U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 [FEE REQUIRED] for the fiscal year ended June 30, 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: 0-23524
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)
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
<PAGE>
The Consolidated Statement of Changes in Stockholders' Equity at page F-5
of the Company's report on Form 10-KSB for the fiscal year ended June 30, 1999
is hereby replaced by the same report attached and incorporated by referenced.
The Company's Form 10-KSB reflected the Treasury Shares Amount as of June 30,
1999 at ($2,122), the correct ending balance of this account as of June 30, 1999
is ($12,122).
<PAGE>
ITEM 7: FINANCIAL STATEMENTS
Independent auditors' report F-2
Consolidated balance sheets F-3
Consolidated statements of operations 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
<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
<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
Deferred Gain (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
<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
<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>
<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
<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
<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
<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 are recorded at
established billing rates or at the amount realizable under agreements with
third-party payors, including Medicaid and Medicare. Revenues under third-party
payor agreements are subject to examination and adjustment, and amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
accrued and subsequent settlements are recorded in operations in the year of
settlement.
F-8
<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)
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.
Charity care amounted to approximately $242,000 and $504,000 for the years ended
June 30, 1999 and 1998, respectively, and is classified as patient care revenue
and an equal amount of cost is charged to patient care expenses in the
statements of operations.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:
Assets Estimated 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
<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.
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 the
Salem, Virginia.
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.
F-10
<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)
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.
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.
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
___________ ___________
F-11
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
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 interest only payments
through March 1998 principal due in monthly
installments of $9,167 beginning April 1998
through February 2001. A balloon payment of
approximately $1,300,000 plus interest 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
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
<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 $500,000 in 12% convertible debentures to
private investors. These debentures are convertible in $1,000 increments for 500
shares of PHC, Inc. Class A Common Stock and expire December 2, 2004.
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
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% 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
<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 1998
____ ____
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 1998
____ ____
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 1998
____ ____
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
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
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.
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.
F-16
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE H - STOCK PLANS (CONTINUED)
[1] Stock plans: (continued)
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
<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:
Weighted-
Number 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
<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.
F-19
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
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.
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.
F-20
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
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:
Number of Exercise Expiration
Description Shares Price Date
______________
IPO warrants 1,792,862 shares $5.90 per share March 2000
Private placement warrants 746,662 shares $3.71 per share January 2001
Bridge warrants 37,002 shares $6.94 per share February 2001
Warrant for services 25,000 shares $2.00 per share October 2001
Warrant for services 3,559 shares $2.95 per share February 2002
Consultant warrant 80,000 shares $2.62 per share March 2002
Convertible debenture warrants 150,000 shares $2.00 per share March 2002
Preferred stock warrant 50,000 shares $2.75 per share June 2000
Warrant for services 150,000 shares $2.50 per share May 2002
Private Placement 86,207 shares $2.90 per share Sept 2002
Private Placement 3,000 shares $2.90 per share March 2003
Debt Service 52,500 shares $2.38 per share March 2003
Private Placement 49,990 shares $2.31 per share March 2001
Debt Service 52,500 shares $1.82 per share July 2003
Debt Service 20,000 shares $1.50 per share July 2003
Private Placement 25,000 shares $1.00 per share Dec 2004
Private Placement 60,000 shares $1.00 per share Dec 2003
Private Placement 10,000 shares $2.00 per share Dec 2003
Private Placement 15,000 shares $1.50 per share Dec 2003
Private Placement 10,000 shares $1.00 per share Dec 2003
Private Placement 10,000 shares $1.00 per share Jan 2004
Private Placement 10,000 shares $1.00 per share Jan 2004
Private Placement 10,000 shares $1.00 per share Feb 2004
Private Placement 10,000 shares $1.00 per share March 2004
Private Placement 10,000 shares $1.00 per share April 2004
Private Placement 10,000 shares $1.00 per share May 2004
Private Placement 10,000 shares $1.00 per share June 2004
Warrant for Services 37,500 shares $1.45 per share Jan 2004
Warrant for Services 37,500 shares $1.45 per share Apr 2004
Warrant for Services 3,000 shares $1.20 per share Feb 2004
Warrant for Services 5,000 shares $1.00 per share April 2004
Warrant for Services 5,000 shares $1.00 per share April 2004
Warrant for Services 5,000 shares $1.00 per share April 2004
Warrant for Services 1,000 shares $1.00 per share May 2004
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 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.
F-21
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
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.
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 issued 150,000
shares of PHC, Inc. Class A common stock to the former owners of Behavioral
Stress Centers, Inc. Also, in connection with the merger, another entity was
formed, Shliselberg Physician Services, P.C. formerly Perlow Physicians, P.C.
("Shliselberg"), to acquire the assets of the medical practices theretofore
serviced by BSC. The Company advanced Shliselberg the funds to acquire those
assets and at June 30, 1999 Shliselberg owed the Company $3,690,113 which
includes in addition to acquisition costs, management fees of approximately
$1,657,500 and interest on the advances of approximately $576,300. 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.
The Company has no ownership interest in Shliselberg.
F-22
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1999 and 1998
NOTE K - ACQUISITIONS (CONTINUED)
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.
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-23
<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-24
<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 reversed recognition of this gain in
fiscal 1999.
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.
NOTE O - BUSINESS SEGMENT INFORMATION
The Company's operations are conducted in one business segment, the operation of
behavioral health treatment centers. All of the Company's operations are in the
United States.
F-25
<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-26
<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: October 20, 1999 By: /s/ Bruce A. Shear, President and
Chief Executive Officer
