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, 1998
[ ] 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)
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.
The issuer's revenues for the fiscal year ended June 30, 1998 were $ 21,246,189.
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, 1998, was $4,615,671. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At September 15, 1998, 4,935,267 shares of the issuer's Class A Common Stock and
727,328 shares of the issuer's Class B Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
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<PAGE>
This amendment to the Company's report on form 10-KSB for the year ended
June 30, 1998 filed with the Securities and Exchange Commission on October 13,
1998, is being filed to reflect the following information:
1. Item 3. Legal Proceedings expanded to include detail previously reported
under "Closed and Discontinued operations-Franvale".
2. Item 6. Management Discussion and Analysis or Plan of Operation expanded to
included the changes in the restatement of the financial statements.
3. Item 7. Financial Statements restated to include:
a. To dual date auditors' report to include information related to QCC as
of October 5, 1998 and reflected in Note I.
b. An additional expense of approximately $148,000 for warrants issued in
lieu of cash for investor relations services.
c. Dividends of $190,000 charged to retained earnings for the beneficial
conversion feature of the series B convertible preferred stock.
d. Expanded footnote A to the financial statements relating to business
segment reporting.
e. Expanded footnote J to the financial statements relating to equity
transactions
4. Item 11. Security Ownership of Certain Beneficial Owners and Management to
include an additional 5% owner previously omitted.
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<PAGE>
PART I
ITEM 3. LEGAL PROCEEDINGS.
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. While the investigation
apparently is in a preliminary phase, the focus appears to be 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.
The Company has been named as a defendant in a proceeding captioned
HEALTHCARE SERVICES GROUP, INC. V .QUALITY CARE CENTERS OF MASSACHUSETTS, INC.
AND PHC, INC., C.A. No. 98-132 (Sup. Ct., Suffolk Co., MA). The plaintiff, a
supplier of housekeeping and laundry services to Franvale, recently filed a
motion to add the Company as a party defendant. The plaintiff has alleged two
causes of action against the Company in the Substitute First Amended Complaint.
In Count III (Accord and Satisfaction), Plaintiff seeks $51,845.61 for the
Company's alleged breach of an agreement to pay plaintiff the money owed to it
by Franvale. In Count IV (Guaranty), plaintiff alleges that the Company agreed
to pay Franvale's debt but did not do so and plaintiff seeks a judgment of
$67,412.60. The Court has not yet ruled on the plaintiff's motion to add the
Company as a defendant and the Company has not been formally served with
process. If the Company is joined as a defendant, it intends vigorously to
contest the plaintiff's claims. At this time it is not possible to evaluate the
likelihood of an unfavorable outcome or to predict the Company's potential loss.
Based on the AD DAMNUM clause of the Substitute First Amended Complaint, the
maximum potential loss to the Company is alleged to be $67,412.60, plus costs
and interest from the date of demand.
The Company has been named as a defendant in a proceeding captioned THE
HARTFORD PROVISION COMPANY V. PHC, INC., Civil Action No. 9886 CV 0395 (District
Court Department of the Trial Court, Peabody Division, Mass.). Hartford alleges
that it provided food products and other goods to Franvale pursuant to the
Company's Credit Application and Guaranty Agreement. Hartford claims that
Franvale has a balance due and owing of $25,579.16. Count I alleges breach of
contract and Count II alleges violation of G. L. c. 93A, Massachusetts' unfair
and deceptive trade practices act. The Company filed a Motion to Dismiss Count
II for failure to allege anything other than a simple breach of contract action.
With regard to Count I, Hartford has thus far been unable to produce the written
contract with the Company's signature on it, as they allege. The Company denies
any liability and asserts that the goods were provided to Franvale and that the
Company never signed any Credit Application and it intends to vigorously contest
Plaintiff's claims.
Although the results of these litigations cannot be estimated at this time,
the Company does not believe that any monetary payments will be material to the
financial position or results of operations of the Company.
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<PAGE>
PART II
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, 1998 and 1997.
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.
OVERVIEW
The Company presently provides health care services through two substance
abuse treatment centers, a psychiatric hospital and nine outpatient psychiatric
centers (collectively called "treatment facilities"). The profitability of the
Company is largely dependent on the level of patient census 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 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.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
The Company experienced a significant loss for fiscal year ended June 30,
1998 including increased expenses incurred related to the closure and buy out of
the lease at PHC of Rhode Island, Inc., approximately $500,000, the final
write-down of receivables of the California facility, approximately $100,000,
the write down of approximately 10% of the amount due to BSC-NY, Inc.,
approximately $380,000, from the related Professional Corporation due to cash
flow problems and slow collections, an additional increase in reserve for bad
debts excluding the above of approximately $950,000 and, although the actual
closure of the Blacksburg, Virginia clinic happened subsequent to year end, the
effect of the closure and buy out of the lease of the Blacksburg Virginia
clinic, approximately $140,000, is also reflected in the June 30, 1998 financial
statements. Adjustments relating to the foregoing matters were primarily
recorded in the fourth quarter of fiscal 1998. There are also additional losses
for Franvale Nursing and Rehabilitation Center since the Company was unable to
complete the sale of the facility as originally planned when operations were
reported as discontinued (see `Business - Closed and Discontinued Operations -
Franvale' for additional details related to the sale of the facility).
The environment the Company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the Company recorded an increase in its accounts receivable
reserve in the year ended June 30, 1997 and has continued with a more stringent
reserve policy through the year ended June 30, 1998 including a significant
increase in reserve amounts during the fourth quarter of 1998. The company also
instituted a more aggressive collection policy in response to today's healthcare
environment, which has begun to produce results. 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. 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.
Total patient care revenue from all facilities, excluding Franvale which is
reported as discontinued operations, decreased 3% to $21,246,189 for the year
ended June 30, 1998 from $21,927,655 for the year ended June 30, 1997. This
decline in revenue is due primarily to a decline in census and closure of Good
Hope Center in Rhode Island. Net inpatient care revenue from psychiatric
services increased slightly to $13,640,801 for the fiscal year ended June 30,
1998 compared to $13,557,703 for the year ended June 30, 1997 and net outpatient
care revenue decreased 13.5% to $6,128,552 for the year ended June 30, 1998 from
$7,089,340 for the year ended June 30, 1997. Revenues from Practice Management
and Pioneer Development and Support Services ("PDSS") increased 15% to
$1,476,836 for the year ended June 30, 1998 from $1,280,613 for the year ended
June 30, 1997.
Total patient care expenses for all facilities excluding Franvale increased
3% to $10,706,639 for the year ended June 30, 1998 from $10,346,111 for the year
ended June 30, 1997. This increase in patient care expenses is largely a result
in increases in outpatient and capitated rate services provided which have a
higher percentage of total expenses related directly to patient care. Total
Administrative expenses for all facilities excluding Franvale increased 10% to
$9,488,631 for the year ended June 30, 1998 from $8,622,946 for the year ended
June 30, 1997. Approximately 40% of this increase is due to the accrual of
additional employee earned time benefits. During the fiscal year ended June 30,
1998 the Company changed its vacation/sick time policy to an earned time policy.
Prior to 1998 the company accrued vacation time but did not accrue sick time
since the Company was not obligated to pay sick time at termination of
employment. In fiscal 1998 the Company put in place an earned time policy which
provides for more days accrued per person with no distinction between vacation,
holiday or sick time. This created a greater potential liability for payment if
employment is terminated for any reason since federal law views earned time as
part of salary and due to the employee in full at termination. The Company
decided to adopt this more costly plan to improve employee morale and bring
benefits more in line with the Company's competition. Approximately 14% of this
increase is due to the costs related to the closing of the Blacksburg Clinic
primarily the write-off of intangible assets related to that clinic and
approximately 8% of this increase is due to additional accounting and legal cost
related to the registration of securities.
YEAR 2000 COMPLIANCE
The Company has contracted with its Information Systems Vendor to upgrade
its current accounts receivable software to accommodate a four digit year and
bill, track and age receivables accordingly. This software is expected to be
installed in test form by December 31, 1998. The Company has also contracted
with another company to provide case management software that is year 2000
compliant. This software has already been installed at Pioneer Development and
Support Services in Utah and is currently being modified to meet the needs of
Harmony Healthcare in Nevada. The Company has already upgraded Network software
at some locations and is currently upgrading hardware to accommodate the
software upgrade at all other locations. If the Company is unable to make
required changes prior to January 1, 2000 it will be required to change current
electronic billing to paper billing and insert the eight digit year on all paper
bills manually. Although this is a costly and time consuming process, it would
allow the company to continue processing claims.
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. As of
June 30, 1998 only 10% of vendors notified have responded to our requests. We
are sending second notices and will explore alternative sources if responses are
not received by fiscal year end June 30, 1999.
To date the Company has expended approximately $26,000 on items
relating to the year 2000 issues and anticipates approximately $150,000 in
additional expenses relating to the upgrade of Company's computer and telephone
systems.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the two fiscal years ended June 30, 1998, the Company met its cash flow
needs through accounts receivable financing and by issuing debt and equity
securities as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DATE TRANSACTION TYPE NUMBER OF PROCEEDS MATURITY TERMS STATUS
SHARES DATE
11/96 Warrant issued as
payment of commision 25,000 10/7/2001 $2.00 exercise outstanding
on Convertible price as
Debentures adjusted 7/97
issued for
services
11/96 Convertible Debentures $3,125,000 12/31/98 7% Interest Converted
per Yr. 8/97
2/97 Warrant issued in 3,000 2/18/2002 $2.80 per outstanding
exchange for investor $1.25 shares
relations services adjusted for
dilution issued
for services
3/97 Warrant issued in 160,000 3/31/2002 exercise price outstanding
exchange for investor $2.62 issued
relations services for services
3/97 Warrants issued as 150,000 3/31/2002 $2.00 exercise outstanding
registration penalty price issued as
on Convertible Debentures registration
penalty
5/97 Convertible Preferred 1,000 $1,000,000 05/31/99 6% Interest per Converted
Stock per Yr. 6/97 through
convertible 8/97
at 80% of 5
day average bid
price
6/97 Warrant issued in 50,000 06/04/2000 exercise price outstanding
conjuction with $2.75
the Private
Placement of
Convertible Preferred
Stock 5/97
9/97 Common Stock 172,414 $500,000 N/A Issued with Common
warrants at a Stock
3.3% discount Sold
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 $2.50
and financial
advisory services
12/97 Mortgage advance $500,000 10/31/2001 Prime Plus 5% outstanding
3/98 Warrant issued as a 3,000 03/10/2003 exercise price outstanding
penalty for late $2.90
registration of
Private Placement
Common Stock
3/98 Note Payable $350,000 11/10/98 Prime Plus 3.5% outstanding
as extended
3/98 Warrants issued 52,500 03/10/2003 exercise price outstanding
as additional $2.38
interest on 3/98
debt
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 per outstanding
Stock Yr. convertible
at 80% of 5
day average
bid price
3/98 Warrants issued 49,990 03/18/2001 exercise price outstanding
in connection with $2.31
the Private
Placement of
convertible
Preferred Stock
on 3/98
5/98 Note Payable - $50,000 on demand 12% annual outstanding
Related Party interst rate
6/98 Note Payable - $50,000 on demand 12% annual outstanding
Related Party interest rate
</TABLE> - 5 -
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DATE TRANSACTION TYPE NUMBER OF PROCEEDS MATURITY TERMS STATUS
SHARES DATE
7/98 Warrants issued 52,500 07/10/2003 exercise price outstanding
as additional $1.81
intrerest on
extension of 3/98
debt
7/98 Warrants issued 20,000 07/10/2003 exercise price
outstanding
as additional $1.81
intrerest on
extension of 3/98
debt
8/98 Warrants issued for 50,000 8/15/2001 exercise price outstanding
services $1.75
8/98 Note Payable - $100,000 on demand 12% annual outstanding
Related Party interest rate
</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 decreased 15.9% to $8,126,972 during the year ended June 30, 1998 from
$9,671,763 at June 30, 1997. This decrease in accounts receivable is primarily
due to the write off of uncollectable California receivables, the write down of
Good Hope Center accounts receivable with the close of the facility and the
overall increase in reserve for bad debts. The Company continues to closely
monitor its accounts receivable balances and implement procedures and policies,
including more aggressive collection techniques, to manage accounts receivable
growth and keep it consistent with growth in revenues. 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, 1998 was approximately $1,680,000.
The Company believes that it will meet future financing needs through the
accounts receivable funding to sustain existing operations for the foreseeable
future. The Company also intends to renew the expansion of its operations
through the acquisition or establishment of additional treatment facilities
after the close of Franvale is completed and the residual costs of Good Hope
Center are final. The Company's expansion plans will be dependent upon obtaining
adequate financing as opportunities arise.
The liquidation of the assets and liabilities of Franvale may result in a
non-cash financial statement gain of approximately $2,000,000 during the year
ending June 30, 1999.
ITEM 7. FINANCIAL STATEMENTS
Independent auditors' reports F-2, F3
Consolidated balance sheets F-4
Consolidated statements of operations F-5
Consolidated statements of changes in stockholders' equity F-6
Consolidated statements of cash flows F-7
Consolidated notes to financial statements F-8
F-1
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<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheet of PHC, Inc. and
subsidiaries as of June 30, 1998 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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, 1998 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Boston, Massachusetts
September 18, 1998
October 5, 1998 as to the subsidiary Quality Care Centers of Massachusetts, Inc.
Chapter 7 Bankruptcy filing. (See Note I)
F2
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<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheet of PHC, Inc. and
subsidiaries as of June 30, 1997 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of PHC,
Inc. and subsidiaries at June 30, 1997 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
September 19, 1997
F3
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<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30,
1998 1997
______________________
Current assets:
Cash and cash equivalents (Note A) $ 227,077 $ 844,471
Accounts receivable, net of allowance for
doubtful accounts of $3,488,029 at June
30, 1998 and $1,942,602 at June 30, 1997
(Notes A, L and M) 7,441,972 9,066,763
Prepaid expenses 156,695 346,091
Other receivables and advances 127,064 249,218
Deferred income tax asset (Note F) 515,300 515,300
Other receivables, related party (Note K) 64,065 80,000
___________ ___________
Total current assets 8,532,173 11,101,843
Accounts receivable, noncurrent 685,000 605,000
Other receivables, noncurrent, related party,
net of allowance for doubtful accounts of
$382,000 in 1998 (Note K) 2,941,402 2,983,177
Other receivables 426,195 134,284
Property and equipment, net (Notes A, B and D) 2,128,273 3,525,195
Deferred income tax asset (Note F) 154,700 154,700
Deferred financing costs, net of amortization
of $18,065 and $83,026 at June 30, 1998
and 1997 respectively 53,608 60,575
Goodwill, net of accumulated amortization of
$307,707 and $208,133 at June 30, 1998
and 1997, respectively (Note A) 2,011,613 1,644,252
Other assets (Note A) 19,386 214,150
___________ ___________
Total assets $ 16,952,350 $ 20,423,176
___________ ___________
LIABILITIES
Current liabilities:
Accounts payable $ 2,346,213 $ 2,529,126
Notes payable - related parties (Note E) 159,496 51,600
Current maturities of long-term debt (Note C) 1,107,167 560,914
Revolving credit note 1,683,458 1,789,971
Current portion of obligations under capital
leases (Note D) 67,492 97,038
Accrued payroll, payroll taxes and benefits 729,194 303,731
Accrued expenses and other liabilities 1,004,763 672,154
Net current liabilities of discontinued
operations (Note A and I) 2,641,537 334,349
___________ ___________
Total current liabilities 9,739,320 6,338,883
___________ ___________
Long-term debt, less current maturities
(Note C) 2,850,089 3,021,540
Obligations under capital leases (Note D) 93,747 1,434,816
Notes payable - related parties (Note E) -- 23,696
Convertible debentures ($3,125,000 less discount
$390,625) -- 2,734,375
Net long term liabilities of discontinued operations
(Note A and I) -- 1,145,285
___________ ___________
Total noncurrent liabilities 2,943,836 8,359,712
___________ ___________
Total liabilities 12,683,156 14,698,595
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, 950 and 500
shares issued and outstanding June 30, 1998
and June 30, 1997 respectively (liquidation
Preference $950,000) 10 5
Class A common stock, $.01 par value; 20,000,000
shares authorized, 4,935,267 and 2,877,836
shares issued June 30, 1998 and June 1997,
respectively 49,353 28,778
Class B common stock, $.01 par value; 2,000,000
shares authorized, 727,328 and 730,360
issued and outstanding June 30, 1998 and
1997, respectively, convertible into one share
of Class A Common Stock 7,273 7,304
Class C common stock, $.01 par value; 200,000
shares authorized, no shares outstanding
June 30, 1998 and 199,816 shaers issued and
outstanding June 30, 1997 -- 1,998
Additional paid-in capital 15,485,895 10,398,630
Treasury stock, 2,776 and 8,656 common shares
at cost June 30, 1998 and June 30, 1997,
respectively (12,122) (37,818)
Accumulated deficit (11,261,215) (4,674,316)
___________ __________
Total stockholders' equity 4,269,194 5,724,581
___________ ___________
Total liabilities and stockholders' equity $ 16,952,350 $ 20,423,176
SEE NOTES TO FINANCIAL STATEMENTS
F-4
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<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
1998 1997
______________________________
Revenues:
Patient care, net (Note A) $ 19,649,353 $ 20,700,616
Management fees (Note K) 833,750 597,278
Other 763,086 629,761
_____________ ____________
Total revenue 21,246,189 21,927,655
Operating expenses:
Patient care expenses 10,706,639 10,346,111
Cost of management contracts 467,065 324,440
Provision for doubtful accounts 3,684,452 2,593,573
Administrative expenses 9,488,631 8,622,946
_____________ ____________
Total operating expenses 24,346,787 21,887,070
_____________ ____________
Income (loss) from operations (3,100,598) 40,585
_____________ ____________
Other income (expense):
Interest income 391,353 199,976
Interest expense (1,289,642) (1,441,030)
Other income, net 58,583 490,019
Gain from operations held for sale
(Note I) -- 26,853
_____________ ____________
Total other expense, net (839,706) (724,182)
_____________ ____________
LOSS BEFORE INCOME TAXES (3,940,304) (683,597)
Income taxes (Note F) 219,239 197,311
_____________ ____________
LOSS FROM CONTINUING OPERATIONS (4,159,543) (880,908)
LOSS FROM DISCONTINUED OPERATIONS
(NOTES A AND I) (2,220,296) (1,958,756)
_____________ ____________
Net loss $ (6,379,839) $ (2,839,664)
Dividends (207,060) (204,330)
_____________ _____________
Loss applicable to common shareholders $(6,586,899) $(3,043,994)
Basic and Diluted Loss per common share:
Continuing Operations $ (.84) $ (.33)
Discontinued Operations (.42) (.60)
_____________ ____________
Total $ (1.26) $ (.93)
_____________ ____________
Basic and Diluted Weighted average number of
shares outstanding 5,237,168 3,270,175
See Notes to Financial Statements
F-5
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<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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, 1996 2,293,568 $ 22,936 812,237 $ 8,122 199,816 $1,998
Issuance of shares with 229,500 2,295
acquisitions (Note K)
NPP 15,000
BSC 150,000
PCV 64,500
Exercise of options 13,475 135
Payment of notes receivable
Conversion of shares 81,877 818 (81,877) (818)
Issuance of employee stock
purchase plan shares 9,452 94
Issuance of shares in
connection with consulting
agreement (Note J) 20,000 200
Issuance of warrants with
convertible debentures
(Note C)
Cancellation of notes receivable
Payment of notes receivable
Issuance of preferred stock,
Series A (Note J) 1,000 $10
Adjustment related to
beneficial conversion feature
of convertible preferred
stock and convertible debenture
(Notes C and J)
Conversion of preferred stock
Series A (Note J) 229,964 2,300 (500) (5)
Dividend on preferred stock
Costs related to private
placements
Net loss, year ended June 30,
1997 ________ ________ _______ _______ _______ _______ ________ ______
BALANCE - JUNE 30, 1997 2,877,836 28,778 730,360 7,304 199,816 1,998 500 5
Conversion of debt (Note C) 1,331,696 13,317
Conversion of preferred stock
Series A (Note J) 246,305 2,463 (500) (5)
Issuance of shares with
Acquisition (Note K) 41,024 410
Issuance private placement
shares (Note J) 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
(Note J)
Issuance of shares with
consulting agreement
(Note J) 20,870 209
Issuance of Shares with
earn out agreement
(Note K) 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 4,935,267 $49,353 727,328 $7,273 0 $0 950 $10
(as restated) _________ _______ _______ ______ ______ ______ _____ _____
See Notes to Financial Statements
</TABLE>
- 11 -
<PAGE>
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Additional
Paid-In
Capital Notes
Common Receivable Treasury Shares Accumulated
Stock for Stock Shares Amount Deficit Total
_______________________________________________________________________
BALANCE - JUNE 30, 1996 $8,078,383 $ (63,928) $(1,630,322) $6,417,189
Issuance of shares with
Acquisitions (Note K) 838,524 840,819
NPP 15,000
BSC 150,000
PCV 64,500
Exercise of options 59,709 59,844
Payment of notes receivable 662 662
Conversion of shares -0-
Issuance of employee stock
Purchase Plan Shares 30,530 30,624
Issuance of shares in
connection with consulting
agreement (Note J) 79,800 80,000
Issuance of warrants with
convertible debentures
(Note C) 125,000 125,000
Cancellation of notes receivable 37,818 8,656 $(37,818) -0-
Payment of notes receivable 25,448 25,448
Issuance of preferred stock
Series A (Note J) 999,990 1,000,000
Adjustment related to beneficial
conversion feature of
convertible preferred stock
and convertible debentures
(Notes C and J) 330,284 (200,000) 130,284
Conversion of preferred stock
Series A (Note J) (2,295) -0-
Dividend on preferred stock (4,330) (4,330)
Costs related to private
placements (141,295) (141,295)
Net loss, year ended June 30,
1997 (2,839,664) 2,839,664)
____________________________________________________________________
BALANCE - JUNE 30, 1997 10,398,630 0 8,656 (37,818) (4,674,316) 5,724,581
Conversion of debt (Note C) 2,696,789 2,710,106
Conversion of preferred stock
Series A (Note J) (2,458) 0
Issuance of shares with
acquisition (Note K) 79,605 80,015
Issuance Private Placement
shares (Note J) 498,276 500,000
Conversion of Shares -0-
Cancel Class C Common Stock 1,998 -0-
Issue warrants for services
(Note J) 184,523 184,523
Issuance of shares with
consulting agreement (Note J) 36,249 36,458
Issuance of shares with
earn out agreement (Note K) 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 $15,485,895 $-0- 2,776 $(12,122)$(11,261,215) $4,269,194
(as restated)
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
F-6
- 12 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended June 30,
1998 1997
___________________________
Cash flows from operating activities:
Net loss $(6,379,839) $(2,839,664)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 674,162 469,118
Beneficial conversion feature of
convertible debt -- 130,284
Compensatory stock options and stock and
warrants issued for obligations 269,790 205,000
Changes in:
Accounts receivable 1,544,791 (2,929,003)
Prepaid expenses and other current assets 257,173 (349,017)
Other assets (257,941) 196,339
Net assets of operations held for sale -- 56,682
Accounts payable (182,913) 884,299
Accrued expenses and other liabilities 758,072 (143,943)
Net liabilities of discontinued operations 1,161,903 1,299,795
____________ ___________
Net cash used in operating activities (2,154,802) (3,020,110)
____________ ___________
Cash flows from investing activities:
Acquisition of property and equipment
and intangibles (212,492) (682,425)
Loan receivable 152,749 (3,063,177)
____________ ___________
Net cash used in investing activities (59,743) (3,745,602)
____________ ___________
Cash flows from financing activities:
Revolving debt, net (106,513) 1,789,981
Proceeds from borrowings 950,000 2,767,373
Payments on Debt (557,883) (696,886)
Deferred financing costs 6,967 21,498
Preferred Stock Dividends (17,060) --
Issuance of Capital Stock 1,321,640 944,173
Convertible Debt -- 2,500,000
____________ ___________
Net cash provided by financing activities 1,597,151 7,326,139
____________ ___________
Net increse (decrease) in cash and cash equivalents (617,394) 560,427
Beginning balance of cash and cash equivalents 844,471 284,044
____________ ___________
Ending balance of cash and cash equivalents $ 227,077 $ 844,471
____________ ___________
Supplemental cash flow information:
Cash paid during the period for:
Interest $1,567,763 $ 1,279,862
Income taxes $130,290 $86,414
____________ ___________
Supplemental disclosure of noncash investing and
financing
Stock issued for acquisitions and earn-out
agreement $ 614,280 $840,819
Capital leases 83,082 284,048
Conversion of preferred stock 500,000 500,000
Beneficial conversion feature of preferred stock 190,000 200,000
Warrant Valuations 233,332 0
Conversion of Debt to Common Stock 2,710,106 0
SEE NOTES TO FINANCIAL STATEMENTS
F-7
- 13 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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. 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 five 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). Pioneer Counseling of
Virginia, Inc. ("PCV'), an 80% owned subsidiary provides outpatient services
through a physicians practice (see Note K). 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 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. 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 during the year ending June 30, 1999.
During the year ended June 30, 1998, the Company recorded an increase in its
accounts receivable reserve in line with its more aggressive reserve policy
established last year, reserved for the remaining accounts receivable balance
from a closed California facility and allowed for a higher reserve for the
closed Rhode Island facility.
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.
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.
F-8
- 14 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUES AND ACCOUNTS RECEIVABLE: (CONTINUED) The Company has $769,982 of
receivables from Medicaid and Medicare at June 30, 1998, which constitute a
concentration of credit risk should Medicaid and Medicare defer or be unable to
make reimbursement payments as due. This amount does not include receivables due
to Franvale Nursing and Rehabilitation which is reported as net current
liabilities of discontinued operations on the accompanying Balance Sheet.
Charity care amounted to approximately $504,000 and $725,000 for the years ended
June 30, 1998 and 1997, 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 covenants not to compete. Covenants not
to compete are amortized over the life of the underlying agreement using the
straight line method.
GOODWILL, NET OF ACCUMULATED AMORTIZATION:
The excess of the purchase price over the fair market value of net assets
acquired are being amortized on a straightline basis over twenty years.
BASIC AND DILUTED LOSS PER SHARE:
Net loss per share is computed by dividing net loss applicable to common stock
by the weighted average number of shares of common stock for each fiscal year
excluding Class C Common Shares.
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.
F-9
- 15 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 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 which was closed May 31, 1998 aggregating approximately $1,240,000
in total assets less the liability of approximately $1,300,000, in an agreement
to release the company from the lease. The company also 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 is being closed in fiscal
year 1999 to consolidate operations in the Salem, Virginia facility. During the
year ended June 30, 1997 the Company wrote off the carrying value of the
goodwill for PHC of Kansas, one of its subsidiaries in the amount of
approximately $50,000. 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. 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 the purposes of applying SFAS
123.
RECENT ACCOUNTING PRONOUNCEMENTS
With the closure of Quality Care Centers of Massachusetts, Inc., the Company's
operations are conducted in one business segment, the operation of behavioral
health treatment centers, and all of the Company's operations are in the United
States therefore, there is no additional requirement for segment reporting
placed on the company by SFAS 131.
F-10
- 16 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised as follows:
JUNE 30,
1998 1997
_________________________________
Land $ 119,859 $ 119,859
Buildings 1,676,963 3,154,799
Furniture and equipment 839,972 855,226
Motor vehicles 41,444 50,889
Leasehold improvements 354,687 358,644
__________ __________
3,032,925 4,539,417
Less accumulated
depreciation and
amortization 904,652 1,014,222
__________ __________
$2,128,273 $3,525,195
NOTE C - LONG-TERM DEBT JUNE 30,
1998 1997
_________________________________
Long-term debt is summarized as follows:
Note payable with interest at 9% requiring
monthly payments of $1,150 through May
2001 $34,636 $44,816
Note payable due in monthly installments of
$2,000 including imputed interest at 8%.
Approximately $21,000 of this obbligation
was canceled in connection with the
closing of GHC. -- 40,574
9% mortgage note due in monthly installments
of $4,850, including interest through
July 1, 2012, when the remaining principal
balance is payable 478,582 492,996
Note payable due in monthly installments of
$21,506 including interest at 10.5% through
November 1, 1999, collateralized by all assets
of PHN and certain receivables. Interest
only payments have been made since May 1998
per subsequent agreement. 374,190 547,092
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 have been made since May
1998 per subsequent agreement. 598,848 818,371
Note payable due in monthly installments of
$5,558 including interest at 9.25% through
May 2012 when the remaining principal balance
is payable, collateralized by real estate. 521,000 538,605
Term mortgage note payable with interest only
payments through March 1998 principal due in
monthly installments of $9,167 beginning April
1998 through February 2001, a balloon payment
of approximately $1,300,000 plus interest is
due March 2001, interest at prime plus 5% (13.5%
at June 30, 1998) collateralized by all assets
of PHM. 1,600,000 1,100,000
Note payable bearing interest at prime plus
3-1/2% (12% at June 30, 1998)with the principal
due on November 10, 1998 collateralized by MRC's
real property and BSC's accounts receivable and
cross-collateralized with the revolving credit
note referred to below. 350,000 --
__________ __________
3,957,256 3,582,454
Less current maturities 1,107,167 560,914
_________ _________
Noncurrent maturities $2,850,089 $ 3,021,540
__________ ___________
F-11
- 17 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE C - LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows as of June 30, 1998:
YEAR ENDING
JUNE 30, AMOUNT
____________
1999 $ 1,107,167
2000 560,171
2001 1,863,216
2002 20,634
2003 22,570
Thereafter 383,498
___________
$ 3,957,256
___________
The Company has a revolving credit note under which a maximum of $4,000,000 may
be outstanding at any time. At June 30, 1998 the outstanding balance was
$1,683,458. Advances are made based on a percentage of accounts receivable and
principal is payable upon receipt of proceeds of the accounts receivable.
Interest is payable monthly at prime plus 2.25% (10.75% at June 30, 1998). 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.
In fiscal 1997, the Company issued 7% convertible debentures due December 31,
1998 in the aggregate principal amount of $3,125,000. The number of shares of
Class A common stock into which the debentures were convertible was determined
by dividing the principal amount to be converted by the conversion price. The
conversion price was equal to 94% of the average closing bid price of the Class
A common stock as reported by NASDAQ for the five trading days immediately
preceding the date of conversion. The beneficial conversion feature, valued at
$130,284, was recorded as additional interest. In addition, on March 31, 1997
the Company issued warrants to the debenture holders as compensation for
amending the debenture agreement to allow for a later filing of the Registration
Statement which was originally required to be filed in December 1996. The
warrants provide for the purchase of 150,000 shares of Class A common stock at
$2.00 per share and expire in 2003. The warrants were valued at $125,000. During
fiscal 1998, all of the convertible debentures were converted into 1,331,696
shares of Class A common stock.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 1998, the Company was obligated under various capital leases for
equipment providing for monthly payments of approximately $7,000 for fiscal 1999
and terms expiring from July 1998 through February 2002.
The carrying value of assets under capital leases is as follows:
June 30
______________________
1998 1997
____ ____
Building (Good Hope Center - Capital Lease) $ -- $1,477,800
Equipment and improvements 511,517 485,004
Less accumulated depreciation and amortization (225,703) (501,732)
--------- ----------
$285,814 $1,461,072
F-12
- 18 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 1998:
Year Ending
JUNE 30, EQUIPMENT
___________ _________
1999 $83,203
2000 59,897
2001 40,807
2002 3,138
Thereafter --
________
Total future minimum lease
payments 187,045
Less amount representing interest 25,806
________
Present value of future minimum
lease payments 161,239
Less current portion 67,492
_______
Long-term obligations under
capital lease $93,747
=========
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows: JUNE 30,
____________________
1998 1997
____________________
Note payable, President and principal
stockholder, interest at 8%, due in
installments through December 1998 $39,496 $ 55,296
Notes payable, Tot Care, Inc., Company
owned by the President and principal
stockholder, interest at 12% and payable
on demand 100,000 --
Notes payable, other related parties, interest
at 12% and payable on demand 20,000 20,000
_______ ________
159,496 75,296
Less current maturities 159,496 51,600
_______ _______
$ -0- $23,696
F-13
- 19 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the accompanying
balance sheets:
YEAR ENDED
June 30
________________________
1998 1997
________________________
Temporary differences attributable to:
Allowance for doubtful accounts $1,315,000 $1,007,000
Facility Closing Costs 85,000 --
Depreciation 225,000 147,000
Other 2,000 3,000
Operating loss carryforward 1,650,000 340,000
_________ __________
Total deferred tax asset 3,277,000 1,497,000
Less:
Valuation allowance (2,607,000) (827,000)
___________ __________
Subtotal 670,000 670,000
Current portion (515,300) (515,300)
___________ __________
Long-term portion $ 154,700 $ 154,700
_________ __________
The Company had no deferred tax liabilities at June 30, 1998 and 1997.
Income tax expense (benefit) is as follows:
YEAR ENDED
____________________
1998 1997
____________________
Current state income taxes $ 219,239 $197,311
_________ ________
Reconciliations of the statutory U.S. Federal income taxes based on a rate of
34% to actual income taxes is as follows:
YEAR ENDED
____________________
1998 1997
____________________
Income tax benefit at statutory rate $(2,044,400) (898,400)
State income taxes, net of federal benefit 144,700 130,200
Increase in valuation allowance 1,780,000 827,000
Increase due to nondeductible items, primarily
penalties and travel and entertainment expenses 161,231 12,000
Other 177,708 126,511
___________ ________
$219,239 $197,311
___________ ________
At June 30,1998 the Company had a net operating loss carryforward amounting to
approximately $4,865,000 which expires at various dates through 2013.
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.
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,
1998. The Company has closed two facilities that contributed 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).
F-14
- 20 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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, 1998 and 1997 was approximately $882,000
and $752,000, 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, 1998 are as follows:
YEAR ENDING
JUNE 30, AMOUNT
____________ ____________
1999 $413,364
2000 280,974
2001 186,820
2002 120,061
2003 97,165
Thereafter 42,490
___________
$1,140,874
LITIGATION:
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,
1998 total claims pending amounted to approximately $93,000.
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. While the investigation
apparently is in a preliminary phase, the focus appears to be 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.
CONTINGENCY:
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-15
- 21 -
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE H - STOCK PLANS (CONTINUED)
[1] STOCK PLANS: (CONTINUED)
The stock option plan provides for the issuance of a maximum of 400,000
shares of Class A common stock of the Company pursuant to the grant of
incentive stock options to employees or nonqualified stock options to
employees, directors, consultants and others whose efforts are
important to the success of the Company. Subject to the provisions of
this plan, the compensation committee has the authority to select the
optionees and determine the terms of the options including: (i) the
number of shares, (ii) option exercise terms, (iii) the exercise or
purchase price (which in the case of an incentive stock option will not
be less than the market price of the Class A common stock as of the
date of grant), (iv) type and duration of transfer or other
restrictions and (v) the time and form of payment for restricted stock
upon exercise of options. The employee stock purchase plan provides for
the purchase of Class A common stock at 85 percent of the fair market
value at specific dates, to encourage stock ownership by all eligible
employees. A maximum of 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, 1998, options for 17,500 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.
Under the above plans, at June 30, 1998, 164,555 shares were available
for future grant or purchase.
The Company had the following activity in its stock option plans for
fiscal 1998 and 1997:
NUMBER WEIGHTED-AVERAGE
OF EXERCISE PRICE
SHARES PER SHARE
_______________________________
Option plans:
Balance - June 30, 1996 114,750 $5.56
Granted 125,500 $4.56
Repriced options:
Original (95,375) $5.99
Repriced 95,375 $3.50
Cancelled (21,400) $6.05
Exercised (13,475) $5.16
__________
Balance - June 30, 1997 205,375 $4.27
Granted 210,000 $2.37
Cancelled (40,000) $3.21
__________
Balance - June 30, 1998 375,375 $3.32
__________
F-16
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<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE H - STOCK PLANS (CONTINUED)
[2] STOCK-BASED COMPENSATION:
Options for 169,000 shares are exercisable as of June 30, 1998 at
exercise prices ranging from $2.00 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, 1998 range from
$2.00 to $6.63 per share and have a weighted-average exercise price of
approximately $3.03 per share, with a weighted-average remaining
contractual life of approximately four years.
Subsequent to June 30, 1998 223,875 of the outstanding stock options
were repriced to $1.25 and 50,000 were repriced to $1.50. Of the
outstanding stock options 101,500 are held by Directors and former
employees and were not repriced. The weighted average exercise price of
the options that were not repriced is $3.15.
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
compensa- tion expense recognized in 1998 or 1997. If the Company had
elected to recognize compensation cost for the plans based on the fair
value at the grant date for awards granted, consistent with the method
prescribed by SFAS No. 123, net loss per share would have been changed
to the pro forma amounts indicated below:
YEAR ENDED
JUNE 30,
1998 1997
_____________________________
Net loss As reported
Continuing Operations $(4,011,925) $ (880,908)
Discontinued Operations (2,220,296) (1,958,756)
Pro forma
Continuing Operations (4,140,252) (934,516)
Discontinued Operations (2,220,296) (1,958,756)
Net loss
per share As reported
Continuing Operations (.77) (.27)
Discontinued Operations (.42) (.60)
Pro forma
Continuing Operations (.79) (.28)
Discontinued Operations (.42) (.60)
The fair value of the Company's stock options used to compute pro forma net loss
and net loss per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998 and 1997: dividend yield of 0%; expected volatility of 30%;
a risk-free interest rate of between 5% and 7%; and an expected holding period
of five years.
The per share weighed-average grant-date fair value of options granted
during the years ended June 30, 1998 and 1997 was $.84 and $3.44, respectively.
F-17
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<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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.
Subsequent to year end 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 and results of
operations. The liquidation of the assets and liabilities of Franvale may result
in a non-cash financial statement gain of approximately $2,000,000 during the
year ending June 30, 1999. 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 $148,000.
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, 1998:
- 24 -
<PAGE>
<TABLE>
<S> <C>
<C> <C> <C>
NUMBER of EXERCISE EXPIRATION
DATE DESCRIPTION UNITS PRICE DATE
SHARE
___________________________________________________________________________________________________________________
09/01/93 Warrants to purchase units issued with bridge financing 5,946 units $3.70 per unit September 1998
Equity treatment
03/10/94 Unit purchase option issued as part of the IPO 156,271 units $5.60 per unit March 1999
Equity transaction
03/10/94 IPO warrants 1,772,073 $5.97 per share March 1999
Equity transaction
02/08/96 Private placement warrants with common stock issuance 737,170 $3.76 per share January 2001
Equity transaction
02/27/96 Warrants issued with the exercise of Bridge warrants 36,573 $7.02 per share February 2001
Equity transaction
11/01/96 Warrants for debt placement service 25,000 $2.00 per share October 2001
$125,000 value charged to interest expense over term
of debt
02/18/97 Warrant for investor relation services 3,753 $2.80 per share February 2002
$1,210 value passed as an adjustment
03/03/97 Consultant warrant for investor relations 160,000 $2.62 per share March 2002
$16,306 value passed as an adjustment
03/31/97 Warrants issued as registration penalty on 150,000 $2.00 per share March 2002
Convertible Debentures
$46,375 value charged to interest expense over
term of debenture
06/04/97 Warrants issued with preferred stock placement 50,000 $2.75 per share June 2000
Equity transaction
06/01/97 Warrants issued for investment banker services 150,000 $2.50 per share May 2002
$193,748 value charged to professional fees
09/19/97 Private Placement warrants with common stock issuance 86,207 $2.90 per share March 2003
Equity transaction
03/10/98 Penalty warrants issued for late registration of private 3,000 $2.90 per share March 2003
placement shares
Equity transaction
03/10/98 Warrants issued as additional interest on debt 52,500 $2.38 per share March 2003
$48,809 value charged to interest expense over
term of loan
03/19/98 Warrants issued with preferred stock private placement 49,990 $2.31 per share March 2001
Equity transaction
</TABLE>
F-18
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<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE J - CERTAIN CAPITAL TRANSACTIONS
Each unit consists of one share of Class A common stock and a warrant to
purchase one share of Class A common stock at $7.50 per share.
In 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. 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, 1998
and 1997 dividends amounted to $ 17,060 and $4,330 respectively. On July 1, 1998
the Company issued 13 shares of series B preferred stock in payment of dividends
payable for the fiscal year ended June 30, 1998.
As part of the Consultant Warrant agreement to purchase 160,000 shares as listed
in the table above, 80,000 may be canceled if certain stock prices, as defined
in the agreement, are not achieved by March 31, 1999 and June 30, 1999.
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 prior to June 30, 1998 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.
In June 1997, the Company received $1,000,000 in exchange for the issuance of
Series A Convertible preferred stock and warrants to purchase 50,000 shares of
Class A common stock. The warrants are exercisable at $2.75 per share and expire
in 2000. The warrants were valued at $30,000. The number of shares of Class A
common stock into which the preferred stock was converted was equal to 80% of
the closing bid price of the Class A common stock as reported by NASDAQ for the
five trading days immediately preceding the conversion. The beneficial
conversion feature, due to the 80% discount above, valued at $200,000 was
recorded as additional dividends. In June 1997, 500 shares of preferred stock
were converted into 229,640 shares of Class A common stock. In fiscal 1998, the
500 remaining shares of preferred stock were converted into 246,305 shares of
Class A common stock. The issuance of these securities will result in the
issuance of some additional Class A common shares under existing dilution
agreements with other stockholders.
In September 1997, the Company sold units consisting of four shares of common
stock and a warrant to purchase two shares of common stock for $500,000. The
common shares sold under this arrangement amounted to 172,414 shares and the
warrants allow the holder to purchase an additional 86,207 common shares. The
exercise price of the warrants is $2.90 per share of common stock and the
warrants expire in September 2002. The agreement required that the shares be
registered within 90 days of the 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 of class A common stock at
$2.90 per share.
F-19
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<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
In connection with the acquisition of a business in fiscal 1996, the Company
entered into a consulting agreement with the former owner of the business
whereby the former owner would be granted, as partial compensation, 20,000
shares of common stock for each of the four fiscal years ending June 30, 2000.
The consulting agreement provides that if the traded market value is less than
$60,000, then the number of shares issued will be increased to raise the traded
market value to $60,000. The shares issued pursuant to the consulting agreement
have been charged to compensation expense. The consulting agreement also
provides for an annual salary of approximately $24,000 through October 1999.
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. The purchase price
was allocated as follows:
Office equipment $ 18,000
Covenants not to compete 20,000
Goodwill 597,746
Deposits 15,072
Liabilities assumed (42,659)
-------
$ 608,159
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 to Shliselberg Physician Services, P.C.
formerly Perlow Physicians, P. C. ("Perlow"), 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, 1998 Perlow owed the
Company $3,292,428 which includes some acquisition costs, management fees and
interest on the advances of approximately $481,119. During fiscal 1998 the
Company established a reserve against this receivable in the amount of $382,000.
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 Perlow and therefore does not consolidate its
operations.
F-20
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<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE K - ACQUISITIONS (CONTINUED)
The purchase price of BSC was allocated as follows:
Goodwill $63,600
Equipment and other assets 20,000
_______
$83,600
_______
The merger agreement requires additional purchase price to be paid by BSC to the
former owners of Behavioral Stress Centers, Inc. for the three years following
the merger date. The additional purchase price is based on the income of BSC
before taxes and is to be paid in PHC stock, at market value up to $200,000 and
the balance, if any, in cash. 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
are subject to a price guarantee of $2.35, payable in shares. The Company is
required to issue shares for the difference between the selling price and the
guarantee price if the selling price is less than $2.35. At September 15, 1998
the market price per share was $.938. Subsequent to year end a former owner sold
30,382 shares. If that owner sells the additional 320 shares he owns, the
Company will issue approximately $50,000 in additional shares of stock in
accordance to the price guarantee agreement.
BSC also entered into a management agreement with Perlow whereby management fees
are required of Perlow 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 Perlow and effective January
1, 1998 the management agreement was amended to provide for a management fee of
20% of the total monthly expenses of Perlow.
.........
On November 1, 1996, BSC entered into a lease agreement for its facilities. The
lease payments are due in equal monthly installments over a three year period
with an option to extend annually for three additional years. The lease is to be
paid by Perlow in accordance with the management agreement.
Summary, unaudited financial information for Perlow as of and for the year
ended June 30, 1998 is as follows:
Total assets $3,783,000
Stockholder's deficit $ (382,000)
Net revenue $3,110,000
Net loss $ (304,000)
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-21
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<PAGE>
PHC INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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 above agreements the purchase price was allocated as
follows:
Land 50,600
Building 540,000
Covenant not to compete 50,000
Goodwill 285,038
_________
$ 925,638
__________
In accordance with the agreement the two owners will be paid a finders fee for
all subsequently acquired medical practices within a 200 mile radius of PCV and
those medical practices identified by the owners wherever the location.
The finders fee is payable in Class A common stock and in cash.
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.
Information is not available to present pro forma financial information relating
to the 1997 acquisitions. 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.
NOTE L - SALE OF RECEIVABLES
The Company had a sale and purchase agreement whereby third-party receivables
were sold at a discount with recourse. The amount of receivables subject to
recourse at June 30, 1997 totaled approximately $577,000. Proceeds from the sale
of these receivables totaled approximately $3,000,000 for the year ended June
30, 1997. The purchase fees related to the agreement amount to approximately
$127,000 for the year ended June 30, 1997 and are included in interest expense
in the accompanying consolidated statement of operations. 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 Finova
Capital from 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.
F-22
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<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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
Perlow, the closure of the Blacksburg facility and an increase in accounts
receivable reserves of the other facilities.
NOTE N - EVENTS SUBSEQUENT TO JUNE 30, 1998
On July 10, 1998 the Company issued warrants to purchase 52,500 and 20,000
shares of PHC, Inc. Class A Common Stock, exercisable at $1.81 per share, to
Healthcare Financial Partners, Inc. in conjunction with the payment extension
granted on the $350,000 financing provided to PHC, Inc.
On August 13, 1998 the Company borrowed $100,000 from Bruce A. Shear, President
and Principal Stockholder. This amount bears interest at 12% and is payable on
demand.
Subsequent to year end the Company issued a warrant to purchase 50,000 shares of
PHC, Inc. Class A Common Stock, exercisable at $1.75 per share. The warrant may
be canceled if certain stock prices, as defined in the agreement, are not
achieved.
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-23
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<PAGE>
PART III
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of shares of the Company's Class A Common Stock and Class B Common Stock (the
only classes of capital stock of the Company currently outstanding) as of August
15, 1998 by (i) each person known by the Company to beneficially own more than
5% of any class of the Company's voting securities, (ii) each director of the
Company, (iii) each of the named executive officers as defined in 17 CFR
228.402(a)(2) and (iv) all directors and officers of the Company as a group.
Unless otherwise indicated below, to the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to their shares
of Common Stock, except to the extent authority is shared by spouses under
applicable law. In preparing the following table, the Company has relied on the
information furnished by the persons listed below:
Amount
Name And Address and Nature
of Beneficial of Beneficial Percent
Title of Class Owner Owner Class (12)
_______________________________________________________________________________
Class A Common Stock Gerald M. Perlow 19,750(1) *
c/o PHC, Inc.
200 Lake Street
Peabody MA 01960
Donald E. Robar 13,875(2) *
c/o PHC, Inc.
200 Lake Street
Peabody MA 01960
Bruce A. Shear 36,000(3) *
c/o PHC, Inc.
200 Lake Street
Peabody MA 01960
Robert H. Boswell 43,587(4) *
c/o PHC, Inc.
200 Lake Street
Peabody MA 01960
Howard W. Phillips 41,504(5) *
P. O. Box 2047
East Hampton NY 11937
William F. Grieco 63,280(6)(7) 1.3%
115 Marlborough Street
Boston MA 02116
J. Owen Todd 59,280(7) 1.2%
c/o Todd and Weld
1 Boston Place
Boston MA 02108
ProFutures Special 482,397(8) 8.9%
Equities Fund, L.P.
11612 Bee Cave RD-STE 216
Austin TX 78733
All Directors and
Officers as a Group 240,420(9) 4.9%
(7 persons)
Class B Common Stock (10)....... Bruce A. Shear 671,259(11) 92.3%
c/o PHC, Inc.
200 Lake Street
Peabody MA 01960
All Directors and
Officers as a Group 671,259 92.3%
(7 persons)
* Less than 1%.
(1) Includes 9,750 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $2.06 to $6.63 per share.
(2) Includes 12,375 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $2.06 to $6.63 per share.
(3) Includes 25,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price of $2.63
per share. Excludes an aggregate of 59,280 shares of Class A Common Stock
owned by the Shear Family Trust and the NMI Trust, of which Bruce A.
Shear is a remainder beneficiary.
(4) Includes an aggregate of 36,500 shares of Class A Common Stock issuable
pursuant to currently exercisable stock options at an exercise price
range of $2.00 to $3.50 per share.
(5) Includes 37,504 shares issuable upon the exercise of a currently
exercisable Unit Purchase Option for 18,752 Units, at a price per unit of
$5.60, of which each unit consists of one share of Class A Common Stock
and one warrant to purchase an additional share of Class A Common Stock
at a price per share of $7.50 and 4,000 shares issuable pursuant to
currently exercisable stock options having an exercise price range of
$2.06 to $3.50 per share.
(6) Includes 4,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of
$2.06 to $3.50 per share
(7) Messrs. Todd and Grieco are the two trustees of the Trusts which
collectively hold 59,280 shares of the Company's outstanding Common
Stock. Gertrude Shear, Bruce A. Shear's mother, is the lifetime
beneficiary of the Trusts. In addition to the shares held by the Trusts,
to the best of the Company's knowledge, Gertrude Shear currently owns
less than 1% of the Company's outstanding Class B Common Stock.
(8) Includes 165,522 shares of Class A Common Stock issuable upon the
exercise of outstanding warrants and 316,875 shares of Class A Common
Stock estimated to be issuable upon the conversion of Series B
Convertible Preferred Stock.
(9) Includes an aggregate of 110,625 shares issuable pursuant to currently
exercisable stock options. Of those options, 4,125 have an exercise price
of $6.63 per share, 68,250 have an exercise price of $3.50 per share,
35,000 have an exercise price of $2.63 and 2,000 have an exercise price
of $2.06 and 1,250 have an exercise price of $2.00. Also includes 37,504
shares issuable upon the exercise of the Unit Purchase Option as
described in (5).
(10) Each share of Class B Common Stock is convertible into one share of Class
A Common Stock automatically upon any sale or transfer thereof or at any
time at the option of the holder.
(11) Includes 56,369 shares of Class B Common Stock pledged to Steven J. Shear
of 2 Addison Avenue, Lynn, Massachusetts 01902, Bruce A. Shear's brother,
to secure the purchase price obligation of Bruce A. Shear in connection
with his purchase of his brother's stock in the Company in December 1988.
In the absence of any default under this obligation, Bruce A. Shear
retains full voting power with respect to these shares.
(12) Represents percentage of equity of class, based on numbers of shares
listed under the column headed "Amount and Nature of Beneficial
Ownership". Each share of Class A Common Stock is entitled to one vote
per share and each share of Class B Common Stock is entitled to five
votes per share on all matters on which stockholders may vote (except
that the holders of the Class A Common Stock are entitled to elect two
members of the Company's Board of Directors and holders of the Class B
Common Stock are entitled to elect all the remaining members of the
Company's Board of Directors).
Based on the number of shares listed under the column headed "Amount and
Nature of Beneficial Ownership," the following persons or groups held the
following percentages of voting rights for all shares of common stock combined
as of August 15, 1998:
Bruce A. Shear ........................................39.28%
J. Owen Todd..............................................0.7%
William F. Grieco.........................................0.7%
ProFutures Special Equities Fund, LP......................5.3%
All Directors and Officers as a Group (7 persons).......40.23%
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibits Index
Exhibit No. Description
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Auditors.
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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: December 7, 1999 By: /s/ Bruce A. Shear
President
Chief Executive Officer
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Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 of PHC, Inc. (the "Company") of our report dated September
18, 1998 (October 5, 1998 as to the second paragraph of Note I and September 10,
1999 as to Note P) relating to the consolidated financial statements of the
Company appearing in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1998.
BDO Seidman, LLP
Boston, Massachusetts
December 6, 1999
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Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 of PHC, Inc. (the "Company") of our report dated September
19, 1997, relating to the consolidated financial statements of the Company
appearing in the Company's Annual Report on Form 10-KSB for the year ended June
30, 1997.
/s/ Richard A. Eisner Company, LLP
New York, New York
December 6, 1999
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