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, 1998.
| | 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 X No
Applicable only to corporate issuers
Number of shares outstanding of each class of common equity, as of October
16, 1998:
Class A Common Stock 4,935,267
Class B Common Stock 727,328
Transitional Small Business Disclosure Format
(Check one):
Yes No X
<PAGE>
PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 1998 and June
30, 1998.
Condensed Consolidated Statements of Operations - Three months ended
September 30, 1998 and September 30, 1997.
Condensed Consolidated Statements of Cash Flows - Three months ended
September 30, 1998 ` and September 30, 1997.
Notes to Condensed Consolidated Financial Statements - September 30,
1998.
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
PHC INC. AND SUBSIDIARIES (UNAUDITED)
CONSOLIDATED BALANCE SHEETS
Sept. 30 June 30
1998 1998
ASSETS
Current assets:
Cash & Cash Equivalents...................... $ 81,275 $ 227,077
Accounts receivable, net of allowance
for bad debts of $3,539,637 at Sept. 30,
1998, $ 3,488,029 at June 30, 1998......... 7,220,700 7,441,972
Prepaid expenses............................ 181,984 156,695
Other receivables and advances.............. 430,279 127,064
Deferred Income Tax Asset................... 515,300 515,300
Other Receivables, related party............ 305,766 64,065
___________ __________
Total current assets.................... 8,735,304 8,532,173
Accounts Receivable, noncurrent................ 610,000 685,000
Other receivables, noncurrent, related party
net of allowance for doubtful accounts of
$382,000 Sept.30, 1998 and June 30, 1998.... 3,048,742 2,941,402
Other Receivable............................... 117,680 426,195
Property and equipment, net.................... 2,124,485 2,128,273
Deferred income taxes.......................... 154,700 154,700
Deferred financing costs, net of amortization
of $4,514 at Sept. 30, 1998 and $18,065
at June 30, 1998............................ 59,593 53,608
Goodwill, net of accumulated amortization
of $26,869 at Sept. 30, 1998 and $307,707
at June 30, 1998............................ 1,983,363 2,011,613
Other assets................................... 136,568 167,004
__________ __________
Total assets.............................. $ 16,970,435 $17,099,968
__________ __________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $2,691,024 $ 2,346,213
Notes payable--related parties ............. 243,696 159,496
Current maturities of long term debt........ 1,137,138 1,107,167
Revolving credit note....................... 1,559,490 1,683,458
Current portion of obligations under capital
leases.................................... 64,652 67,492
Accrued Payroll, Payroll Taxes and
Benefits.................................. 260,547 729,194
Accrued expenses and other liabilities...... 1,093,807 1,004,763
Net current liabilities of discontinued
operations................................ 1,232,394 1,232,394
__________ __________
Total Current liabilities................ 8,282,748 8,330,177
__________ __________
Long-term debt................................ 2,742,730 2,850,089
Obligations under capital lease............... 77,160 93,747
Net long term liabilities of discontinued
operations................................. 1,409,143 1,409,143
__________ _________
Total noncurrent liabilities............. 4,229,033 4,352,979
__________ __________
Total liabilities........................ 12,511,781 12,683,156
__________ __________
Stockholders' Equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized, 976 and 950 shares issued
and outstanding Sept. 30, 1998 and June 30,
1998 liquidation preference ($976,000 and
950,000 respectively)....................... 10 10
Class A common stock, $.01 value; 20,000,000
shares authorized, 4,935,267 shares issued
Sept. 98 and June 98........................ 49,353 49,353
Class B common stock, $.01 par value; 2,000,000
shares authorized, 727,328 issued Sept. 98 and
June 98, convertible into one share of Class
A common stock.............................. 7,273 7,273
Additional paid-in capital.................... 15,313,395 15,295,895
Treasury stock, 2,776 shares at cost.......... (12,122) (12,122)
Accumulated Deficit........................... (10,899,255) (10,923,597)
___________ ___________
Total Stockholders' Equity.................... 4,458,654 4,416,812
___________ ___________
Total Liabilities & Stockholders' Equity.... $16,970,435 $17,099,968
See Notes to Consolidated Financial Statements
<PAGE>
PHC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
September 30
1998 1997
Revenues:
Patient Care, net........................... $ 4,476,738 $4,770,735
Management Fees. ........................... 235,104 233,283
Other....................................... 199,453 173,477
___________ __________
Total revenue................................. 4,911,295 5,177,495
Operating expenses:
Patient care expenses....................... 2,308,051 2,641,817
Cost of Management Contracts................ 128,165 102,400
Provision for doubtful accounts............. 356,190 427,093
Administrative expenses..................... 1,905,917 2,286,764
___________ __________
Total operating expenses...................... 4,698,323 5,458,074
___________ __________
Income (loss) from operations................. 212,972 (280,579)
___________ __________
Other income (expense):
Interest income............................. 109,382 97,647
Interest expense............................ (286,688) (326,588)
Other income (expense), net................. 4,342 34,750
___________ __________
Total other expense, net...................... (172,964) (194,191)
___________ __________
Income (loss) before Provision for Taxes...... 40,008 (474,770)
Provision for Income Taxes.................... 911 7,200
___________ __________
Income (loss) from continuing operations...... $ 39,097 (481,970)
Loss from discontinued operations............. -- (436,668)
___________ __________
Net income (loss)................. $ 39,097 (918,638)
___________ __________
Basic and Diluted earnings (loss) per
common share:
Continuing Operations................... $ .01 $ (.11)
Discontinued Operations................. -- (.10)
Total................................ $ .01 $ (.21)
Basic and Diluted weighted average number
of shares outstanding...................... 5,659,819 4,444,706
See Notes to Consolidated Financial Statements
<PAGE>
PHC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended
September 30
1998 1997
Cash flows from operating activities:
Net income (loss).............................. $ 39,097 $ (918,638)
Adjustments to reconcile net income or
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.................. 78,775 146,337
Compensatory stock options and stock and
warrants issued for obligations.............. -- 46,131
Changes in:
Accounts receivable......................... (43,681) (228,345)
Prepaid expenses and other current
assets..................................... (25,289) 137,686
Other assets................................. 30,436 11,461
Accounts payable............................. 344,811 40,577
Accrued expenses and other liabilities....... (379,603) (64,853)
Net liabilities of discontinued
operations................................. -- 193,087
__________ __________
Net cash provided by (used in) operating
activities.................................... 44,546 (636,557)
__________ __________
Cash flows from investing activities:
Acquisition of property and equipment.......... (46,737) (39,084)
Costs related to business acquisitions......... -- (8,390)
__________ __________
Net cash used in investing activities............ (46,737) (47,474)
__________ __________
Cash flows from financing activities:
Revolving debt, net........................... (123,968) (462,847)
Proceeds from borrowings...................... 100,000 446,062
Payments on debt.............................. (111,895) --
Deferred financing costs...................... (5,985) --
Preferred Stock Dividends..................... (1,763) --
__________ __________
Net cash provided by (used in) financing
activities.................................... (143,611) (16,785)
__________ __________
NET INCREASE (DECREASE) IN CASH.................. (145,802) (700,816)
Beginning cash balance........................... 227,077 844,471
__________ __________
ENDING CASH BALANCE.............................. $ 81,275 $ 143,655
__________ __________
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................ $ 282,821 $ 33,101
Income taxes............................ 51,195 37,956
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
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
Issuance of Preferred Stock in lieu of cash
for Dividends due.......................... $ 26,000 --
See Notes to Consolidated Financial Statements
<PAGE>
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1998
Note A - The Company
PHC, Inc. (the "Company") is a national health care company specializing in
the treatment of substance abuse, which includes alcohol and drug dependency and
related disorders, and in the provision of psychiatric services. The Company
currently operates two substance abuse treatment facilities: Highland Ridge
Hospital, located in Salt Lake City, Utah, ("Highland Ridge"); and Mount Regis
Center, located in Salem, Virginia, near Roanoke ("Mount Regis") and ten
psychiatric facilities: Harbor Oaks Hospital ("Harbor Oaks"), a 64-bed
psychiatric hospital located in New Baltimore, Michigan; Harmony Healthcare
("Harmony Healthcare"), a provider of outpatient behavioral health services in
Las Vegas, Nevada; Total Concept EAP ("Total Concept"), a provider of outpatient
behavioral health services in Shawnee Mission, Kansas;" North Point-Pioneer,
Inc. ("NPP") which operates five outpatient behavioral health centers under the
name Pioneer Counseling Center in the greater Detroit metropolitan area, and
Pioneer Counseling of Virginia, Inc. ("PCV"), an 80% owned subsidiary providing
outpatient services through a physicians' practice in Roanoke, Virginia. The
Company also operates BSC-NY, Inc. ("BSC") which provides management and
administrative services to psychotherapy and psychological practices in the
greater New York City metropolitan area. Additionally, BSC provides billing and
administrative services to the Company's Joint Venture with Lexington Healthcare
Group, Inc., Behavioral Rehab Services of Connecticut, Inc.
In May, 1998 the Company closed Good Hope Center, a substance abuse
treatment facility located in West Greenwich, Rhode Island ("Good Hope") and
entered into an agreement terminating the lease for the facility. In June, 1998
the Company's sub acute long-term care facility, Franvale Nursing and
Rehabilitation Center ("Franvale"), in Braintree, Massachusetts was closed in a
State Receivership action which was precipitated when the Company caused the
owner of the Franvale facility, Quality Care Centers of Massachusetts, Inc., to
institute a proceeding under Chapter 11 of the Federal Bankruptcy Code. The net
assets and liabilities of this facility are shown as discontinued operations on
the accompanying 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,
1998 are not necessarily indicative of the results that may be expected for the
year ending June 30, 1999. The accompanying financial statements should be read
in conjunction with the June 30, 1998 consolidated financial statements and
footnotes thereto included in the Company's 10-KSB filed on October 13, 1998.
Item 2. Management's Discussion and Analysis or Plan of Operation
PHC, INC. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net patient care revenue decreased 6.2% to $4,476,738 for the three months
ended September 30, 1998 from $4,770,735 for the three months ended September
30, 1997. This decrease in revenue is due primarily to the close of Good Hope
Center in May, 1998 which accounted for $377,645 of the net revenue for the
three months ended September 30, 1997.
Management fees increased by 1% to $235,104 for the three months ended
September 30, 1998 from $233,283 for the three months ended September 30, 1997.
This increase in revenue is due to increases in BSC-NY, Inc. related fees for
the management of Psychological and Psychotherapy practices in New York.
Administrative expenses decreased 16.6% to $1,905,917 for the three months
ended September 30, 1998 from $2,286,764 for the three months ended September
30, 1997. Patient care expenses also decreased by 12.6% to $2,308,051 for the
three months ended September 30, 1998 from $2,641,817 for the three months ended
September 30, 1997. These expense decreases are also a result of the close of
Good Hope Center in May, 1998 which accounted for $333,378 and $231,985 of the
administrative and patient care expenses, respectively, for the three months
ended September 30, 1997.
Year 2000 Compliance
The Company has contracted with its Information Systems Vendor to upgrade
its current accounts receivable software to accommodate a four digit year and
bill, track and age receivables accordingly. This software is expected to be
installed in test form by December 31, 1998. The Company has also contracted
with another company to provide case management software which is year 2000
compliant. This software has already been installed at Pioneer Development and
Support Services in Utah and is currently being modified to meet the needs of
Harmony Healthcare in Nevada. The Company has already upgraded Network software
at some locations and is currently upgrading hardware to accommodate the
software upgrade at all other locations.
The Company is currently in the process of contacting each third party
payor of accounts receivable, financial institution, major supplier of essential
products and utility to request the status of their year 2000 compliance.
To date the Company has expended approximately $46,000 on items relating to
the year 2000 issues and anticipates approximately $130,000 in additional
expenses relating to the upgrade of Company's computer and telephone systems.
Liquidity and Capital Resources
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Net accounts receivable from
patient care decreased during the quarter ended September 30, 1998 by 3.6%,
approximately $290,000. This is primarily the result of a more aggressive
collection policy. The Company continues to closely monitor its accounts
receivable balances and is working to reduce amounts due consistent with growth
in revenues.
During the quarter ended September 30, 1998 the Company met its cash flow
needs through ongoing accounts receivable financing and through debt and equity
transactions as follows:
Transaction # of Maturity
Date Type Shares Proceeds Date Terms Status
____ ___________ ______ ________ __________ ______________ ___________
7/98 Warrants 52,500 07/10/2003 exercise price outstanding
issued $1.81
as
additional
interest
on
extension of
3/98 debt
7/98 Warrants 20,000 07/10/2003 exercise price outstanding
issued $1.50
as
additional
interest
on
extension of
3/98 debt
8/98 Warrants 50,000 08/15/2001 exercise price outstanding
issued for $1.75
services
8/98 Note Payable $100,000 on demand 12% annual outstanding
- Related interest
Party rate
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 renew the expansion of its
operations through the acquisition or establishment of additional treatment
facilities. The Company's expansion plans will be dependent upon obtaining
adequate financing as opportunities arise.
FORWARD LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements regarding
the Company, its business prospects and results of operations that are subject
to certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements.
Factors that may affect such forward-looking statements include, without
limitations; the Company's ability to successfully and timely develop and
finance new projects, the impact of competition on the Company's revenues, and
changes in reimbursement rates, patient mix, and demand for the Company's
services.
When used, words such as "believes," "anticipates," "expects," "intends"
and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. The Company undertakes no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may subsequently arise.
Readers are urged to carefully review and consider the various disclosures
made by the Company in this report, news releases, and other reports filed with
the Securities and Exchange Commission that attempt to advise interested parties
of the risks and factors that may affect the Company's business.
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K
(a) Exhibit List
Exhibit No. Description
10.66 Promissory Note by and between PHC, Inc. and Bruce A. Shear dated
August 13, 1998, in the amount of $100,000. Filed as an exhibit to the
Company's report on Form 10QSB dated November 3, 1998.
27 Financial Data Schedule
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995.
(b) Reports on Form 8-K
No reports were filed on form 8-K during the quarter ended September 30,
1998.
<PAGE>
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 3, 1998 /s/ Bruce A. Shear
Bruce A. Shear
President
Chief Executive Officer
Date: November 3, 1998 /s/ Paula C. Wurts
Paula C. Wurts
Controller
Assistant Treasurer
<PAGE>
Exhibit 10.66
PROMISSORY NOTE
Peabody, Massachusetts
$100,000.00
August 13, 1998
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby acknowledged, the undersigned PHC, Inc., a Massachusetts corporation
having its principal offices at 200 Lake Street, Suite 102, Peabody,
Massachusetts, ("Borrower"), promises to pay to the order of Bruce A. Shear, an
individual residing at 14 Ida Road, Marblehead, Massachusetts, ("Lender"), the
principal sum of ONE HUNDRED THOUSAND ($100,000.00) DOLLARS.
This Note shall bear interest on the unpaid principal at 12% annually, to
be paid in arrears monthly; provided that in no event shall the amount payable
by the Borrower as interest on this Note exceed the highest lawful rate
permissible under any law applicable hereto.
Payment of principal shall be made upon demand of the Lender at any time
after August 13, 1998. Demand shall be made in writing with thirty (30) days
notice to Borrower.
This Note may be prepaid, in whole or in part, at any time or from time to
time without penalty to Borrower.
This note shall be binding upon borrower and its successors and assigns,
and shall inure to the benefit or Lender and its successors and assigns.
Borrower shall not assign this Note without the express written consent of
the Lender, except Borrower may assign this Note to an affiliate of Borrower
without such consent.
This Note shall be governed by and construed according to the laws of the
Commonwealth of
Massachusetts.
Executed as a sealed instrument as of the date first written above.
BORROWER: LENDER:
PHC, Inc.
/s/ Paula C. Wurts /s/ Bruce A. Shear
Ass't Treas
/s/ T. A. Bates /s/ T. A. Bates
Witness Witness
<PAGE>
Exhibit 99.1
CAUTIONARY STATEMENT FOR PURPOSES
OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE LITIGATION REFORM ACT OF 1995
PHC, Inc. (the "Company") desires to take advantage of the new "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 and
is including this Exhibit 99.1 in its Form 10-KSB in order to do so.
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual consolidated
results for the Company's current quarter and beyond, to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company.
During its last fiscal year and in certain other fiscal years of its
operation, the Company has generated losses and there can be no assurance that
future losses will not occur.
The Company has experienced a significant increase in accounts receivable
in recent years and there can be no assurance that this trend will not continue,
and that if it does, that it will not have a material adverse effect on the
Company's cash flow and financial performance.
The Company historically experiences and expects to continue to experience
a decline in revenue in its fiscal quarters ending December 31 due to a
seasonality decline in revenue from the Company's substance abuse facilities
during such period.
Payment for the company's substance abuse treatment is provided by private
insurance carriers and managed care organizations; payment for long-term and
subacute care is provided by private insurance carriers, managed care
organizations and the Medicare and Medicaid programs; payment for psychiatric
services is provided by private insurance carriers, managed care organizations
and the Medicare and Medicaid programs. In general, revenues derived from the
Medicare and Medicaid programs in connection with the long-term and subacute
care services provided by the Company have been less profitable to the Company
than revenues derived from private insurers and managed care organizations in
connection with the substance abuse treatment provided by the Company and
changes in the sources of the Company's revenues could significantly alter the
Company's profitability. Additionally, the Company experiences greater delays in
the collection of amounts reimbursable by the Medicare and Medicaid programs
than in the collection of amounts reimbursable by private insurers and managed
care organizations. Accordingly, a change in the Company's service mix from
substance abuse to long-term care could have a materially adverse effect on the
Company as would an increase in the percentage of the Company's patients who are
insured by Medicare or Medicaid.
Cost containment pressures from private insurers in the Medicare and
Medicaid programs may begin to restrict the amount that the Company can charge
for its services.
There can be no assurance that the Company's existing facilities will
continue to meet, or that proposed facilities will meet, the requirements for
reimbursement by third party or government payors.
The Company has substantial receivables from Medicare and Medicaid which
constitute a concentration of credit risk should these agencies defer or be
unable to make reimbursement payments as due.
The Company often experiences significant delays in the collection of
amounts reimbursable by third-party payors. Although the Company believes it
maintains an adequate allowance for doubtful accounts, if the amount of
receivables which eventually becomes uncollectible exceeds such allowance, the
Company could be materially adversely affected.
If a growing number of managed care organizations and insurance companies
adopt policies which limit the length of stay for substance abuse treatment, the
Company's business would be materially adversely affected.
There can be no assurance that occupancy rates at the Company's facilities
will continue at present levels. Similarly, there can be no assurance that the
patient census will not decrease in the future.
There can be no assurance that the Company will be successful in
identifying appropriate acquisition opportunities, or if it does, that the
Company will be successful in acquiring such facilities or that such acquired
facilities will be profitable. The failure of the company to implement its
acquisition strategy could have a materially adverse effect an the Company's
financial performance. Moreover, the inherent risks of expansion could also have
a material adverse effect on the Company's business.
Additionally, the company's acquisition program will be directed by the
President and Chief Executive officer of the Company and the Company does not
intend to seek stockholder approval for any such acquisitions unless required by
applicable law or regulations. Accordingly, investors will be substantially
dependent upon the business judgment of management in making such acquisitions.
Furthermore, the company's acquisition strategy is highly dependent on access to
capital, of which there can be no assurance.
The Company and the healthcare industry in general are subject to extensive
federal, state and local regulation with respect to licensure and conduct of
operations. There can be no assurance that the Company will be able to obtain
new licenses to affect its acquisition strategy or maintain its existing
licenses and reimbursement program participation approvals.
It is not possible to accurately predict the content or impact of future
legislation and regulations affecting the healthcare industry. In addition, both
the Medicare and Medicaid programs are subject to statutory and regulatory
changes and there can be no assurances that payments under those programs to the
Company will, in the future, remain at a level comparable to the present level
or be sufficient to cover the cost allocable to such patients.
Bruce A. Shear the President and Chief Executive officer of the Company
together with his affiliates is able to control all matters requiring approval
of the stockholders, including the election of a majority of the directors, as a
result of his ownership of the Company's stock.
There can be no assurance that the Company will be successful in hiring or
retaining the personnel it requires for continued growth, or that the Company
will be able to continue to attract and retain highly qualified personnel,
particularly skilled healthcare personnel. The healthcare business is highly
competitive and subject to excess capacity.
The Company has entered into relationships with large employers, healthcare
institutions, labor unions and other key clients to provide treatment for
chemical dependency and substance abuse as well as other services and the loss
of any of these key clients would require the Company to expend considerable
effort to replace patient referrals and would result in revenue losses to the
Company and attendant loss in income.
Existing environmental contamination at certain of the Company's facilities
and potential future environmental contamination at facilities acquired by the
company could have a materially adverse effect on the Company's operations.
On October 31, 1994, the Company was served with a summons for a Civil
Action in the Superior Court Department of the Trial Court of the Commonwealth
of Massachusetts by NovaCare, Inc. ("NovaCare"), an entity which contracted with
the Company in 1992 to provide rehabilitation therapy and related administrative
services to the Company's long-term care facility (the "Action"). The complaint
alleged that the Company owed NovaCare contractual damages in the amount of
approximately $587,000 plus interest, attorney fees, costs of collection, and
double or triple damages pursuant to a Massachusetts statute prohibiting unfair
and deceptive trade practices. The Company filed a counterclaim alleging that
NovaCare breached the contract in question and that the Company may be owed
damages in excess of the amount sought by NovaCare.
On February 13, 1996, the company settled the Action by agreeing to pay
NovaCare an amount less than its claim. The Company is not paying NovaCare
accrued interest, attorney's fees, costs of collection, or multiple damages. A
portion of the settlement amount has already been paid. The balance of the
settlement amount is payable over twelve (12) months with interest on the unpaid
balance at 9.5%. In the event that the Company defaults on its obligation to pay
the settlement amount, it has agreed to entry of judgment against it in the
amount of $457,637.46 (the "Judgment"). The Judgment represents the full unpaid
balance of NovaCare's claim against the Company, including interest, attorney's
fees, and costs of collection. Any amounts paid by the Company to NovaCare after
February 9, 1996 shall be deducted from the Judgment. Until the settlement
amount is paid, NovaCare will continue to hold a mortgage on a day care property
owned by the Company in Saugus, Massachusetts. As of Fiscal Year Ended June 30,
1997, this obligation has been paid in full.
Interruption by fire, earthquakes or other catastrophic events, power
failures, work stoppages, regulatory actions or other causes to any of the
Company's operations could have a materially adverse impact on the Company.
The company has and in the future may enter into transactions in which it
acquires businesses or obtains financing for a consideration that includes the
issuance of stock, warrants, options or convertible debt at a price less than
the value at which the Company's stock may then be trading in the public markets
or which are convertible into or exercisable for Common Stock at a conversion
rate or exercise price less than such value. Such transactions may result in
significant dilution to the existing holders of the Company's stock.
The Company has authorized 1,000,000 shares of Preferred Stock, the terms
of which may be fixed and which may be issued by the Company's Board of
Directors, without stockholder approval. The issuance of the Preferred Stock
could have the effect of making it more difficult for a third party to acquire
the Company and may result in the issuance of stock that dilutes the existing
stockholders and has liquidation, redemption, dividend and other preferences
superior to the Company's outstanding Class A Common Stock.
NOTE: THIS DOES NOT DISCUSS PREFERRED STOCK, REDEMPTION OF WARRANTS, THE
EFFECTS OF DE-LISTING FROM NASDAQ, PENNY STOCK RULES OR THIN FLOAT. THOSE
SUBJECTS ARE, HOWEVER, INCLUDED IN THE RISK-FACTOR SECTION OF THE 06/97 S-3.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the
consolidated balance sheet and the consolidated statement of income filed as
part of the report on Form 10-QSB and is qualified in its entirety by reference
to such report on Form 10-QSB.
</LEGEND>
<CIK> 0000915127
<NAME> PHC, Inc.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 81,275
<SECURITIES> 0
<RECEIVABLES> 11,370,337
<ALLOWANCES> 3,539,637
<INVENTORY> 0
<CURRENT-ASSETS> 8,735,304
<PP&E> 3,071,281
<DEPRECIATION> 946,796
<TOTAL-ASSETS> 16,970,435
<CURRENT-LIABILITIES> 8,282,748
<BONDS> 0
0
10
<COMMON> 56,626
<OTHER-SE> 4,402,018
<TOTAL-LIABILITY-AND-EQUITY> 16,970,435
<SALES> 0
<TOTAL-REVENUES> 4,911,295
<CGS> 0
<TOTAL-COSTS> 4,698,323
<OTHER-EXPENSES> 172,964
<LOSS-PROVISION> 356,190
<INTEREST-EXPENSE> 286,688
<INCOME-PRETAX> 40,008
<INCOME-TAX> 911
<INCOME-CONTINUING> 39,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,097
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
