U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A2
[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, 1999
[ ] 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: 0-22916
PHC, INC.
(Name of small business issuer in its charter)
MASSACHUSETTS 04-2601571
(State or other jurisdiction of (I.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 (New area code)
Securities registered under Section 12(b) of the Act:
NONE.
Securities registered under Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
(1)
<PAGE>
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 X No
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.
No Disclosure X
The issuer's revenues for the fiscal year ended June 30, 1999 were $ 19,139,496.
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, 1999, was $6,353,776. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At September 15, 1999, 5,610,194 shares of the issuer's Class A Common Stock and
727,170 shares of the issuer's Class B Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
(2)
<PAGE>
Changes in this amendment include:
1. Item 6. Management's discussion and analysis or plan of operation is being
amended to more clearly define refinement of collection and reserve
policies, collection difficulties and increases in other assets.
2. Item 7. The footnotes to the financial statements are being expanded to
include further explanation of accounting policies, additional information
with regard to certain capital transactions, notes, taxes and acquisitions
and detailed financial information by operating segment.
(2)
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion and analysis of the financial condition and
results of operations of the Company for the years ended June 30, 1999 and 1998.
It should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein. During the fiscal years several
businesses were acquired or closed which makes comparability of period results
difficult. See Psychiatric Service Industry - Operating Statistics" in Part
One, Item One of this report for further detail.
Overview
The Company presently provides health care services through two substance abuse
treatment centers, a psychiatric hospital and seven outpatient psychiatric
centers (collectively called "treatment facilities"). The Company's revenue for
providing behavioral health services through these facilities is derived from
Medicare and Medicaid and contracts with managed care companies, state agencies,
railroads, gaming industry corporations and individual clients. The
profitability of the Company is largely dependent on the level of patient census
and the payor mix at these treatment facilities. The Company's administrative
expenses do not vary greatly as a percentage of total revenue but the percentage
tends to decrease slightly as revenue increases because of the fixed components
of these expenses. The Company's most recent addition, Behavioral Health Online,
Inc., is a provider of behavioral health information and education through its
web site. Revenues from the web site are expected to be derived from behavioral
health professionals for educational units required by professional standards,
sponserships and advertising for behavioral health suppliers and the sale of
books, tapes and other behavioral health related items to behavioral health
professionals and other consumers.
The healthcare industry is subject to extensive federal, state and local
regulation governing, among other things, licensure and certification, conduct
of operations, audit and retroactive adjustment of prior government billings and
reimbursement. In addition, there are ongoing debates and initiatives regarding
the restructuring of the health care system in its entirety. The extent of any
regulatory changes and their impact on the Company's business is unknown.
Managed care has had a profound impact on the Company's operations, in the form
of shorter lengths of stay, extensive certification of benefits requirements and
reduced payment for services.
(3)
<PAGE>
Results of Operations
Years Ended June 30, 1999 and 1998
The Company experienced an increase in profitability from its continuing
operations. Earnings before taxes, interest, depreciation and amortization for
currently operating facilities increased by $1,351,169 for the year ended June
30, 1999 to $845,747 from a loss for the year ended June 30, 1998 of $505,422.
These amounts exclude income and loss for both years for the California, Rhode
Island, and Virginia operations. Although net revenue for the operating
facilities decreased by 2%, approximately $337,000, for the year ended June 30,
1999, many changes toward more efficient operations resulted in non-proportional
decreases in many operating expenses. Total consultant fees related to patient
care decreased 16% to $2,273,601 for the year ended June 30, 1999 from
$2,721,960 for the year ended June 30, 1998. While patient care related payroll
expense increased only 2% to $5,507,138 for the year ended June 30, 1999 from
$5,417,628 for the year ended June 30, 1998. This is a combined 4% reduction in
the cost of salaries related to patient care as a result of the more efficient
use of salaried employees time and the reduction in the use of non-employee
therapists for patient care. More efficient ordering has resulted in a decrease
of 62% in the cost of hospital supplies excluding food, laboratory fees and
pharmacy, which also decreased. A change in laboratory service provider and more
efficient management of requests for lab tests resulted in a 37%, approximately
$76,000, decrease in laboratory fees expense for the fiscal year ended June 30,
1999. A change in pharmacy and a shift in some pharmacy billing from our
facilities to the vendor resulted in a 7%, approximately $14,000, decrease in
pharmacy costs for the operating facilities. Savings were also evident in
administrative expenses for the operating facilities. More efficient ordering
also resulted in a decrease of 10.8%, approximately $25,000, in the cost of
general office supplies and expense. Consolidating marketing efforts contributed
toward a 24%, approximately $74,000, decrease in marketing, promotion, and
travel expenses. More efficient staffing in administrative positions resulted in
a decrease of 17%, approximately $458,000, in administrative payroll, while the
cost of administrative consultants also decreased 26% or approximately $63,000.
Bad debt expenses also decreased 27%, approximately $775,000, due to the
considerable charge to bad debt expense in the previous year and the current
decline in accounts receivable. Because most of the changes outlined above were
in place for all of the year ended June 30, 1999, the Company does not expect to
experience the same decreases in expenses in future years but intends to work at
maintaining the current level of expenses. The Company will, however, continue
to evaluate operations looking for less expensive alternatives to provide the
same quality service.
The Company reduced its total loss by $5,090,703 for the fiscal year ended
June 30, 1999 compared to June 30, 1998. The Company also continued to divest
itself of facilities operating at a loss. The remaining Pioneer Counseling of
Virginia clinic was closed in January 1999 resulting in approximately $300,000
in expenses to write-down intangible assets. The total loss recorded for Pioneer
Counseling of Virginia, including this expense was approximately $810,000. The
final cost of the release from two of the Michigan outpatient clinic leases is
also reflected in the current fiscal year. The Company also experienced a loss
of approximately $160,000 through its start up operations for
Behavioralhealthonline.com. None of the start-up costs of the web site have been
capitalized. Except for the purchase of equipment, all costs have been expensed
(4)
<PAGE>
as incurred. The web site produces minimal revenues during the development
stages when operating costs are high. To date, no revenues have been recorded
for the web site. The web site is expected to be fully operational in the third
quarter of the fiscal year 2000.
In the fiscal year ended June 30, 1998 the Company experienced a loss from
the discontinued operations of Franvale Nursing and Rehabilitation Center of
approximately $2,200,000.
The environment the Company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the Company has increased staff, standardized some
procedures for collecting receivables and instituted a more aggressive
collection policy, which has resulted in an overall decrease in its accounts
receivable. In response to today's healthcare environment, the Company's
collection policy calls for earlier contact with insurance carriers with regard
to payment, use of fax and registered mail to follow-up or resubmit claims and
earlier employment of collection agencies to assist in the collection process.
Our collectors also seek assistance through every legal means, including the
State insurance commissioner's office, when appropriate, to collect claims. This
early concentration on claim collection allows facility staff to become aware of
minor billing errors early and correct them before the claim can be denied for
timely and accurate submission. Any valid claims denied due to billing errors on
the part of the Company which require write-off are charged to bad debt expense
in the period the account is written off. Any invalid claims result in a charge
against revenue not reserves. An amount is recorded as a contractual adjustment
only if an agreement with the insurance carrier is on file before the patient is
admitted. Although the Company's receivables have decreased, the Company
continues to reserve for bad debts based on managed care denials and past
difficulty in collections. Changing conditions in healthcare required the
Company to reevaluate its methods for determining collectability. The growth of
managed care has negatively impacted reimbursement for behavioral health
services with a higher rate of denials requiring higher reserves. The collection
difficulties experienced are due to the denial of claim, that had been
previously approved. Managed care companies frequently deny claims although
authorization for treatment is on file. The Company has limited success in
challenging these denials. Accordingly, the Company has adopted a more
aggressive reserve policy to reserve amounts sooner to address these changing
conditions in the healthcare environment. During the year ended June 30, 1998
the Company increased its bad debt reserve by approximately $300,000 to write
down the receivables of the closed Rhode Island facility, Good Hope Center, and
during the year ended June 30, 1999 the Company increased its bad debt reserve
by approximately $33,000 to write down the receivables of the closed Virginia
facility, Pioneer Counseling of Virginia, Inc.
Total patient care revenue from all facilities, decreased 10% to
$19,139,496 for the year ended June 30, 1999 from $21,246,189 for the year ended
June 30, 1998. This decline in revenue is due primarily to the decline in census
and closure of Good Hope Center in Rhode Island. Net inpatient care revenue from
psychiatric services decreased 12% to $11,955,143 for the fiscal year ended June
30, 1999 compared to $13,640,801 for the year ended June 30, 1998 and net
outpatient care revenue decreased 7% to $5,574,835 for the year ended June 30,
1999 from $6,008,552 for the year ended June 30, 1998. Revenues from Practice
Management and Pioneer Development and Support Services ("PDSS") increased 3% to
$1,519,518 for the year ended June 30, 1999 from $1,476,836 for the year ended
June 30, 1998. All revenues reported above and in the accompanying statement of
operations are shown net of estimated contractual adjustments and charity care
provided. When payment is made, if the contractual adjustment is found to have
been understated or overstated appropriate adjustments are made in the period
the payment is received in accordance with the AICPA Audit and Accounting Guide
for Health Care Organizations.
Total patient care expenses for all facilities decreased 12% to $9,384,070
for the year ended June 30, 1999 from $10,706,639 for the year ended June 30,
1998. This decrease in patient care expenses is largely a result of the closure
(5)
<PAGE>
of Good Hope Center and the Virginia clinics. The Company expects these expenses
to decline in fiscal 2000 as compared to fiscal 1999. Total administrative
expenses for all facilities decreased 17% to $7,865,013 for the year ended June
30, 1999 from $9,488,631 for the year ended June 30, 1998. This decrease in
administrative expense is due largely to the one-time charges recorded in the
fiscal year ended June 30, 1998. Expenses for the closure of Good Hope Center
and the Blacksburg Clinic were among these one-time charges.
There was significant increase in other assets in the year ended June 30,
1999. Other assets consist of deposits and other deferred expenses. This
increase is primarily due to the deferred expenses of Quality Care Centers
recorded during the year. These deferred expenses are legal expenses and other
closure expenses relating to the move of records from the facility and
production of facility records for various litigations as listed under ITEM 3
LEGAL PROCEEDINGS in this report. The deferred expenses will be offset against
an expected gain to be realized upon the final resolution of the closing of
Quality Care Centers.
Year 2000 Compliance
The Company was unable to reach an agreement with its Information Systems
Vendor to upgrade its current accounts receivable software to accommodate a
four-digit year. The Company has identified alternative software solutions,
which are year 2000 compliant. The software installation is anticipated to be
operational by the deadline; however, as a precaution, the Company has contacted
each of its facilities' fiscal intermediaries and has been granted an extension
of time beyond the HCFA deadline for year 2000 compliance. In the event that
installation of the software is delayed, each facility is making plans to
complete the billing process by adding the four-digit year manually for those
bills that are not currently processed through a third party electronic biller.
Although this is a time consuming and costly alternative, it will allow the
Company to continue processing bills. The Company has already upgraded the
network software at the corporate offices and most of its facilities and is
currently upgrading hardware to accommodate all required software upgrades.
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. The
company has received responses from approximately 60% of all vendors contacted.
All operation critical equipment, telephones, elevators, etc., has been tested
and found to be compliant. There are a few suppliers of goods and services
critical to operations that have not yet responded. The Company is in the
process of identifying alternate sources for these goods and services.
To date the Company has expended approximately $60,000 on items relating to
the year 2000 issues and anticipates approximately $165,000 in additional
expenses relating to the upgrade of Company's computer systems.
Liquidity and Capital Resources
For the two fiscal years ended June 30, 1999, the Company met its cash flow
needs through accounts receivable financing and by issuing debt and equity
securities as follows:
(6)
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DATE TRANSACTION TYPE NUMBER OF PROCEEDS MATURITY TERMS STATUS
SHARES DATE
9/97 Common Stock 172,414 $500,000 N/A Issued with Common Stock
warrants at a Sold
3.3% discount
9/97 Warrant issued as 86,207 -- 09/30/2002 exercise price outstanding
part of the units $2.90
in the Private
Placement of Common
Stock
9/97 Warrant issued in 150,000 -- 05/31/2002 exercise price outstanding
exchange for cash and $2.50
financial advisory
services
12/97 Mortgage advance -- $500,000 10/31/2001 Prime Plus 5% outstanding
3/98 Warrant issued as 3,000 -- 03/10/2003 exercise price outstanding
a penalty for late $2.90
registration of Private
Placement Common Stock
3/98 Note Payable -- $350,000 05/10/99 Prime Plus outstanding
as extended 3.5%
3/98 Warrants issued as 52,500 -- 03/10/2003 exercise price outstanding
additional interest on $2.38
3/98 debt
(7)
<PAGE>
3/98 Common Stock issued 227,347 $534,265 N/A N/A N/A
to the former owners
of BSC-NY, Inc. for
the earn out agreement
in lieu of cash
3/98 Convertible Preferred 950 $950,000 03/18/2000 6% Interest outstanding
Stock per Yr.
convertible at
80% of 5 day
average bid
price
3/98 Warrants issued in 49,990 -- 03/18/2001 exercise price outstanding
connection with the $2.31
Private Placement of
Convertible Preferred
Stock on 3/98
5/98 Note Payable - -- $50,000 on demand 12% annual outstanding
Related Party interest rate
6/98 Note Payable - -- $50,000 on demand 12% annual outstanding
Related Party interest rate
(8)
<PAGE>
7/98 Warrants issued as 52,500 -- 07/10/2003 exercise price outstanding
additional interest on $1.81
extension of 3/98 debt
7/98 Warrants issued as 20,000 -- 07/10/2003 exercise price outstanding
additional interest on $1.81
extension of 3/98 debt
8/98 Warrants issued for 50,000 -- 08/15/2001 exercise price outstanding
services $1.75
8/98 Note Payable - -- $100,000 on demand 12% annual outstanding
Related Party interest rate
12/98 Shares issued for 304,097 -- -- -- outstanding
price guaratee
12/98 Convertible Debentures -- $500,000 12/02/2004 12% annual outstanding
interest
convertible
at $2.00 in
$1,000 increments
12/98 Warrants issued in 165,000 -- 06/2004 issued from outstanding
Private Placement Dec thru June;
exercisable at
$1.00 to $2.00
01/99 Warrants for services 94,000 -- 05/2004 issued from outstanding
Jan thru June;
exercisable at
$1.00 to $1.45
</TABLE>
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Accounts receivable from patient
care, net of allowance for doubtful accounts, decreased 14.6% to $6,938,227
during the year ended June 30, 1999 from $8,126,972 at June 30, 1998. This
decrease in accounts receivable is largely the result of the write-down of the
accounts receivable for closed facilities, increased staff, standardization of
some procedures for collecting receivables and a more aggressive collection
policy. The increased staff has allowed the company to concentrate on current
accounts receivable and resolve any problem issues before they become
uncollectable. The Company's collection policy calls for earlier contact with
insurance carriers with regard to payment, use of fax and registered mail to
follow-up or resubmit claims and earlier employment of collection agencies to
assist in the collection process. Our collectors will also seek assistance
through every legal means, including the State insurance commissioner's office,
when appropriate, to collect claims. At the same time, the Company continues to
increase reserves for bad debt based on potential insurance denials and past
difficulty in collections. In February 1998 the Company entered into an accounts
receivable funding revolving credit agreement with Healthcare Financial
Partners-Funding II, L.P. ("HCFP"), on behalf of five of its subsidiaries, which
provides for funding of up to $4,000,000 based on outstanding receivables. The
outstanding balance on this receivables financing on June 30, 1999 was
approximately $1,669,830.
The Company believes that it has sufficient financing available to sustain
existing operations for the foreseeable future. The Company also intends to
renew the expansion of its existing operations through new product lines and
expansion of contracts. The Company will also expand through its web site
operations offering the behavioral health professional goods and services unique
(9)
<PAGE>
and specific to their needs for a fee.
The liquidation of the assets and liabilities of Franvale may result in a
non-cash financial statement gain of approximately $2,000,000. In the quarter
ended December 31, 1998 the company was relieved of the HUD mortgage of
approximately $6,741,000 and surrendered the underlying assets amounting to
approximately $4,329,000. The recognition of the gain has been deferred until
final resolution of all contingent liabilities.
(10)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
AT PAGE
Index..............................................................F-1
Independent auditor'report.........................................F-2
Consolidated balance sheets........................................F-3
Consolidated statements of operation...............................F-4
Consolidated statements of changes in stockholders'equity..........F-5
Consolidated statements of cash flows..............................F-6, F-7
Consolidated notes to financial statements.........................F-8
F-1
(11)
<PAGE>
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, 1999 and 1998 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
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 referred to above
present fairly, in all material respects, the consolidated financial position of
PHC, Inc. and subsidiaries at June 30, 1999 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The consolidated financial statements referred to above as of June 30, 1998
and for the year then ended have been restated (See Note P).
BDO Seidman, LLP
Boston, Massachusetts
September 10, 1999
F2
(12)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
1999 1998
(as restated)
____ ___________
ASSETS (Notes C and D)
Current assets:
Cash and cash equivalents (Note A) $ 381,170 $ 227,077
Accounts receivable, net of allowance for
doubtful accounts of $3,647,848 at June 30,
1999 and $3,488,029 at June 30, 1998
(Notes A, L and M) 6,343,227 7,441,972
Prepaid expenses 101,865 156,695
Other receivables and advances 334,155 127,064
Deferred income tax asset (Note F) 459,280 515,300
Other receivables, related party 53,517 64,065
___________ ___________
Total current assets 7,673,214 8,532,173
Accounts receivable, noncurrent 595,000 685,000
Other receivables, noncurrent, related party,
net of allowance for doubtful accounts of
$782,000 in 1999 and $382,000 in 1998(Note K) 2,908,113 2,941,402
Other receivables 109,165 426,195
Property and equipment, net (Notes A, B and D) 1,483,319 2,128,273
Deferred income tax asset (Note F) 154,700 154,700
Deferred financing costs, net of amortization
of $64,041 and $18,065 at June 30, 1999 and
1998, respectively 45,067 53,608
Goodwill, net of accumulated amortization of
$116,900 and $307,707 at June 30, 1999 and 1998,
respectively (Note A) 1,761,075 2,011,613
Other assets (Note A) 297,781 19,386
___________ ___________
Total assets $15,027,434 $16,952,350
___________ ___________
LIABILITIES
Current liabilities:
Accounts payable $ 1,832,750 $ 2,346,213
Notes payable - related parties (Note E) 200,000 159,496
Current maturities of long-term debt (Note C) 1,286,318 1,107,167
Revolving credit note (Note C) 1,669,830 1,683,458
Current portion of obligations under capital
leases (Note D) 60,815 67,492
Accrued payroll, payroll taxes and benefits 333,955 729,194
Accrued expenses and other liabilities 1,459,290 1,004,763
Net Current Liabilities
of Discontiuned Operations (Note A and I) 2,641,537 2,641,537
___________ ___________
Total current liabilities 9,484,495 9,739,320
Long-term debt, less current maturities (Note C) 1,730,230 2,850,089
Obligations under capital leases (Note D) 51,657 93,747
Convertible debentures (Note C) 500,000 --
___________ ___________
Total noncurrent liabilities 2,281,887 2,943,836
___________ ___________
Total liabilities 11,766,382 12,683,156
___________ ___________
Commitments and contingent liabilities
(Notes A, D, G, H, J, and K)
STOCKHOLDERS' EQUITY (Notes H, J and K)
Convertible Preferred stock, $.01 par value;
1,000,000 shares authorized, 813 and 950
shares issued and outstanding June 30, 1999
and 1998 respectively 8 10
Class A common stock, $.01 par value; 20,000,000
shares authorized, 5,612,930 and 4,935,267
shares issued June 30,1999 and 1998, respectively 56,129 49,353
Class B common stock, $.01 par value; 2,000,000
shares authorized, 727,210 and 727,328
issued and outstanding June 30, 1999 and 1998,
respectively, convertible into one share of
Class A common stock 7,272 7,273
Additional paid-in capital 15,967,176 15,485,895
Treasury stock, 2,776 common shares at cost June
30, 1999 and 1998 (12,122) (12,122)
Accumulated deficit (12,757,411) (11,261,215)
___________ ____________
Total stockholders' equity 3,261,052 4,269,194
___________ ___________
Total liabilities and stockholders' equity $15,027,434 $16,952,350
___________ ___________
See notes to financial statements
F-3
(13)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended June 30,
1999 1998
(as restated)
Revenues:
Patient care, net (Note A) $ 17,529,978 $ 19,649,353
Management fees (Note K) 666,881 833,750
Other 942,637 763,086
Total revenues 19,139,496 21,246,189
Operating expenses:
Patient care expenses 9,384,070 10,706,639
Cost of management contracts 259,012 467,065
Provision for doubtful accounts 2,183,139 3,684,452
Administrative expenses 7,865,013 9,488,631
Total operating expenses 19,691,234 24,346,787
___________ _____________
Loss from operations (551,738) (3,100,598)
Other income (expense):
Interest income 451,271 391,353
Interest expense (1,258,314) (1,289,642)
Other income, net 64,129 58,583
___________ _____________
Total other expense, net (742,914) (839,706)
Loss before income taxes (1,294,652) (3,940,304)
Income taxes (Note F) 59,434 219,239
Loss from continuing operations (1,354,086) (4,159,543)
Loss from discontinued operations
(Notes A and I) -- (2,220,296)
Net loss (1,354,086) (6,379,839)
Dividends (Note J) (142,110) (207,060)
Loss applicable to common shareholders $ (1,496,196) $ (6,586,899)
Basic and diluted loss per common share
(Note A):
Continuing operations $ (.25) $ (.84)
Discontinued operations -- (.42)
Total $ (.25) $ (1.26)
Basic and diluted weighted average
number of shares outstanding 6,008,263 5,237,168
See notes to financial statements.
F-4
(14)
<PAGE>
PHC, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Changes In Stockholders' Equity (See Notes A, C, H, J, K and N)
Class A Class B Class C
Common Stock Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount
Balance - June 30, 1997 2,877,836 $28,778 730,360 $ 7,304 199,816 $ 1,998 500 $ 5
Conversion of debt 1,331,696 13,317
Conversion of preferred stock
series A 246,305 2,463 (500) (5)
Issuance of shares with
acquisition 41,024 410
Issuance private placement
shares 172,414 1,724
Conversion of shares 3,032 31 (3,032) (31)
Cancel class C common stock (199,816) (1,998)
Issue warrants for services
Issuance of shares with
consulting agreement 20,870 209
Issuance of shares with
earn out agreement 227,347 2,274
Issuance of employee stock purchase
plan shares 14,743 147
Issuance of preferred stock Series B 950 10
Adjustment related to beneficial
conversion feature of convertible
preferred stock
Warrant issued with debt
Treasury stock issued to employees
Dividends on preferred stock
Costs related to private placements
Net Loss - year ended June 30, 1998 -- -- -- -- -- -- -- --
_______ _______ _______ _______ ______ ________ ______ ______
Balance -June 30, 1998
(as restated) 4,935,267 $49,353 727,328 $7,273 0 $0 950 $10
Costs related to private placement
Conversion of preferred stock 248,129 2,481 (190) (3)
Price guarantee shares 304,097 3,041
Issue warrants for services
Issuance of shares with consulting
agreement 56,470 564
Issuance of shares with earn out
agreement 53,374 534
Issuance of employee stock
purchase plan shares 15,475 155
Issue warrants for financing
Conversion from class B to class A 118 1 (118) (1)
Dividends on preferred stock 53 l
Net Loss - year ended June 30, 1999 -- -- -- -- -- -- -- --
_______ _______ _______ _______ ______ ________ ______ ______
Balance - June 30, 1999 5,612,930 $56,129 727,210 $7,272 0 $ 0 813 $ 8
See notes to financial statements.
</TABLE>
(15)
<PAGE>
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity (See Notes A, C, H,
J, K and N)
Additional
Paid-in
Capital,
Common Treasury Shares Accumulated
Stock Shares Amount Deficit Total
_____________ ________ ______ ____________ _____
Balance - June 30,
1997 $10,398,630 8,656 $(37,818) $(4,674,316) $5,724,581
Conversion of debt 2,696,789 2,710,106
Conversion of preferred
stock series A (2,458) 0
Issuance of shares with
acquisition 79,605 80,015
Issuance private placement
shares 498,276 500,000
Conversion of shares -0-
Cancel class C common
stock 1,998 -0-
Issue warrants for
services 184,523 184,523
Issuance of shares with
consulting agreement 36,249 36,458
Issuance of shares with
earn out agreement 531,991 534,265
Issuance of employee
stock purchase plan
shares 35,750 35,897
Issuance of preferred
stock series B 949,990 950,000
Adjustment related to
beneficial conversion
feature of convertible
preferred stock 190,000 (190,000) -0-
Warrant issued with debt 48,809 48,809
Treasury stock issued to
employees (5,880) 25,696 25,696
Dividends on preferred stock (17,060) (17,060)
Costs related to private
placements (164,257) (164,257)
Net loss-year ended June
30, 1998 -- -- -- (6,379,839) (6,379,839)
_____________ ________ ______ ____________ _________
Balance - June 30,
1998 (as restated) $15,485,895 2,776 $(12,122) $(11,261,215) $ 4,269,194
Costs related to private
placement (56,565) (56,565)
Conversion of preferred
stock 91,959 (92,569) 1,868
Price guarantee shares 117,076 120,117
Issue warrants for
services 108,354 108,354
Issuance of shares with
consulting agreement 38,436 39,000
Issuance of shares with
earn out agreement 59,513 60,047
Issuance of employee
stock purchase plan
shares 18,261 18,415
Issue warrants for
financing 51,248 51,248
Conversion from class B
to class A
Dividends on preferred
stock 52,999 (49,541) 3,460
Net Loss-year ended June
30, 1999 -- -- -- (1,354,086) (1,354,086)
_____________ ________ ________ ____________ __________
Balance-June 30, 1999 15,967,176 2,776 ($12,122) $(12,757,411) $3,261,052
See notes to financial statements
F-5
(16)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended June 30,
1999 1998
(as restated)
_____________________________
Cash flows from operating activities:
Net loss $(1,354,086) $(6,379,839)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 325,764 674,162
Compensatory stock options and
stock and warrants issued
for obligations 279,719 269,790
Changes in:
Accounts receivable 1,188,745 1,544,791
Prepaid expenses and other
current assets (141,713) 257,173
Other assets 693,275 (257,941)
Accounts payable (513,463) (182,913)
Accrued expenses and other liabilities 59,288 758,072
Net liabilities of discontinued operations -- 1,161,903
____________ _____________
Net cash provided by (used in)
operating activities 537,529 (2,154,802)
____________ _____________
Cash flows from investing activities:
Acquisition of property and equipment
and intangibles (115,254) (212,492)
Loan receivable -- 152,749
____________ _____________
Net cash (used in) investing
activities (115,254) (59,743)
____________ _____________
Cash flows from financing activities:
Revolving debt, net 13,628 (106,513)
Proceeds from borrowings 485,829 950,000
Payments on debt (1,274,969) (557,883)
Deferred financing costs -- 6,967
Preferred stock dividends (7,681) (17,060)
Issuance of capital stock 15,011 1,321,640
Convertible debt 500,000 --
____________ _____________
Net cash provided by (used in)
financing activities (268,182) 1,597,151
____________ _____________
Net increase (decrease) in cash and
cash equivalents 154,093 (617,394)
Beginning balance of cash and cash equivalents 227,077 844,471
____________ _____________
Ending balance of cash and cash equivalents $ 381,170 $ 227,077
____________ _____________
Supplemental cash flow information:
Cash paid during the period for:
Interest $1,227,628 $1,567,763
Income taxes $ 189,027 $ 130,290
See notes to financial statements
F-6
(17)
<PAGE>
Supplemental disclosures of noncash investing and financing
activities:
Stock issued for acquisitions and earn-out agreement $ 60,047 $614,280
Capital leases 25,010 83,082
Conversion of preferred stock 190,000 500,000
Beneficial conversion feature of preferred stock -- 190,000
Warrant Valuations 159,602 233,332
Conversion of Debt to Common Stock -- 2,710,106
Issuance of Preferred Stock in lieu of cash for
Dividends due 53,000 --
Issuance of Common Stock in lieu of Preferred Stock
Dividends 81,429 --
See notes to financial statements F-7
(17)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation:
PHC, Inc. ("PHC" or the "Company") operates substance abuse treatment centers in
several locations in the United States, a psychiatric hospital in Michigan and
psychiatric outpatient facilities in Nevada, Kansas and Michigan. PHC also
manages a psychiatric practice in New York, operates an outpatient facility
through a physicians practice, and operates behavioral health centers and
maintains a behavioral health web site. PHC of Utah, Inc. ("PHU") and PHC of
Virginia, Inc. ("PHV") 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 four 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 K). Behavioral Health Online, Inc. ("BHO") provides
behavioral health information and education through its web site. Quality Care
Centers of Massachusetts, Inc. ("Quality Care") operated a long-term care
facility known as the Franvale Nursing and Rehabilitation Center (see Note I).
The consolidated financial statements include PHC and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Until January 1999, the Company operated Pioneer Counseling of Virginia, Inc.
("PCV"), an 80% owned subsidiary which provided outpatient services through a
physicians practice. Until May 31, 1998, the Company operated Good Hope Center,
a substance abuse treatment facility in West Greenwich, Rhode Island ("Good
Hope"). Until June 1, 1998 the Company also operated a subacute long-term care
facility, Franvale Nursing and Rehabilitation Center ("Franvale"), in Braintree
Massachusetts. On June 1, 1998 Franvale was placed into state receivership. On
October 5, 1998 Franvale filed for protection under the Chapter 7 Bankruptcy
code. All financial information for Franvale is reported in the accompanying
financial statements as discontinued operations. The liquidation of the assets
and liabilities of Franvale may result in a non-cash financial statement gain of
approximately $2,000,000. In the quarter ended December 31, 1998 the company was
relieved of the HUD mortgage of approximately $6,741,000 and surrendered the
underlying assets amounting to approximately $4,329,000. The recognition of the
gain has been deferred until final resolution of all contingent liabilities.
During the year ended June 30, 1999, the Company recorded an increase in its
accounts receivable reserve in line with its more aggressive reserve policy
established last year and reserved for the remaining accounts receivable balance
for the closed Rhode Island facility and the closed Pioneer Counseling of
Virginia facilities.
Revenues and accounts receivable: Patient care revenues and accounts receivable
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 contractual
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 provided and subsequent settlements are recorded in
operations in the year of settlement. The provision for contractual allowances
is deducted directly from revenue and the net revenue amount is recorded as
accounts receivable. The allowance for doubtful accounts does not include the
contractual allowances.
(18)
<PAGE> F-8
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues and accounts receivable (continued)
Medicaid reimbursements are currently based on established rates depending on
the level of care provided and are adjusted prospectively. Medicare
reimbursements are currently based on provisional rates that are adjusted
retroactively based on annual cost reports filed by the Company with Medicare.
The Company's 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.
The Company has $585,714 of receivables from Medicaid and Medicare at June 30,
1999, which constitute a concentration of credit risk should Medicaid and
Medicare defer or be unable to make reimbursement payments as due. Long-term
assets include accounts receivable-non-current, other
receivables-non-current-related party and other receivables. Accounts
receivable-non-current consists of amounts due from former patients for service.
This amount represents amounts collectable under supplemental payment
agreements, arranged by the Company's collection agencies, entered into because
of the patients' inability to pay under normal payment terms. All of these
receivables have been extended beyond their original due date. Accounts of
former patients that do not comply with these supplemental payment agreements
are written off. Other receivables-non-current-related party is the amount due
from a related professional corporation net of the related allowance for
doubtful accounts. This amount consists of the balance due of funds advanced to
the professional corporation for acquisition costs, management fees, working
capital and interest on the advanced funds (see discussion regarding BSC-NY,
Inc. in Note K). Other receivables consists of amounts due to the Company from a
third party in a licensure agreement and amounts due from employees for
advances. Charity care amounted to approximately $242,000 and $504,000 for the
years ended June 30, 1999 and 1998, respectively. Patient care revenue is stated
net of charity care in the accompanying 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 39 years
Furniture and equipment 3 through 10 years
Motor vehicles 5 years
Leasehold improvements Term of lease
Other assets:
Other assets are primarily deposits and deferred expenses.
Goodwill, net of accumulated amortization:
The excess of the purchase price over the fair market value of net assets
acquired is being amortized on a straightline basis over twenty years.
F-9
(19)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic and diluted loss per share:
The loss per share is computed by dividing the loss applicable to common
shareholders, net of dividends charged directly to retained earnings, by the
weighted average number of shares of common stock outstanding for each fiscal
year. No common stock equivalents have been included in the calculation of
diluted loss per share because their effect would be anti-dilutive.
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
128, Earnings per share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive affects of options, warrants and convertible securities. Dilutive
earnings per share is similar to the previously reported fully diluted earnings
per share. Diluted loss per share does not include warrants, options,
convertible securities or contingently issuable shares that would have an
anti-dilutive effect.
Estimates and assumptions:
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.
Cash equivalents:
Cash equivalents are short-term highly liquid investments with maturities of
less than three months, when purchased.
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, 1999 the Company wrote off the carrying value of
goodwill for Pioneer Counseling of Virginia, Inc., approximately $305,000, and
wrote down the remaining balance of accounts receivable for the facility of
approximately $43,000. During the year ended June 30, 1998 the Company wrote off
the carrying value of goodwill for PHC of Rhode Island, Inc., approximately $
23,000, and wrote off equipment and the land and building assets related to the
capital lease from that facility aggregating approximately $1,240,000 in total
assets and the related liability of approximately $1,300,000. Also in 1998 the
Company wrote down the remaining balance of accounts receivable from a closed
California facility, approximately $92,000, and the equipment, goodwill and
additional closing costs recorded for the Blacksburg facility, approximately
$136,000, which was closed in fiscal year 1999 to consolidate operations in
Salem, Virginia. All of the above write-downs were considered necessary due to
the closing of facilities. The assets had no ongoing value or were written-down
to their net realizable value. Write-downs in the carrying value of goodwill and
property and equipment are charged to depreciation and amortization expense,
which is included in administrative expenses in the Company's statements of
operations. Write-downs in accounts receivable were charged to the provision for
doubtful accounts in the accompanying statements of operations.
F-10
(20)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with FASB statement no. 121, long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of evaluating
the recoverability of long-lived assets, the recoverability test is performed
using undiscounted net cash flows related to the long-lived assets. The amount
of the impairment losses recognized is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
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, 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.
All of the Company's employees are employed under leasing arrangements. The
Company believes that its leased employees meet the common law definition of
employee and therefore qualify as employees for purposes of applying SFAS 123.
Recent Accounting Pronouncements:
In June 1998 and July 1999, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 133 and 137. ("SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities," and ("SFAS No.
137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133." SFAS No. 133 and SFAS No. 137
require companies to recognize all derivative contracts at their fair value as
either assets or liabilities on the balance sheet. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (1) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (2) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. These statements are effective for all quarters beginning
after July 15, 1999.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect the adoption of the new standard to affect its financial statements.
In April 1998 Statement of Position 98-5, Reporting on the Costs of Start-up
Activities was issued which required such costs, including organization costs,
to be expensed as incurred and is effective for fiscal years beginning after
December 15, 1998. The Company does not expect that this Statement of Position
will have a material impact on the Company's statement of operations or
financial position.
F-11
(21)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
June 30,
1999 1998
______ __________
Land $ 69,259 $ 119,859
Buildings 1,136,963 1,676,963
Furniture and equipment 868,722 839,972
Motor vehicles 41,444 41,444
Leasehold improvements 358,207 354,687
__________ ___________
2,474,595 3,032,925
Less accumulated depreciation
and amortization 991,276 904,652
__________ ___________
$1,483,319 $2,128,273
__________ ___________
<PAGE>
NOTE C NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is summarized as follows:
June 30,
1999 1998
______ __________
Note payable with interest at 9% requiring
monthly payments of $1,150 through May 2001 $23,509 $34,636
9% mortgage note due in monthly installments
of $4,850, including interest through July
1, 2012 when the remaining principal balance
is payable 462,814 478,582
Note payable due in monthly installments of
$21,506 including interest at 10.5% through
November 1, 1999 when the remaining principal
balance is payable, collateralized by all
assets of PHN and certain receivables.
Interest only payments were made from May 1998
through October 1998 per subsequent agreement. 261,802 374,190
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.
Interest only payments were made from May 1998
through October 1998 per subsequent agreement. 471,297 598,848
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 real estate. 0 521,000
Term mortgage note payable with interst only
payments through March 1998 principal due in
monthly installments of $9,167 beginning
April 1998 through February 2001. A balloon
payment of approximately $1,300,000 plus
interst is due March 2001, interest at prime
plus 5% (12.75% at June 30, 1999) collateralized
by all assets of PHM. 1,433,333 1,600,000
(22)
<PAGE>
NOTE C NOTES PAYABLE AND LONG-TERM DEBT (CON'T)
Long-term debt is summarized as follows:
June 30,
1999 1998
______ __________
Note payable bearing interest at prime plus
3-1/2% (11.25% at June 30, 1999) with
the principal due on November 10, 1998 as
extended and collateralized by MRC's real
property and BSC's accounts receivable and
cross-collateralized with the revolving
credit note referred to below. 324,730 350,000
Note payable due in monthly installments of
$2,378 including interest at 12% through
October 1999. 9,278 0
Note payable due in monthly installments of
$7,633 including interest at 12% through
October 1999. 29,785 0
__________ __________
3,016,548 3,957,256
Less current maturities 1,286,318 1,107,167
__________ __________
Noncurrent maturities $ 1,730,230 $ 2,850,089
__________ __________
F-12
(23)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE C - LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows as of June 30, 1999:
Year Ending
June 30, Amount
___________ _______
2000 $1,286,318
2001 1,303,527
2002 20,634
2003 22,570
2004 24,687
Thereafter $358,812
________
$3,016,548
The Company has a revolving credit note under which a maximum of $4,000,000 may
be outstanding at any time. At June 30, 1999 the outstanding balance was
$1,669,830. 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% at June 30, 1999). The
agreement is automatically renewable for one-year periods 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 excluding Franvale and guaranteed by PHC.
On December 7, 1998 the Company issued the principal sum of $500,000 of
convertible debentures with interest at 12% per annum that are due on December
2, 2004. Interest is payable quarterly. The debentures and any unpaid interest
are convertible into shares of common stock at the rate of $1,000 for 500 shares
of common stock, which equates to $2.00 per share of common stock. The traded
market price of the Company's common stock at the date of issuance of the
convertible debentures was $1.188 per share and accordingly there was no
beneficial conversion feature. The holders of the debentures have the right to
put all or any portion of the debentures to the Company at the original purchase
price plus unpaid interest upon 30 days written notice beginning December 3,
2001. The Company has the right to call the debentures upon the same terms as
above. If called, the holders of the debentures then have 20 days from the date
of written notice to exercise their conversion privilege as to any debentures
not then already converted.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 1999, the Company was obligated under various capital leases for
equipment providing for monthly payments of approximately $5,000 for fiscal 2000
and terms expiring from July 1999 through July 2003.
The carrying value of assets under capital leases included in property and
equipment is as follows:
June 30,
1999 1998
_______________________
Equipment and improvements $528,820 $511,517
Less accumulated amortization (259,564) (225,703)
__________ __________
$269,256 $285,814
F-13
(24)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 1999:
Year Ending
June 30,
_____________
2000 $ 65,327
2001 47,302
2002 11,201
2003 2,821
Thereafter 235
__________
Total future minimum lease payments 126,886
Less amount representing interest 14,414
__________
Present value of future minimum
lease payments 112,472
Less current portion 60,815
__________
Long-term obligations under capital lease $ 51,657
__________
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows:
June 30,
1999 1998
_______________________
Note payable, President and principal
stockholder, interest at 8%, due in
installments through December 1998 $ -0- $ 39,496
Notes payable, Tot Care, Inc., Company
owned by the President and principal
stockholder, interest at 12% and payable
on demand 100,000 100,000
Note payable, President and principal
stockholder, interest at 12% payable
on demand 100,000 -0-
Notes payable, other related parties, interest
at 12% and payable on demand -0- 20,000
____________ _________
Total $200,000 $159,496
____________ _________
F-14
(25)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the accompanying
balance sheets:
Year Ended
June 30,
1999 l998
________________________
Temporary differences attributable to:
Allowance for doubtful accounts $1,546,000 $1,315,000
Facility Closing Costs 198,000 85,000
Depreciation 237,000 225,000
Other 86,000 2,000
Operating loss carryforward 1,542,000 1,650,000
_________ __________
Total deferred tax asset 3,609,000 3,277,000
Less:
Valuation allowance (2,995,000) (2,607,000)
_________ __________
Subtotal 614,000 670,000
Current portion (459,300) (515,300)
_________ __________
Long-term portion $ 154,700 $ 154,700
_________ __________
The Company had no deferred tax liabilities at June 30, 1999 and 1998.
Income tax expense is as follows:
Year Ended
June 30,
1999 l998
________________________
Current state income taxes $ 59,434 $219,239
_________ __________
Reconciliations of the statutory U.S. Federal income taxes based on a rate of
34% to actual income taxes is as follows:
Year Ended
June 30,
1999 l998
________________________
Income tax benefit at statutory
rate $ (440,200) $(2,044,400)
State income taxes, net of federal
benefit 39,000 144,700
Increase in valuation allowance 388,000 1,780,000
Increase due to nondeductible items,
primarily penalties and travel
and entertainment expenses 37,000 161,231
Other 35,634 177,708
_________ __________
$ 59,434 $ 219,239
_________ __________
At June 30,1999 the Company had a net operating loss carryforward amounting to
approximately $4,500,000 which expires at various dates through 2019.
If the Company has significant sales of stock in future years, the utilization
of the net operating loss carryforward in any given year may be limited under
provisions of the Internal Revenue Code.
F-15
(26)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE F - INCOME TAXES (CONTINUED)
The Company anticipates that it will have sufficient taxable income in future
fiscal years to realize its net deferred tax assets existing as of June 30,
1999. The Company has closed two facilities that contributed the most
significantly to its past losses, the Franvale Nursing and Rehabilitation Center
and the Good Hope Center. The Company has also implemented procedures to improve
the operating efficiency of its remaining centers. The Company also anticipates
that it will have a substantial gain on the closing of its Franvale facility of
over $2,000,000 (see Note I).
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 31, 2004. Rent
expense for the years ended June 30, 1999 and 1998 was approximately $784,000
and $882,000, respectively. Rent expense includes certain short term rentals
and, in 1998, additional rent expense associated with the closing of Good Hope
Center. Minimum future rental payments under noncancelable operating leases,
having remaining terms in excess of one year as of June 30, 1999 are as follows:
Year Ending
June 30, Amount
___________ ______
2000 $ 606,854
2001 562,243
2002 552,339
2003 504,989
2004 562,320
Thereafter 14,584
_________
$ 2,803,329
Litigation and contingency:
In connection with the liquidation of Franvale, some vendors allege that there
are amounts due for services which are the obligation of PHC, Inc. At June 30,
1999 total claims pending amounted to approximately $67,000.
In September 1998, the Company and Franvale were each served with subpoenas in
connection with an on-going investigation of Franvale being conducted by the
Attorney General of the Commonwealth of Massachusetts. The focus is the quality
of patient care provided by Franvale during the period of early 1997 until the
facility was placed into receivership in June 1998. The Company is cooperating
fully with the investigation and currently is engaged in producing documents
requested in the subpoenas. The Company does not believe that it has violated
any laws and does not believe that any monetary payments required in connection
with this matter will be material to the financial position or results of
operations of the Company.
In addition, the Commonwealth of Massachusetts may institute a claim against
PHC, Inc. to recover expenses incurred as a consequence of Franvale's
receivership. The Company believes that it has valid defenses to any such claim
and, in any event, it believes that there will be adequate assets remaining in
Franvale to satisfy any receivership expenses.
F-16
(27)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
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 1,000,000
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 of the Board of Directors 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 150,000
shares may be issued under this plan.
The non-employee directors' stock option plan provides for the grant of
nonstatutory stock options automatically at the time of each annual meeting
of the Board. Through June 30, 1999, options for 23,500 shares were granted
under this plan. A maximum of 50,000 shares may be issued under this plan.
Each outside director is granted an option to purchase 2,000 shares of
Class A common stock at fair market value on the date of grant, 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. In September 1998, all 21,875 options due to
expire, were extended for an additional five years. Also in September 1998,
all 183,875 shares underlying the then outstanding employee stock options
were repriced to the current market price, using the existing exercise
durations.
Under the above plans, at June 30, 1999, 601,580 shares were available for
future grant or purchase.
F-17
(28)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE H - STOCK PLANS (CONTINUED)
The Company had the following activity in its stock option plans for fiscal
1999 and 1998:
Number Weighted-Average
of Exercise Price
Shares Per Share
______ ________________
Option plans:
Balance - June 30, 1997 205,375 $4.27
Granted 210,000 $2.37
Cancelled (40,000) $3.21
Balance - June 30, 1998 375,375 $3.32
Granted 218,500 $1.21
Cancelled (71,000) $1.95
Repriced Options
Original (183,875) $2.96
Repriced 183,875 $1.25
Balance - June 30, 1999 522,875 $2.02
[2] Stock-based compensation:
Options for 252,000 shares are exercisable as of June 30, 1999 at exercise
prices ranging from $1.03 to $6.63 and a weighted-average exercise price of
approximately $3.08 per share, with a weighted-average remaining
contractual life of approximately three years.
The exercise prices of options outstanding at June 30, 1999 range from
$1.03 to $6.63 per share and have a weighted-average exercise price of
approximately $2.02 per share, with a weighted-average remaining
contractual life of approximately four years.
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 1999 or 1998. 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,
loss per share would have been changed to the pro forma amounts indicated
below:
F-18
(29)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE H - STOCK PLANS (CONTINUED)
Year Ended
June 30,
1999 1998
__________________
Loss applicable As reported
to common Continuing Operations $(1,496,196) $(4,366,603)
shareholders Discontinued Operations -- (2,220,296)
Pro forma
Continuing Operations (1,595,475) (4,494,930)
Discontinued Operations -- (2,220,296)
Loss per share As reported
Continuing Operations (.25) (.84)
Discontinued Operations -- (.42)
Pro forma
Continuing Operations (.27) (.86)
Discontinued Operations -- (.42)
The fair value of the Company's stock options used to compute pro forma loss and
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 1999 and 1998: dividend yield of 0%; expected volatility of 30%;
a risk-free interest rate of 6.5%; 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, 1999 and 1998 was $.48 and $.87, respectively.
NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS
On May 26, 1998, PHC, Inc.'s wholly owned subsidiary, Quality Care, which
operates Franvale filed for reorganization under Chapter 11. On May 29, 1998,
the Bankruptcy Court terminated the Chapter 11 proceeding determining that there
was no likelihood of reorganization since the prospective acquirer of the
facility was now imposing certain terms unacceptable to all interested parties
and that the transfer of patients and liquidation of assets could be as readily
effectuated in a state court receivership under the aegis of the Massachusetts
Health Care Statutes and accordingly dismissed the Chapter 11 case. On June 1,
1998, a receiver was appointed to transfer the patients and close the facility
expeditiously. The Company has recorded the losses of Franvale through May 31,
1998 in the accompanying financial statements.
The Company's Bankruptcy Attorney was notified that effective September 30, 1998
the patient care receivership for Quality Care had been terminated. On October
5, 1998, in response to the termination of the State Receivership, the Company
filed for protection under Chapter 7.
F-19
(30)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS (CONTINUED)
Although the full extent of the financial impact on PHC, Inc. cannot be
determined at this time, the management of PHC, Inc. does not believe that the
liquidation of the assets and liabilities of Quality Care will have a
substantial negative impact on PHC's financial position or the results of
operations. The Company is subject to a guarantee signed by PHC, Inc. for
furniture and equipment purchased by Quality Care during the fiscal year ended
June 30, 1996. The amount of this debt recorded by Quality Care in the
accompanying financial statements is approximately $150,000. The liquidation of
the assets and liabilities of Franvale may result in a non-cash financial
statement gain of approximately $2,000,000. In the quarter ended December 31,
1998 the company was relieved of the HUD mortgage of approximately $6,741,000
and surrendered the underlying assets amounting to approximately $4,329,000. The
recognition of the gain has been deferred until final resolution of all
contingent liabilities. As of June 30, 1999 the Company paid approximately
$220,000 in costs related to record transfer and litigation surrounding the
close of Franvale. This total deferred amount and any litigation settlements or
other related costs will be offset against the Quality Care Centers of
Massachusetts, Inc. gain when recognized.
NOTE J - 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, 1999:
<TABLE>
<S> <C> <C> <C> <C>
DATE OF NUMBER OF EXERCISE EXPIRATION
ISSUANCE DESCRIPTION SHARES PRICE DATE
03/10/1994 IPO Warrants
Equity transaction 1,792,862 shares $5.90 per share March 2000
02/08/1996 Private Placement warrants with
common stock issuance
Equity transaction 746,662 shares $3.71 per share January 2001
02/27/1996 Warrants issued with the exercise of
Bridge warrants
Equity transaction 37,002 shares $6.94 per share February 2001
11/01/1996 Warrant for debt placement service
$125,000 value charged to interest
expense over term of debt 25,000 shares $2.00 per share October 2001
02/18/1997 Warrant for investor relation services
$1,210 value passed as an adjustment 3,559 shares $2.95 per share February 2002
03/03/1997 Consultant warrant for investor relations
$16,306 value passed as an adjustment 40,000 shares $2.62 per share March 2002
09/17/1998 Consultant warrant for investor
$12,776 value passed as an adjustment 40,000 shares $2.00 per share March 2002
03/31/1997 Warrants issued as registration penalty
on Convertible Denbeture $46,375
value charged to interest expense
over term of debentures 150,000 shares $2.00 per share March 2002
06/04/1997 Warrants issued with preferred stock
placement Equity transaction 50,000 shares $2.75 per share June 2000
06/01/1997 Warrants issued for investment banker
services $193,748 value charged to
professional fees 150,000 shares $2.50 per share May 2002
09/19/1997 Private Placement warrants with common
stock issuance
Equity transaction 86,207 shares $2.90 per share Sept 2002
03/10/1998 Warrants issued as a penalty for late
registration of private placement shares
Equity transaction 3,000 shares $2.90 per share March 2003
03/10/1998 Warrants issued as additional interest
on debt $48,809 value charged
to interest expense
over term of loan 52,500 shares $2.38 per share March 2003
03/19/1998 Warrants issued with preferred stock
private placement
Equity transaction 49,990 shares $2.31 per share March 2001
F-20
(31)
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
DATE OF NUMBER OF EXERCISE EXPIRATION
ISSUANCE DESCRIPTION SHARES PRICE DATE
07/10/1998 Warrants issued with extension of debt
$28,740 value charged to interest
expense over term of loan 52,500 shares $1.81 per share July 2003
07/10/1998 Warrants issued with extension
of debt as price guarantee
$14,779 value charged to interest
expense over term of loan 20,000 shares $1.50 per share July 2003
12/31/1998 Warrants issued with convertible
debenture
$9,240 value charged to professional
fees over term of debenture 25,000 shares $1.00 per share Dec 2004
12/31/1998 Warrants issued for convertible
debentures finders fee
$25,873 value charged to professional
fees over term of debenture 60,000 shares $1.00 per share Dec 2003
12/31/1998 Warrants issued for convertible
debentures finders fee
$3,696 value charged to professional
fees over term of debenture 10,000 shares $2.00 per share Dec 2003
12/31/1998 Warrants issued for convertible
debentures finders fee
$3,246 value charged to professional
fees over term of debenture 15,000 shares $1.50 per share Dec 2003
12/01/1998 Warrants issued for convertible
debentures finders fee
$1,302 value charged to professional
fees over term of debenture 10,000 shares $1.00 per share Dec 2003
01/01/1999 Warrants issued for convertible
debentures finders fee
$3,696 value charged to professional
fees over term of debenture 10,000 shares $1.00 per share Jan 2004
02/01/1999 Warrants issued for convertible
debentures finders fee
$3,696 value charged to professional
fees over term of debenture 10,000 shares $1.00 per share Feb 2004
03/01/1999 Warrants issued for convertible
debentures finders fee
$3,696 value charged to professional
fees over term of debenture 10,000 shares $1.00 per share March 2004
04/01/1999 Warrants issued for convertible
debentures finders fee
$3,696 value charged to professional
fees over term of debenture 10,000 shares $1.00 per share Apr 2004
05/01/1999 Warrants issued for convertible
debentures finders fee
$3,696 value charged to professional
fees over term of debenture 10,000 shares $1.00 per share May 2004
06/01/1999 Warrants issued for convertible
debentures finders fee
$3,696 value charged to professional
fees over term of debenture 10,000 shares $1.00 per share Jun 2004
01/05/1999 Warrants for investment banker services
$18,100 value charged to professional
fees over service period 37,500 shares $1.45 per share Jan 2004
04/05/1999 Warrants for investment banker services
$18,100 value charged to professional
fees over service period 37,500 shares $1.45 per share Apr 2004
02/23/1999 Consultant warrant for investor relations
$1,307 value charged to professional
fees 3,000 shares $1.20 per share Feb 2004
04/21/1999 Consultant warrant for web site
development services
$1,547 value charged to professional
fees 5,000 shares $1.00 per share Apr 2004
05/18/1999 Consultant warrant for web site
advisory services
$1,848 value charged to professional
fees 5,000 shares $1.00 per share Apr 2004
04/21/1999 Warrant issued for management
consultant services
$1,547 value charged to professional
fees 5,000 shares $1.00 per share Apr 2004
05/18/1999 Warrant issued for management consultant
services
$370 value charged to professional
fees 1,000 shares $1.00 per share May 2004
</TABLE>
Warrants issued for services or in connection with debt are valued at fair
value at grant date using the Black-Scholes pricing model and charged to
operations consistent with the underlying reason the warrants were issued.
Charges to operations in connection with these warrants amounted to
approximately $160,000 and $233,000 in fiscal 1999 and 1998 respectively.
In September 1997, the Company received $500,000 in exchange for 172,414
unregistered shares of PHC, Inc. class A common stock and warrants to
purchase 86,207 additional shares of PHC, Inc. class A common stock for
$2.90 per share in a private placement. The agreement required that the
shares be registered within 90 days of closing date of the private
placement. The registration was not complete by the deadline therefore the
Company was required to issue warrants to purchase 3,000 additional shares
at $2.90 per share.
F-21
(32)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
In February 1998, the Company received $950,000 in exchange for the issuance of
Series B convertible preferred stock and warrants to purchase 49,990 shares of
Class A common stock. The warrants are exercisable at $2.31 per share and expire
in 2001. 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 which resulted in a deemed dividend of $190,000 in
fiscal 1998. 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. For the year ended June 30, 1999 and 1998 dividends
amounted to $ 142,110 and $17,060 respectively. During the fiscal year ended
June 30, 1999 the Company issued 53 shares of series B preferred stock in
payment of dividends in lieu of cash. The series B convertible preferred stock
agreement carries with it a $2.00 minimum conversion price guarantee. If the
actual computed conversion price is lower than the minimum conversion price, the
Company was originally required to issue a promissory note for the difference
between the market value of the shares to be issued at the conversion price and
at the minimum conversion price. Subsequent to the issuance of the preferred
stock, the Company obtained the right to issue either shares of common stock or
promissory notes for the "price guarantee" differential.
In December 1998, the Company issued $500,000 in 12% convertible debentures to
private investors. These debentures require quarterly interest payments and are
convertible in $1,000 increments for 500 shares of PHC, Inc. class A common
stock. In conjunction with this debt placement the Company has issued or agreed
to issue warrants to purchase 10,000 shares of PHC, Inc. class A common stock at
$2.00 per share, 15,000 shares of PHC, Inc. class A common stock at $1.50 per
share and 175,000 shares of PHC, Inc. class A common stock at $1.00 per share.
On March 26, 1998 the Company issued 227,347 shares of the Company's Class A
Common Stock to the former owners of Behavioral Stress Centers, Inc. now BSC-NY,
Inc. in full payment for the earn-out due to be paid to them for the year ended
October 31, 1997 resulting in additional goodwill. Of the 227,347 shares issued
127,924 were issued in lieu of cash and were subject to a price guarantee of
$2.35, payable in shares. Under the price guarantee the Company issued an
additional 304,097 shares of Common Stock in the quarter ended December 31,
1998. The value of the guarantee shares issued was recorded as interest expense.
Under existing dilution agreements with other stockholders the issuance of
common stock under agreements other than the employee stock purchase and option
plans will increase the number of shares issuable and decrease the exercise
price of certain of the above warrant agreements based on the difference between
the then current market price and the price at which the new common stock is
being issued. The dilutive effect of transactions through June 30, 1999 are
reflected in the table above.
During fiscal 1998, 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.
F-22
(33)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE K - ACQUISITIONS
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.
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. During fiscal 1998 in connection with the asset purchase
agreement, the Company issued 15,000 unregistered shares of Class A common stock
which was accounted for as additional purchase price.
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 advanced 150,000
shares of PHC, Inc. Class A common stock and funds to Shliselberg Physician
Services, P.C., formerly Perlow Physicians, P.C., ("Shliselberg"), which were in
turn issued to the former owners of Behavioral Stress Centers, Inc. to acquire
the assets of the medical practices previously serviced by BSC. At June 30, 1999
Shliselberg owed the Company $3,690,113 which includes some acquisition costs,
management fees, working capital advances and interest on the advances net of
repayments. Total interest charged to Shliselberg by the Company was $305,121
and $378,768 for the years ended June 30, 1998 and 1999 respectively. The
Company expects these amounts to be paid in full; however, in consideration of
the period of time expected for repayment, the lack of profitability at
Shliselberg in prior years and the changing healthcare environment, the Company
established judgmental reserves related to these receivables. During fiscal 1998
the Company established a reserve against this receivable in the amount of
$382,000. The Company increased the reserve to $782,000 in the fiscal year ended
June 30, 1999. It is expected that collections will be received over the next
several years and accordingly, these amounts have been classified as noncurrent
related party receivables on the Company's balance sheet. The Company has no
ownership interest in Shliselberg.
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. On March 26, 1998 the Company issued 227,347
shares of the Company's Class A Common Stock to the former owners of Behavioral
Stress Centers, Inc. now BSC-NY, Inc. in full payment for the earn-out due to be
paid to them for the year ended October 31, 1997 resulting in additional
goodwill. Of the 227,347 shares issued 127,924 were issued in lieu of cash and
were subject to a price guarantee of $2.35, payable in shares. Under the price
guarantee the Company issued an additional 304,097 shares of Common Stock in the
fiscal year ended June 30, 1999. The value of the guarantee shares issued was
recorded as interest expense.
F-23
(34)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE K - ACQUISITIONS (CONTINUED)
BSC also entered into a management agreement with Shliselberg whereby management
fees are required of Shliselberg on a monthly basis over a five-year period with
an automatic renewal for an additional five-year period. The management fee was
calculated at 25% of the total monthly expenses of Shliselberg and effective
January 1, 1998 the management agreement was amended to provide for a management
fee of 20% of the total monthly expenses of Shliselberg. In November 1998 the
management fee was further reduced to 18% of the total monthly expenses of
Shliselberg.
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 Shliselberg in accordance with the management agreement.
Summary, unaudited financial information for Shliselberg as of and for the year
ended June 30, 1999 is as follows:
Total assets $ 3,580,000
Stockholder's deficit $ (782,000)
Net revenue $ 2,930,000
Net loss $ (400,349)
Effective 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 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.
F-24
(35)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE K - ACQUISITIONS (CONTINUED)
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 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.
On October 1, 1997 PCV purchased the assets of a clinic located in Blacksburg,
Virginia in exchange for $50,000 in cash and 26,024 shares of Class A Common
Stock. The company entered into a lease with the former owners for the clinic
property and an employment agreement with one of the owners.
In accordance with the above agreements the purchase price was allocated as
follows:
Fixed Assets 10,000
Covenant not to compete 50,000
Goodwill 38,632
_________
$ 98,632
_________
During fiscal 1998 the Company consolidated the operations of the Blacksburg
clinic with the Salem, Virginia clinic to enhance profitability. The closure of
the Blacksburg clinic, including the write down of related assets and buy out of
the lease, is reflected in the June 30, 1998 financial statements.
During fiscal 1999 the Company decided to close the remaining Pioneer Counseling
of Virginia clinic located in Salem, Virginia. Since the Company was required by
contract to give 30-days notice to contract therapists before closing the
clinic, in January 1999 the Company closed its 80% owned outpatient operations
in Virginia, Pioneer Counseling of Virginia, Inc. The Company sold this
business, excluding accounts receivable and most fixed assets, to the minority
owners in exchange for their shares of stock in Pioneer Counseling of Virginia,
Inc. approximately $25,000, release from the first mortgage on the property of
approximately $506,000 and release from notes payable to the minority owners of
$20,000. The closure of this clinic resulted in a loss of approximately $300,000
which was charged to administrative expenses in the accompanying statement of
operations.
Information is not available to present pro forma financial information relating
to the October 1997 acquisition. The Company so advised the Securities and
Exchange Commission and received a no action letter with respect to this matter.
Had the Blacksburg acquisition made during the fiscal year ended June 30, 1998
(October 1, 1997), been made as of July 1, 1997, the pro forma effect on the
Company's results of operations would have been immaterial and therefore are not
shown.
F-25
(36)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE L - SALE OF RECEIVABLES
The Company had a sale and purchase agreement whereby third-party receivables
were sold at a discount with recourse. In February 1998 the Company entered into
a finance agreement with Healthcare Financial Partners, Inc. to provide for
receivables funding and liquidate the debt due to the above referenced sale and
purchase agreement and provide receivables funding for PHC of Virginia, Inc.,
PHC of Rhode Island, Inc. and Pioneer Counseling of Virginia, Inc.
NOTE M - FOURTH QUARTER ADJUSTMENTS
The Company recorded significant adjustments in the fourth quarter of fiscal
1998 related to the closure of Good Hope Center, the write down of receivables
of the closed California facility, the write down of the amount due BSC from
Shliselberg, the closure of the Blacksburg facility and an increase in accounts
receivable reserves of the other facilities.
In the quarter ended December 31, 1998 the Company recognized a gain of
approximately $1,100,000 in its form 10-QSB related to the liquidation of the
assets and liabilities of Franvale (See Note I). The Company subsequently
determined that it was more appropriate to defer recognition of any gain until
final resolution of all potential liabilities. Accordingly, the Company will
amend its December 31, 1998 10-QSB to reverse recognition of this gain in fiscal
1999.
The Company wrote-down the amount due BSC from Shliselberg by approximately
$368,000 in the fourth quarter of fiscal 1999 due to slow collections at
Shliselberg.
NOTE N - EVENTS SUBSEQUENT TO JUNE 30, 1999
On July 1, 1999 the Company issued warrants to purchase 10,000 shares of PHC,
Inc. Class A Common Stock, exercisable at $1.00 per share, to George H. Gordon
as part of the December 1998 private placement agreement.
On July 5, 1999 the Company issued warrants to purchase 37,500 shares of PHC,
Inc. Class A Common Stock, exercisable at $1.45 per share, to National
Securities Corporation as part of a service agreement.
On August 1, 1999 the Company issued warrants to purchase 10,000 shares of PHC,
Inc. Class A Common Stock, exercisable at $1.00 per share, to George H. Gordon
as part of the December 1998 private placement agreement.
On August 11, 1999 the Company borrowed approximately $310,000 from Heller
Healthcare Finance, Inc. f/k/a HCFP Funding, Inc. through an extension of the
February 18, 1998 Loan and Security Agreement.
F-26
(37)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE O - BUSINESS SEGMENT INFORMATION
The Company's nine operating business units have separate management teams and
infrastructures that offer behavioral health treatment through different
delivery systems. PHC of Michigan, Inc. ("PHM") provides inpatient and
outpatient psychiatric care. PHC of Utah, Inc. ("PHU") provides inpatient and
outpatient treatment of addictive disorders and chemical dependency. PHC of
Nevada, Inc. ("PHN") provides psychiatric treatment on an outpatient basis
through fee for service and capitated rate contracts with employers and
insurance carriers. North Point Pioneer, Inc. ("NPP") operates four outpatient
behavioral health centers under the name of Pioneer Counseling Centers. PHC of
Virginia, Inc. ("PHV") provides inpatient and outpatient treatment of addictive
disorders and chemical dependency. Behavioral Stress Centers, Inc. ("BSC")
provides management and administrative services to psychotherapy and
psychological practices. PHC of Kansas, Inc. ("PHK") provides psychiatric
treatment on an outpatient basis. Behavioral Health Online, Inc. ("BHO")
provides behavioral health information and education through its web site. PHC,
Inc. ("PHC"), the parent Company, operates primarily as a management and holding
company for its subsidiaries and, through PDSS, provides clinical support,
referrals management and professional services for a number of the Company's
national contracts. As allowed by Statement of Financial Accounting Standards
131, PHM, PHU, PHN, NPP, PHV, BSC and PHK have been aggregated. None of the
other operating units of the Company exceed the quantitative thresholds of the
Standard for separately reporting segment information. Accordingly the following
information is presented as required by SFAS 131:
Aggregated Segmemts All Others Total
__________________________________________________________
1999
Revenues $17,569,171 $1,570,325 $19,139,496
Segment profit
(loss) (1,541,087) 187,001 (1,354,086)
Total assets 13,575,413 1,452,021 15,027,434
Capital expenditures 101,384 13,870 115,254
Depreciation &
Amortization 257,143 68,621 325,764
1998
Revenues $18,056,015 $3,190,174 $21,246,189
Segment profit
(loss) (2,054,601) (2,104,942) (4,159,543)
Total assets 13,966,730 2,985,620 16,952,350
Capital expenditures 198,930 13,562 212,492
Depreciation &
Amortization 294,305 379,857 674,162
F-27
(38)
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE P - RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its financial statements as of June 30, 1998 and for
the year then ended. The restatement related to the Company's accounting for a
beneficial conversion feature of a preferred stock issuance and the amortization
of the value of warrants issued to a financial advisor. The Company has
determined that the beneficial conversion feature, amounting to $190,000, should
have been recorded in the 1998 financial statements as a dividend. The Company
also determined that the value of the warrants issued to the financial advisor
should have been fully amortized in 1998, resulting in an additional expense in
1998 of $147,618. The table below reflects the impact of the restatement.
AS REPORTED AS RESTATED
Loss from continuing
operations $(4,011,925) $(4,159,543)
Loss from discontinued
operations (2,220,296) (2.220.296)
_____________ ____________
Loss (6,232,221) (6,379,839)
Dividends ( 17,060) ( 207,060)
_____________ ____________
Loss applicable to
common shareholders $(6,249,281) $(6,586,899)
_____________ ____________
Basic and diluted loss
per common share:
Continuing operations $ (0.77) $ (0.84)
Discontinued operations (0.42) (0.42)
Total $ (1.19) $ (1.26)
F-28
(39)
<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 on its behalf by the
undersigned, thereunto duly authorized.
PHC, INC.
Date: November 29, 1999 /s/ Bruce A. Shear
as amended President, Chief Executive Officer and
Director, (principal executive officer)
