>
PHC, INC. AND SUBSIDIARIES Year Ended
June 30,
____________
1997 1996
__________________________
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net loss $ (2,839,664) $ (585,315)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred tax benefit (418,137)
Depreciation and amortization 679,248 554,025
Beneficial conversion feature of
convertible debt 130,284
Compensatory stock options and stock and warrants
issued for obligations 205,000 39,250
Changes in:
Accounts receivable (1,649,303) (2,985,052)
Prepaid expenses and other current assets (309,188) (69,978)
Other assets 113,419 (107,711)
Net assets of operations held for sale 56,682 106,886
Accounts payable 1,044,282 1,414,089
Accrued expenses and other liabilities (167,763) 295,475
___________ ___________
Net cash used in operating activities (2,737,003) (1,756,468)
___________ ___________
Cash flows from investing activities:
Acquisition of property and equipment
and intangibles (895,914) (1,557,419)
Loan receivable (3,063,177) (17,462)
Net cash used in investing activities (3,959,091) (1,574,881)
Cash flows from financing activities:
Revolving debt, net 1,789,981
Proceeds from borrowings 2,749,505 2,043,748
Payments on debt (696,886) (402,828)
Deferred financing costs 21,498 (711,960)
Issuance of capital stock 944,173 2,109,166
Convertible debt 2,500,000
_________ __________
Net cash provided by financing activities 7,308,271 3,038,126
_________ __________
Net increase (decrease) in cash and cash
equivalents 612,177 (293,223)
Beginning balance of cash and cash equivalents 293,515 586,738
Ending balance of cash and cash equivalents $ 905,692 $ 293,515
___________ ___________
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 1,933,133 $ 779,898
Income taxes $ 86,414 $ 187,120
Supplemental disclosures of noncash investing
and financing activities:
Stock issued for acquisitions of equipment
and services $ 840,819 $ 393,548
Note payable due for litigation
settlement $ 225,000
Capital leases $ 284,048 $ 94,699
Conversion of preferred stock $ 500,000
Beneficial conversion feature of preferred
stock $ 200,000
See notes to financial statements F-6
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation:
PHC, Inc. ("PHC") operates substance abuse treatment centers in several
locations in the United States, a nursing home in Massachusetts, a
psychiatric hospital in Michigan and psychiatric outpatient facilities in
Nevada, Kansas and Michigan. PHC, Inc. also manages a psychiatric practice
in New York, operates an outpatient facility through a physicians practice,
and operates behavioral health centers through its newest acquisitions. PHC
of Utah, Inc. ("PHU"), PHC of Virginia, Inc. ("PHV") and PHC of Rhode Island,
Inc. ("PHR") provide treatment of addictive disorders and chemical
dependency. PHC of Michigan, Inc. ("PHM") provides inpatient and outpatient
psychiatric care. PHC of Nevada, Inc. ("PHN") and PHC of Kansas, Inc.
("PHK") provide psychiatric treatment on an outpatient basis. North
Point-Pioneer, Inc. ("NPP") operates six outpatient behavioral health centers
under the name of Pioneer Counseling Centers. Behavioral Stress Centers,
Inc. ("BSC") provides management and administrative services to psychotherapy
and psychological practices (see Note L). Pioneer Counseling of Virginia,
Inc. ("PCV'), an 80% owned subsidiary provides outpatient services through a
physicians practice (see Note L). Quality Care Centers of Massachusetts,
Inc. ("Quality Care") operates a long-term care facility known as the
Franvale Nursing and Rehabilitation Center. STL, Inc. ("STL") operated day
care centers (see Note J). The consolidated financial statements include PHC
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
For the year ended June 30, 1996, the Company incurred start-up costs related
to an addition at Quality Care prior to obtaining a license to admit
patients. These costs, amounting to $128,313, are included in other expense
in the accompanying statement of operations under the caption "Start-up
Costs".
During the year ended June 30, 1997, the Company recorded an increase in its
accounts receivable reserve, a substantial portion of the increase was
recorded in the fourth fiscal quarter. The Company is currently reviewing
these adjustments to determine if some of these adjustments should have been
made in prior fiscal quarters.
Revenues and accounts receivable:
Patient care revenues are recorded at established billing rates or at the
amount realizable under agreements with third-party payors, including
Medicaid and Medicare. Revenues under third-party payor agreements are
subject to examination and adjustment, and amounts realizable may change due
to periodic changes in the regulatory environment. Provisions for estimated
third party payor settlements are provided in the period the related services
are rendered. Differences between the amounts accrued and subsequent
settlements are recorded in operations in the year of settlement.
A substantial portion of the Company's revenue at the Franvale Nursing and
Rehabilitation Center is derived from patients under the Medicaid and
Medicare programs. There have been, and the Company expects that there will
continue to be, a number of proposals to limit Medicare and Medicaid
reimbursement, as well as reimbursement from certain private payor sources
for both Franvale and substance abuse treatment center services. The Company
cannot predict at this time whether any of these proposals will be adopted
or, if adopted and implemented, what effect such proposals would have on the
Company.
Medicaid reimbursements are currently based on established rates depending on
the level of care provided and are adjusted prospectively at the beginning of
each calendar year. Medicare reimbursements are currently based on
provisional rates that are adjusted retroactively based on annual calendar
cost reports filed by the Company with Medicare. The Company's calendar year
cost reports to Medicare are routinely audited on an annual basis. The
Company periodically reviews its provisional billing rates and provides for
estimated Medicare adjustments. The Company believes that adequate provision
has been made in the financial statements for any adjustments that might
result from the outcome of Medicare audits.
F-7
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenues and accounts receivable: (continued)
The Company has $1,787,000 receivables, from Medicaid and Medicare, at June
30, 1997, which constitutes a concentration of credit risk should Medicaid
and Medicare defer or be unable to make reimbursement payments as due.
Charity care amounted to approximately $725,000 and $865,000 at June 30, 1997
and 1996, respectively and is classified as patient care revenue and an equal
amount of cost is charged to patient care expenses in the statements of
operations.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:
Estimated
Assets Useful Life
_______ __________________
Buildings 20 through 39 years
Furniture and equipment 3 through 10 years
Motor vehicles 5 years
Leasehold improvements Term of lease
Other assets:
Other assets represent deposits, deferred expenses and covenants not to
compete. Covenants not to compete are amortized over the life of the
underlying agreement using the straight line method.
Goodwill, net of accumulated amortization:
The excess of the purchase price over the fair market value of net assets
acquired are being amortized on a straightline basis over their estimated
useful lives, generally twenty years.
Loss per share:
Net loss per share is based on the weighted average number of shares of
common stock outstanding during each period excluding Class C common shares
held in escrow. Common stock equivalents have been excluded since they are
antidilutive.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTIN POLICIES (CONTINUED)
Cash equivalents:
Cash equivalents are short-term highly liquid investments with original
maturities of less than three months.
Fair value of financial instruments:
The carrying amounts of cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value.
Impairment of long-lived assets:
During the year ended June 30, 1997 the Company wrote-off the carrying
value of the goodwill for one of its subsidiaries in the amount of approximately
$50,000.
Stock-based compensation:
The Company accounts for its employee stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based
method of accounting for stock-based compensation plans. The Company adopted the
disclosure only alternative in fiscal year 1997 which requires disclosure of the
pro forma effects on loss and loss per share as if SFAS No. 123 had been
adopted, as well as certain other information.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised as follows:
June 30,
________
1997 1996
_____________________
Land $ 302,359 $ 251,759
Buildings 7,854,419 7,338,838
Furniture and equipment 1,760,359 1,404,716
Motor vehicles 50,889 50,889
Leasehold improvements 385,543 301,067
__________ __________
10,353,569 9,347,269
Less accumulated depreciation
and amortization 1,945,358 1,463,206
__________ __________
$8,408,211 $7,884,063
__________ __________
NOTE C - LONG-TERM DEBT
At June 30, 1996, the Company had substantially completed an addition and
renovation to the Quality Care facility in which 37 new beds were added. The
Company financed this addition and renovation through the United States
Department of Housing and Urban Development ("HUD"). At June 30, 1997 and June
30, 1996 unamortized deferred financing costs related to the construction note
payable totalled $690,750 and $711,960, respectively, and are being amortized
over the life of the note. Interest costs capitalized in conjunction with the
construction approximated $65,250.
F-9
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, l997 and 1996
NOTE C - LONG-TERM DEBT (CONTINUED)
Long-term debt is summarized as follows:
June, 30,
1997 1996
______________________
Note payable with interest at 9% requiring monthly
payments of $1,150 through May 2001 $44,816 $58,154
Note payable due in monthly installments of $2,000
including imputed interest at 8% through April 1,
1999 40,574 60,163
9% mortgage note due in monthly installments of $4,850
through July 1, 2012, when the remaining principal
balance is payable 492,996 505,485
Note payable due in monthly installments of $21,506
including interest at 10.5% through November 1, 1999,
collateralized by all assets of PHN and certain
receivables 547,092 735,213
Construction obligations:
Construction note payable collateralized by real
estate and insured by HUD due in monthly installments
of $53,635, including interest at 9.25%, through
December 2035 6,757,422 6,301,986
Other construction obligations to be added to note
payable 344,802
Note payable to a former vendor, payable in monthly
installments of $19,728 including interest at 9.5% 152,353
Note payable due in monthly installments of $26,131
including interest at 11.5% through June 2000 when
the remaining principal balance is payable,
collateralized by all assets of NPP (see Note L) 818,371
Note payable due in monthly installments of $5,558
including interest at 9.25% through May 2012 when
the remaining principal balance is payable,
collateralized by the real estate 538,605
Term mortgage note payable with interest only payments
through March 1998 principal due in monthly
installments of $9,167 beginning April 1998 through
February 2001, a balloon payment of approximately
$780,000 plus interest is due March 2001, interest
at prime plus 5% (13.5% at June 30, 1997)
collateralized by all assets of PHM 1,100,000
__________ __________
10,339,876 8,158,156
Less current maturities 580,275 403,894
__________ __________
Noncurrent maturities $9,759,601 $7,754,262
__________ __________
F-10
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE C - LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows as of June 30, 1997:
Year Ending
June 30, Amount
___________ ___________
1998 $580,275
1999 692,681
2000 583,450
2001 1,388,742
2002 48,624
Thereafter 7,046,104
$10,339,876
In 1997, the Company issued 7% convertible debentures due December 31, 1998
in the aggregate principal amount of $3,125,000. The number of shares of Class A
common stock into which the debentures may be converted is determined by
dividing the principal amount to be converted by the conversion price. The
conversion price is equal to 94% of the average closing bid price of the Class A
common stock as reported by NASDAQ for the five trading days immediately
preceding the date of conversion. The beneficial conversion feature, valued at
$130,284, was recorded as additional interest. In addition, on March 31, 1997
the Company issued warrants to the debenture holders as compensation for
amending the debenture agreement to allow for a later filing of the Registration
Statement which was originally required to be filed in December 1996. The
warrants provide for the purchase of 150,000 shares of Class A common stock at
$2.00 per share and expire in 2003. The warrants were valued at $125,000.
Subsequent to June 30, 1997, all of the convertible debentures were converted
into 1,331,696 shares of Class A common stock.
The Company has entered into a revolving credit note and a secured note
with maximum advances of $1,500,000 and $1,000,000, respectively. Advances are
made based on a percentage of accounts receivable and principal is payable upon
receipt of proceeds of the accounts receivable. Interest is payable monthly at
prime plus 2.25% (10.75% at June 30, 1997). These agreements expire on February
1999 and July 1998, respectively, automatically renewable for one-year periods
thereafter unless terminated by either party. Upon expiration, all remaining
principal and interest is due. The notes are collateralized by substantially all
of the assets of the Company's subsidiaries.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 1997, the Company is obligated under various capital leases for
equipment and real estate providing for monthly payments of approximately
$31,000 for fiscal 1998 and terms expiring from December 1997 through February
2014. The carrying value of assets under capital leases is as follows:
June 30,
1997 1996
_______________________
Building $1,477,800 $1,477,800
Equipment and improvements 485,004 214,754
Less accumulated depreciation and (501,732) (400,768)
amortization
$ 1,461,07 1,291,786
__________ __________
F-11
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
Future minimum lease payments under the terms of the capital lease
agreements are as follows at June 30, 1997:
Year Ending
June 30, Real
Equipment Property Total
____________ __________ __________ __________
1998 $140,307 $ 231,000 $371,307
1999 117,083 239,000 356,083
2000 95,121 259,248 354,369
2001 70,828 272,208 343,036
2002 13,557 295,188 308,745
Thereafter 4,641,341 4,641,348
__________ __________ __________
Total future minimum lease 436,896 5,937,992 6,374,888
payments
Less amount representing
interest 83,804 4,556,574 4,640,378
__________ __________ __________
Present value of future
minimum lease payments 353,092 1,381,418 1,734,510
Less current portion 102,632 37,316 139,948
__________ __________ __________
Long-term obligations under
capital lease $250,460 $1,344,102 $1,594,562
__________ __________ __________
The Company has an irrevocable option to purchase the real property noted
above for $1,150,000 on March 1, 1998 or $1,100,000 on March 1, 1999 or any
subsequent March 1 through the end of the lease.
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows:
June 30,
1997 1996
_______________________
Note payable, President and principal stockholder,
interest at 8%, due in installments through 1998 $55,296 $ 78,996
Notes payable, other related parties, interest at
12% and payable on demand 20,000 24,998
________ ________
75,296 103,994
Less current maturities 51,600 56,600
________ ________
$23,696 47,394
________ ________
Maturities of related party debt are as follows at June 30, 1997:
Year Ending
June 30, Amount
___________ ___________
1998 $51,600
1999 23,696
__________
$75,296
__________
Related party interest on notes receivable related to the purchase of Class
A common stock approximated $1,699 and $4,295 for the years ended June 30, 1997
and 1996, respectively.
F-12
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the
accompanying balance sheets:
Year Ended
June 30,
____________
1997 1996
___________ ________
Temporary differences attributable to:
Allowance for doubtful accounts $1,007,000 $ 510,000
Depreciation 147,000 154,700
Other 3,000 5,300
Operating loss carryforward 340,000
___________ ________
Total deferred tax asset 1,497,000 670,000
Less:
Valuation allowance (827,000)
Current portion (515,300) (515,300)
___________ ________
Long-term portion $154,700 $154,700
___________ ________
The Company had no deferred tax liabilities at June 30, 1997 and 1996.
Income tax expense (benefit) is as follows:
YearEnded
June 30,
____________
1997 1996
__________ _________
Deferred income taxes benefit $(418,137)
Current income taxes $197,311 206,546
__________ _________
$197,311 $(211,591)
__________ _________
Reconciliations of the statutory U.S. Federal income taxes based on a rate
of 34% to actual income taxes is as follows:
YearEnded
June 30,
____________
1997 1996
__________ _________
Income tax benefit at statutory rate $(898,400) $(271,000)
Increase in valuation allowance 827,000
Increase due to nondeductible items, primarily
penalties and travel and entertainment
expenses 12,000 12,100
Other 59,400 (33,541)
__________ _________
$ 197,311 $(211,591)
__________ _________
The Company has a net operating loss carryforward amounting to
approximately $994,000 which expires at various dates through 2012.
Subsequent to June 30, 1997, the Company may be subject to Internal Revenue
Code provisions which limit the loss carryforward available for use in any given
year.
F-13
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
Operating leases:
The Company leases office and treatment facilities and furniture and
equipment under operating leases expiring on various dates through January 2003.
Rent expense for the years ended June 30, 1997 and 1996 was approximately
$752,000 and $450,000, respectively. Minimum future rental payments under
noncancelable operating leases, having remaining terms in excess of one year as
of June 30, 1997 are as follows:
Year Ending
June 30, Amount
_____________ __________
1998 $ 688,105
1999 441,833
2000 297,780
2001 202,876
2002 93,450
Thereafter 136,864
____________
$1,860,908
____________
Litigation:
The Company is involved in litigation related to the use of its trademark
name, PIONEER HEALTHCARE, in an action pending before a federal court. If the
Company were required to discontinue using the PIONEER HEALTHCARE mark, the
costs and/or monetary damages related to the litigation involved could have an
adverse effect on the Company's financial performance.
NOTE H - STOCK PLANS
[1] Stock plans:
The Company has three stock plans: a stock option plan, an employee stock
purchase plan and a nonemployee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
has the authority to select the optionees and determine the terms of the options
including: (i) the number of shares, (ii) option exercise terms, (iii) the
exercise or purchase price (which in the case of an incentive stock option will
not be less than the market price of the Class A common stock as of the date of
grant), (iv) type and duration of transfer or other restrictions and (v) the
time and form of payment for restricted stock upon exercise of options.
The employee stock purchase plan provides for the purchase of Class A
common stock at 85 percent of the fair market value at specific dates, to
encourage stock ownership by all eligible employees. A maximum of 1 00,000
shares may be issued under this plan.
Also in October 1995, the Company adopted a nonemployee directors' stock
option plan that provides for the grant of nonstatutory stock options
automatically at the time of each annual meeting of the Board. Through June 30,
1997, options for 1 1,500 shares were granted under this plan. A maximum of
30,000 shares may be issued under this plan. Each outside director shall be
granted an option to purchase 2,000 shares of Class A
F-14
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE H - STOCK PLANS (CONTINUED)
[1] Stock plans: (continued)
common stock at fair market value, vesting 25% immediately and 25% on each
of the first three anniversaries of the grant.
In February 1997, all 95,375 shares underlying the then outstanding
employee stock options were repriced to the current market price, using the
existing exercise
durations.
Under the above plans 179,198 shares are available for future grant or
purchase.
The Company had the following activity in its stock option plans for fiscal
1997 and 1996:
Number Weighted-Average
of Exercise Price
Shares Per Share
_________ ________________
Option plans:
Balance - June 30, 1995 92,000 $5.10
Granted 46,500 $6.20
Cancelled (1,250) $5.00
Exercised (22,500) $5.06
_________
Balance - June 30, 1996 114,750 $5.56
Granted 125,500 $4.56
Repriced options:
Original (95,375) $5.99
Repriced 95,375 $3.50
Cancelled (21,400) $6.05
Exercised (13,475) $5.16
_________
Balance - June 30, 1997 205,375 $4.27
_________
Options for 89,250 shares are exercisable as of June 30, 1997 at exercise
prices ranging from $2.87 to $6.63 and a weighted-average exercise price of
approximately $3.71 per share, with a weighted-average remaining contractual
life of approximately three years.
The exercise prices of options outstanding at June 30, 1997 range from
$2.87 to $6.63 per share and have a weighted-average exercise price of
approximately $3.07 per share, with a weighted-average remaining contractual
life of approximately four years.
(2) Stock-based compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. There was no compensation expense recognized in
1997 or 1996. If the Company had elected to recognize compensation cost for the
plans based on the fair value at the grant date for awards granted, consistent
with the method prescribed by SFAS No. 123, net loss per share would have been
changed to the pro forma amounts indicated below:
Year Ended
June 30,
___________
1997 1996
______________________________
Net loss As reported $(2,839,664) $(585,315)
Pro forma (2,893,272) (610,497)
Net loss per As reported
share $(0.87) $(0.22)
Pro forma (0.88) (0.23)
F-15
<PAGE>
PHC, INC.AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE H - STOCK PLANS (CONTINUED)
[2] Stock-based compensation: (continued)
The fair value of the Company's stock options used to compute pro forma net
loss and net loss per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1997 and 1996: dividend yield of 0%; expected
volatility of 30%; a risk-free interest rate of between 5% and 7%; and an
expected holding period of five years.
The per share weighed-average grant-date fair value of options granted
during the years ended June 30, 1997 and 1996 was $3.44 and $2.07, respectively.
NOTE I - SEGMENT INFORMATION
The Company's continuing operations are classified into two primary
business segments: substance abuse/psychiatric services and long-term care.
Year Ended
June 30,
_____________
1997 1996
___________________________
Revenue:
Substance abuse/psychiatric
services $20,700,616 $16,525,672
Long-term care 5,306,717 5,043,922
Other 629,761 233,164
Management fees 597,278
____________ ____________
$27,234,372 $21,802,758
____________ ____________
Income (loss) from operations:
Substance abuse/psychiatric
services $ 627,341 $1,024,245
Long-term care (1,447,468) (826,463)
Other (PDSS) 305,321 86,757
General corporate (427,272) (180,966)
Interest and other income expense,
net (1,700,275) (900,479)
____________ ____________
Loss before income taxes $(2,642,353) $ (796,906)
____________ ____________
Depreciation and amortization:
Substance abuse/psychiatric
services $ 449,641 $ 349,437
Long-term care 210,130 176,450
____________ ____________
General corporate 19,477 28,138
$ 679,248 $ 554,025
____________ ____________
Capital expenditures:
Substance abuse/psychiatric
services $ 729,661 $ 233,466
Long-term care 213,489 982,978
General corporate 63,150 16,583
____________ ____________
$1,006,300 $ 1,233,027
____________ ____________
Identifiable assets:
Substance abuse/psychiatric
services $18,352,342 $10,877,197
Long-term care 7,437,633 8,619,133
General corporate 2,070,834 1,264,205
Net assets of operations held
for sale 56,682
____________ ____________
27,860,809 $20,817,217
____________ ____________
F-16
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE J - OPERATIONS HELD FOR SALE
The Company has systematically phased out its day care center operations
(STL). At June 30, 1996, the Company had net assets relating to its day care
centers amounting to approximately $57,000, which primarily represented the
depreciated cost of one remaining real estate parcel. The parcel was sold in
October 1996 at a gain of approximately $38,000.
NOTE K - CERTAIN CAPITAL TRANSACTIONS
In addition to the outstanding options under the Company's stock plans
(Note H), the Company has the following options and warrants outstanding at June
30, 1997:
Number of Exercise Expiration
Description Units/Shares Price Date
_____________________________________________________________________________
Bridge warrants 5,024 units $4.38 per unit September 1998
Unit purchase option 148,171 units $5.91 per unit March 1999
IPO warrants 1,681,832 shares $6.29 per share March 1999
Private placement warrants 715,682 shares $3.93 per share January 1999
Bridge warrants 34,710 shares $7.39 per share March 1999
Warrant for services 25,000 shares $6.88 per share October 2001
Warrant for services 3,093 shares $3.39 per share February 2002
Consultant warrant
(see below) 160,000 shares $2.62 per share March 2002
Convertible debenture warrants
(Note C) 150,000 shares $2.00 per share March 2002
Preferred stock warrant 50,000 shares $2.75 per share June 2000
Each unit consists of one share of Class A common stock and a warrant to
purchase one share of Class A common stock at $7.50 per share.
In June 1997, the Company received $1,000,000 in exchange for the issuance
of Series A convertible preferred stock and warrants to purchase 50,000 shares
of Class A common stock. The warrants are exercisable at $2.75 per share and
expire in 2000. The warrants were valued at $30,000. The number of shares of
Class A common stock into which the preferred stock may be converted is equal to
80% of the closing bid price of the Class A common stock as reported by NASDAQ
for the five trading days immediately preceding the conversion. The beneficial
conversion feature, due to the 80% discount above, valued at $200,000 was
recorded as additional dividends. In June 1997, 500 shares of preferred stock
were converted into 229,640 shares of Class A common stock. Subsequent to
year-end the 500 remaining shares of preferred stock were converted into 246,305
shares of Class A common stock. The issuance of these securities will result in
the issuance of some additional Class A common shares under existing dilution
agreements with other stockholders.
Cumulative preferred dividends are at the rate of $60 per share per year,
payable quarterly. Dividends are payable in cash or in shares of preferred stock
at $1,000 per share. At June 30, 1997, accrued dividends amounted to $4,330.
Certain Consultant Warrants may be canceled if certain stock prices, as
defined in the agreement, are not achieved by March 3, 1998.
In February 1996, the Company issued, in a private placement, units
comprised of 6,250 shares of Class A common stock and warrants to purchase 9,375
shares of Class A common stock. A total of 79 units, representing 493,750 shares
of Class A common stock and 740,625 warrants were issued in the offering at a
gross purchase price of $1,975,000. Fees and expenses payable in connection with
the offering total $442,395. Subject to the terms and conditions of the
applicable warrant agreement, each warrant is exercisable for one share of Class
A common stock at an exercise price of $4.00, subject to adjustment upon certain
events. The warrants expire in January 1999. Upon the issuance of the units
described above, certain additional shares of Class A common stock or securities
exercisable therefor become issuable under the antidilution provisions of
certain outstanding securities of the Company.
F-17
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE K - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Subsequent to June 30, 1997, the Class C common stock was canceled and
retired because of restrictions on the release of the stock, due to earnings
targets which were not achieved.
Subsequent to June 30, 1997, the Company issued a warrant for the purchase
of 150,000 shares of common stock in exchange for services. The exercise price
of the warrant is $2.50 per share and the warrant expires May 2002.
NOTE L - ACQUISITIONS
On November 1, 1995, the Company purchased an outpatient facility located
in Nevada ("PHN") which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of $631,000 in cash and 75,000 shares of
Class A common stock of PHC, Inc. which were valued at $323,000. The purchase
price was allocated as follows:
Accounts receivable $231,509
Equipment and other assets 54,397
Covenant not to compete 10,500
Goodwill 671,359
Accrued benefits payable (13,765)
_____________
$954,000
_____________
On March 29, 1996 PHN entered into a lease agreement for the real estate.
The lease payments, which increase annually, are due in equal monthly
installments over a
period of four years.
On March 16, 1996, the Company purchased an outpatient facility located in
Kansas ("PHK'') which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of 12,000 shares of Class A common stock
of PHC, Inc., valued at $70,548. The purchase price was allocated as follows:
Equipment and other assets $20,000
Covenant not to compete 10,000
Goodwill 40,548
_____________
$70,548
_____________
In connection with the acquisition, PHK entered into a lease agreement for
the real estate. The lease payments, which increase annually, are due in equal
monthly installments over a period of three years.
In September 1996, the Company purchased the assets of seven outpatient
behavioral health centers located in Michigan ("NPP"). The centers were
purchased for $532,559 and 15,000 shares of Class A common stock of PHC, Inc.
valued at $5.04 per share. The Company borrowed $900,000 (see Note C) to finance
the purchase and to provide working capital for the centers. The purchase price
was allocated as follows:
Office equipment $ 18,000
Covenants note-to-compete 20,000
Goodwill 597,746
Deposits 15,072
Liabilities assumed (42,659)
_____________
$608,159
_____________
F-18
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE L - ACQUISITIONS (CONTINUED)
Concurrent with the asset purchase agreement, NPP entered into an
employment agreement with a former owner which requires an annual salary of
$150,000 and an annual bonus. The agreement is effective for four years and is
automatically extended for successive one year terms unless terminated. The
salary and bonus are subject to adjustment based on collected billings.
NPP also entered into a management agreement whereby $1,500 per month would
be paid for five years to the former owners.
Subsequent to year-end, under the employment agreement, the Company issued
15,000 unregistered shares of Class A common stock.
On November 1, 1996, BSC-NY, Inc. ("BSC"), merged with Behavioral Stress
Centers, Inc., a provider of management and administrative services to
psychotherapy and psychological practices in the greater New York City
Metropolitan Area. In connection with the merger, the Company issued 150,000
shares of PHC, Inc. Class A common stock to the former owners of Behavioral
Stress Centers, Inc. Also, in connection with the merger, another entity was
formed, Perlow Physicians, P.C. ("Perlow"), to acquire the assets of the medical
practices theretofore serviced by BSC. The Company advanced Perlow the funds to
acquire those assets and at June 30, 1997 Perlow owed the Company $3,063,177
which includes in addition to acquisition costs, management fees of
approximately $511,000 and interest on the advances of approximately $176,000.
It is expected that the obligations will be paid over the next several years and
accordingly, most of these amounts have been classified as noncurrent. The
Company has no ownership interest in Perlow.
The purchase price of BSC was allocated as follows:
Goodwill $63,600
Equipment and other assets 20,000
________
$83,600
________
The merger agreement requires additional purchase price to be paid by BSC
to the former owners of Behavioral Stress Centers, Inc. for the three years
following the merger date. The additional purchase price is based on the income
of BSC before taxes and is to be paid in PHC stock, at market value up to
$200,000 and the balance, if any, in cash.
BSC also entered into a management agreement with Perlow. The agreement
requires Perlow to pay 25% of its practice expenses to BSC on a monthly basis
over a five-year period with an automatic renewal for an additional five-year
period.
On November 1, 1996, BSC entered into a lease agreement for its facilities.
The lease payments are due in equal monthly installments over a three year
period with an option to extend annually for three additional years. The lease
is to be paid by Perlow in accordance with the management agreement.
On January 17, 1997, with an effective date of January 1, 1997, the Company
entered into a Stock Exchange Agreement with a Virginia corporation owned by two
individuals to whom the Company has an outstanding note payable. The corporation
consists of private practices of psychiatry. The Stock Exchange Agreement
provided that in exchange for $50,000 in cash and 64,500 shares of restricted
Class A common stock, the Company received an 80% ownership interest in the
Virginia corporation. The Company also paid $80,444 in legal fees in connection
with the Agreement. Concurrent with the Stock Exchange Agreement the two owners
of the Virginia corporation each executed Employment Agreements with the
Virginia corporation to provide professional
F-19
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE L - ACQUISITIONS (CONTINUED)
services and each was granted an option to purchase 15,000 shares of Class
A common stock at an exercise price of $4.87 per share. The options expire on
April 1, 2002. Each agreement requires an annual salary of $200,000 and expires
in five years. Further, a Plan and Agreement of Merger was executed whereby the
Virginia corporation was merged into PCV.
On January 17, 1997 PCV entered into a purchase and sale agreement with an
unrelated general partnership, to purchase real estate with buildings and
improvements utilized by the Virginia Corporation for approximately $600,000 of
which $540,000 was paid through the issuance of a note (Note C).
In accordance with the above agreements the purchase price was allocated as
follows:
Land $ 50,600
Building 540,000
Covenant not-to-compete 50,000
Goodwill 285,038
_____________
$925,638
_____________
In accordance with the agreement the two owners will be paid a finders fee
for all subsequently acquired medical practices within a 200 mile radius of PCV
and those medical practices identified by the owners wherever the location. The
finders fee is payable in Class A common stock and in cash.
Information is not available to present pro forma financial information
relating to the 1997 acquisitions. The Company has so advised the Securities and
Exchange Commission and has received a no action letter with respect to this
matter. Had the acquisitions made during the fiscal years ended June 30, 1996,
been made as of July 1, 1995, the pro forma effect on the Company's results of
operations is immaterial.
NOTE M - SALE OF RECEIVABLES
The Company has entered into a sale and purchase agreement whereby
third-party receivables are sold at a discount with recourse. The interest rate
is calculated at 5.5% plus the six-month LIBOR rate which is 11.5% and 11.3% at
June 30, 1997 and 1996, respectively. The amount of receivables subject to
recourse at June 30, 1997 totaled approximately $577,000 and the agreement
states that total sales of such outstanding receivables are not to exceed
$4,000,000. Proceeds from the sale of these receivables totalled approximately
$3,000,000 and $3,500,000 for the years ended June 30, 1997 and 1996,
respectively. The purchase fees related to the agreement amount to approximately
$127,000 and $73,720 for the years ended June 30, 1997 and 1996, respectively,
and are included in interest expense in the accompanying consolidated statement
of operations. The agreement expires December 31, 1997.
NOTE N - SUBSEQUENT FINANCING
In September 1997, the Company received $500,000 in exchange for the
issuance of 170,414 shares of unregistered Class A common stock.
Also, subsequent to June 30, 1997, the Company purchased the assets of an
outpatient clinic in Virginia for 26,024 shares of Class A common stock and
$50,000 in cash. The clinic's operations will be included in PCV.
F-20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed in behalf by the
undersigned, thereunto duly authorized.
PHC, INC.
Date: October 29, 1997
By: /S/ BRUCE A. SHEAR
Bruce A. Shear, President
and Chief Executive Officer
