-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UbA+cF9zmTorwhCdU5vp3a01bbl8aDmpl3QsogFqAJkpoTahLThTBRpbO9r3Akea cGG/JWhPMXAv03Jag2BmvQ== 0000915127-97-000036.txt : 19971030 0000915127-97-000036.hdr.sgml : 19971030 ACCESSION NUMBER: 0000915127-97-000036 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971029 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHC INC /MA/ CENTRAL INDEX KEY: 0000915127 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 042601571 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-22916 FILM NUMBER: 97702805 BUSINESS ADDRESS: STREET 1: 200 LAKE ST STE 102 CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 5085362777 MAIL ADDRESS: STREET 1: 200 LAKE ST STREET 2: STE 102 CITY: PEABODY STATE: MA ZIP: 01960 10-K/A 1 AMENDMENT TO 10KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A [X] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 [FEE REQUIRED] for the fiscal year ended June 30, 1997 [ ] Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from ______ to _____ Commission file number: 0-23524 PHC, INC. (Name of small business issuer in its charter) MASSACHUSETTS 04-2601571 (State or other jurisdiction of R.S. Employer Identification No.) incorporation or organization) 200 LAKE STREET, SUITE 102, PEABODY, MA 01960 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (978) 536-2777 Securities registered under Section 12(b) of the Act: NONE. Securities registered under Section 12(g) of the Act: Units (each unit consisting of one share of CLASS A COMMON STOCK AND ONE CLASS A WARRANT (Title of class) CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of class) CLASS A WARRANTS TO PURCHASE ONE SHARE OF CLASS A COMMON STOCK (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. The issuer's revenues for the fiscal year ended June 30, 1997 were $ 27,234,372. The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of September 15, 1997, was $13,351,977. (See definition of affiliate in Rule 12b-2 of Exchange Act). At September 15, 1997, 4,470,866 shares of the issuer's Class A Common Stock, 730,331 shares of the issuer's Class B Common Stock and 199,816 shares of the issuer's Class C Common Stock were outstanding. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes No X ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following listing of Exhibits filed with 10K-SB for Fiscal Year ended June 30, 1997 was omitted from the Edgar filing in error: Exhibit Index: 4.23 Warrant Agreement by and between Brean Murray & Company and PHC., Inc. dated 07/31/97 (See 10.125). 4.24 Subscription Agreement by and between PHC, Inc. and ProFutures Special Equities Fund, L.P. to purchase PHC, Inc. Units dated 09/19/97. 4.25 Warrant Agreement by and between PHC, Inc. and ProFutures Special Equities Fund, L.P. for up to 86,207 shares of Class A Common Stock dated 09/19/97. 10.122 Agreement between Family Independence Agency and Harbor Oaks Hospital effective January 1, 1997. 10.123 Master Contract by and between Family Independence Agency and Harbor Oaks Hospital effective January 1, 1997. 10.124 Deed, Deed of Trust and Deed Trust Note in the amount of $540,000 by and between Dillon and Dillon Associates and Pioneer Counseling of Virginia, Inc. (Related to Exhibit 10.109). 10.125 Financial Advisory Agreement, Indemnification Agreement and Form of Warrant by and between Brean Murray & Company and PHC, Inc. dated 06/10/97. 10.126 Employment Agreement by and between Harbor Oaks Hospital and Sudhir Lingnurkar, and Pioneer Counseling Center and Sudhir Lingnurkar dated August 1, 1997. 10.127 Asset Purchasing Agreement, Restrictive Covenants Agreement and Lease with Option to Purchase by and between Pioneer Counseling of Virginia, Inc. and Dianne Jones-Freeman dated August _____, 1997. 10.128 Employment Agreement by and between Pioneer Counseling of Virginia, Inc. and Dianne Jones-Freeman dated August _____, 1997. In the listing of Exhibits, the following misprints occurred: 4.8 Should read "Form of Warrant Agreement by and among the Company, American Stock Transfer & Trust Company and AmeriCorp Securities, Inc. executed in connection with the Private Placement." 4.24 Incorrectly listed date of Units as 1/19/97. The correct date is 9/19/97. 10.128 Listed as "10128" There were two descriptions for footnotes ##. These should read: ## Filed as an exhibit to the Company's report on Form 10-KSB, filed with the Securities and Exchange Commission on September 28, 1994. ### Filed as an exhibit to the Company's Current Report on Form 8-K, filed with the securities and Exchange Commission (Commission File number 0-23524) on November 5, 1996. (b) Reports on Form 8-K Omitted - should read "No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report." ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Additional Information. During the first three quarters of the fiscal year ended June 30, 1997, the Company provided for allowances for bad debts based on historical experience supplemented by certain other current information. During the preparation of the annual financial statements for fiscal 1997, it was determined that the allowances were understated based on a detailed analysis of accounts receivable data. The Company reviewed the year-end adjustments to determine if some of the adjustments should have been made in the prior fiscal quarters of fiscal 1997. The Company has concluded that it is not possible to determine what adjustments, if any, should have been made to allowance reserves in prior fiscal quarters of 1997 because the information on which the year-end analysis was based is not available on a quarterly basis. The Company has changed its internal systems to make such information available on a quarterly basis in the future and will analyze such data to determine the adequacy of its reserves for future quarterly financial statements commencing with the quarter ended September 30, 1997. ITEM 7 - FINANCIAL STATEMENTS Many typographical errors were identified in the Financial Statement printing. Note I - Segment Information was changed to show net revenues from PDSS operations. Note K - Certain capital transactions were changed to show the effect of dilution activity through June 30, 1997. Financial Statements are being resubmitted in their entirety to avoid confusion. PHC, INC. AND SUBSIDIARIES Contents Consolidated Financial Statements Independent auditors' report F-2 Balance sheets as of June 30, 1997 and 1996 F-3 Statements of operations for the years ended June 30, 1997 and 1996 F-4 Statements of changes in stockholders' equity for the years ended June 30, 1997 and 1996 F-5 Statements of cash flows for the years ended June 30, F-6 1997 and 1996 Notes to financial statements F-7 F-1 Richard A. Eisner & Company, LLP Accountants and Consultants INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders PHC, Inc. Peabody, Massachusetts We have audited the accompanying consolidated balance sheets of PHC, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the consolidated financial position of PHC, Inc. and subsidiaries at June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years then ended in conformity with generally accepted accounting principles. Richard A. Eisner & Company, LLP Cambridge, Massachusetts September 19, 1997 F2 University Place, 124 Mt. Auburn Street, Suite 200, Harvard Square, Cambridge, MA 02138 Telephone (617) 576-5790, Fax (617) 497-5490 New York, NY Melville, NY Cambridge, MA Florham Park, NJ PHC, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, _________________ 1997 1996 _____________________________ Current assets: Cash and cash equivalents $ 905,692 $ 293,515 Accounts receivable, net of allowance for bad debts of $2,982,138 at June 30, 1997 and $1,492,983 at June 30, 1996 (Notes A, C and M) 10,650,368 8,866,065 Prepaid expenses 375,382 259,893 Other receivables and advances 260,212 66,513 Deferred income tax asset (Note F) 515,300 515,300 Other receivables, related party (Note L) 80,000 ____________ ____________ Total current assets 12,786,954 10,001,286 Accounts receivable, noncurrent 605,000 740,000 Loans receivable 134,284 113,805 Property and equipment, net (Notes A and B) 8,408,211 7,884,063 Deferred income tax asset (Note F) 154,700 154,700 Deferred financing costs, net of amortization 751,325 772,823 Goodwill, net of accumulated amortization (Note A) 1,644,252 841,413 Restricted deposits and funded reserves 170,874 Other assets (Note A) 222,032 252,445 Net assets of operations held for sale (Note J) 56,682 Other receivables, noncurrent, related party (Note L) 2,983,177 ____________ ____________ $27,860,809 $20,817,217 ____________ ____________ LIABILITIES Current liabilities: Accounts payable $ 4,171,334 $ 3,127,052 Notes payable - related parties (Note E) 51,600 56,600 Current maturities of long-term debt (Note C) 580,275 403,894 Revolving credit note and secured term note 1,789,971 Current portion of obligations under capital leases (Note D) 139,948 88,052 Accrued payroll, payroll taxes and benefits 703,842 715,515 Accrued expenses and other liabilities 587,024 738,784 ____________ ____________ Total current liabilities 8,023,994 5,129,897 ____________ ____________ Long-term debt and accounts payable (Note C) 9,759,601 7,754,262 Obligations under capital leases (Note D) 1,594,562 1,468,475 Notes payable - related parties (Note E) 23,696 47,394 Convertible debentures ($3,125,000 less discount $390,625)(Note C) 2,734,375 ____________ ____________ Total noncurrent liabilities 14,112,234 9,270,131 ____________ _____________ Total liabilities 22,136,228 14,400,028 ____________ _____________ Commitments and contingent liabilities Notes A, G, H, K, L and M) STOCKHOLDERS' EQUITY (Notes H and K) Preferred stock, $.01 par value; 1,000,000 shares authorized, 500 shares issued and outstanding in 1997 (liquidation preference $504,333) 5 Class A common stock, $.01 par value; 20,000,000 shares authorized, 2,877,836 and 2,293,568 shares issued and outstanding in 1997 and 1996, respectively 28,778 22,936 Class B common stock, $.01 par value; 2,000,000 shares authorized, 730,360 and 812,237 issued and outstanding in 1997 and 1996, respectively . convertible into one share of Class A common stock 7,304 8,122 Class C common stock, $.01 par value; 200,000 shares authorized, 199,816 shares issued and outstanding in 1997 and 1996 1,998 1,998 Additional paid-in capital 10,398,630 8,078,383 Notes receivable related to purchase of 31,000 shares of Class A common stock (63,928) Treasury stock, 8,656 shares at cost (37,818) Accumulated deficit (4,674,316) (1,630,322) ____________ ____________ Total stockholders' equity 5,724,581 6,417,189 ____________ ____________ $27,860,809 $20,817,217 ____________ ____________ See notes to financial statements F-3 PHC, INC. AND SUBSIDIARIES Consolidated Statements of Operations Year Ended June 30, _______________________ 1997 1996 _______________________ Revenues: Patient care, net (Note A) $26,007,333 $21,569,594 Management fees (Note L) 597,278 Other 629,761 233,164 ___________ ___________ Total revenue 27,234,372 21,802,758 ___________ ___________ Operating expenses: Patient care expenses 14,436,784 12,004,383 Cost of management contracts 324,440 146,407 Provision for doubtful accounts 3,397,693 1,894,087 Administrative expenses 10,341,973 7,800,715 ___________ ___________ Total operating expenses 28,500,890 21,845,592 ___________ ___________ Loss from operations (1,266,518) (42,834) __________ __________ Other income (expense): Interest income 201,286 14,486 Other income, net 490,327 211,292 Start-up costs (Note A) (128,313) Interest expense (2,094,301) (863,484) Gain from operations held for Sale (Note J) 26,853 11,947 ___________ ___________ Total other expense (1,375,835) (754,072) ___________ ___________ Loss before income taxes (benefit) (2,642,353) (796,906) Income taxes (benefit) (Note F) 197,311 (211,591) ___________ ___________ Net Loss $(2,839,664) $(585,315) ___________ ___________ Net loss per share (Note A) $(.87) $(.22) ___________ ___________ Weighted average number of shares outstanding 3,270,175 2,709,504 ___________ ___________ See notes to financial statements F-4 PHC, INC. AND SUBSIDIARIES Consolidated Statements of Changes In Stockholders' Equity
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, 1995 1,504,662 $15,047 898,795 $8,988 199,966 $2,000 Payment of notes receivable Conversion of shares 86,554 866 (86,558) (866) (150) (2) Exercise of options 22,500 225 Issuance of stock for obligations in lieu of cash 6,600 66 Exercise of bridge loan warrants 33,509 335 Sale of stock in connection with private placement 493,750 4,937 Costs related to private placement Exercise of IPO 21,493 215 warrants Issuance of shares with acquisitions 87,000 870 Exercise of private placement warrants 37,500 375 Amount paid for options, not yet issued Compensatory stock options Net loss, year ended ________ ________ _______ _______ _______ _______ _______ ______ June 30, 1996 Balance - June 30, 1996 2,293,568 22,936 812,237 8,122 199,816 1,998 Costs related to private placements Issuance of shares with acquisitions 229,500 2,295 Exercise of options 13,475 135 Payment of notes receivable Conversion of shares 81,877 818 (81,877) (818) Issuance of employee stock purchase plan shares ` 9,452 94 Issuance of shares in connection with consulting agreement 20,000 200 Issuance of warrants with convertible debentures Cancellation of notes receivable Payment of notes receivable Issuance of preferred stock 1,000 $10 Adjustment related to beneficial conversion Conversion of preferred stock 229,964 2,300 (500) (5) Dividend on preferred stock Net loss, year ended ________ ________ _______ _______ _______ _______ ________ ______ June 30, 1997 Balance - June 30, 1997 2,877,836 $28,778 730,360 $7,304 199,816 $1,998 500 $ 5
See notes to financial statements PHC, INC. AND SUBSIDIARIES (con't) Consolidated Statements of Changes In Stockholders' Equity
Additional Paid-in Notes Capital, Receivable Treasury Shares Accumulated Common Stock for Stock Shares Amount Deficit Total ____________ _________ ________ ______ ___________ ____________ Balance - June 30, 1995 $5,554,874 $(75,362) $(1,045,007) $4,460,540 Payment of notes receivable 11,434 11,434 Conversion of shares 2 -0- Exercise of options 113,575 113,800 Issuance of stock for obligations in lieu of cash 36,184 36,250 Exercise of bridge loan warrants 153,617 153,952 Sale of stock in connection with private placement 1,970,063 1,975,000 Costs related to private placement (442,395) (442,395) Exercise of IPO warrants 137,785 138,000 Issuance of shares with acquisitions 392,678 393,548 Exercise of private placement warrants 149,625 150,000 Amount paid for options, not yet issued 9,375 9,375 Compensatory stock options 3,000 3,000 Net loss, year ended June 30, 1996 (585,315) (585,315) _________ _______ _______ _________ ___________ _________ Balance - June 30, 1996 8,078,383 (63,928) (1,630,322) 6,417,189 Costs related to private placements (141,295) (141,295) Issuance of shares with acquisitions 838,524 840,819 Exercise of options 59,709 59,844 Payment of notes receivable 662 662 Conversion of shares -0- Issuance of employee shares stock purchase plan 30,530 30,624 Issuance of shares in connection with consulting agreement 79,800 80,000 Issuance of warrants with convertible debentures 125,000 125,000 Cancellation of notes receivable 37,818 8,656 $(37,818) -0- Payment of notes receivable 25,448 25,448 Issuance of preferred stock 999,990 1,000,000 Adjustment related to beneficial conversion feature of convertible preferred stock and convertible debentures 330,284 (200,000) 130,284 Conversion of preferred stock (2,295) -0- Dividend on preferred stock (4,330) (4,330) Net loss, year ended June 30, 1997 (2,839,664) (2,839,664) ____________ _________ _______ _________ ___________ __________ Balance - June 30, 1997 $10,398,630 -0- 8,656 $(37,818) $(4,674,316) $5,724,518
See notes to financial statements F-5 PHC, INC. AND SUBSIDIARIES Year Ended June 30, ____________ 1997 1996 __________________________ Consolidated Statements of Cash Flows Cash flows from operating activities: Net loss $ (2,839,664) $ (585,315) Adjustments to reconcile net loss to net cash used in operating activities: Deferred tax benefit (418,137) Depreciation and amortization 679,248 554,025 Beneficial conversion feature of convertible debt 130,284 Compensatory stock options and stock and warrants issued for obligations 205,000 39,250 Changes in: Accounts receivable (1,649,303) (2,985,052) Prepaid expenses and other current assets (309,188) (69,978) Other assets 113,419 (107,711) Net assets of operations held for sale 56,682 106,886 Accounts payable 1,044,282 1,414,089 Accrued expenses and other liabilities (167,763) 295,475 ___________ ___________ Net cash used in operating activities (2,737,003) (1,756,468) ___________ ___________ Cash flows from investing activities: Acquisition of property and equipment and intangibles (895,914) (1,557,419) Loan receivable (3,063,177) (17,462) Net cash used in investing activities (3,959,091) (1,574,881) Cash flows from financing activities: Revolving debt, net 1,789,981 Proceeds from borrowings 2,749,505 2,043,748 Payments on debt (696,886) (402,828) Deferred financing costs 21,498 (711,960) Issuance of capital stock 944,173 2,109,166 Convertible debt 2,500,000 _________ __________ Net cash provided by financing activities 7,308,271 3,038,126 _________ __________ Net increase (decrease) in cash and cash equivalents 612,177 (293,223) Beginning balance of cash and cash equivalents 293,515 586,738 Ending balance of cash and cash equivalents $ 905,692 $ 293,515 ___________ ___________ Supplemental cash flow information: Cash paid during the year for: Interest $ 1,933,133 $ 779,898 Income taxes $ 86,414 $ 187,120 Supplemental disclosures of noncash investing and financing activities: Stock issued for acquisitions of equipment and services $ 840,819 $ 393,548 Note payable due for litigation settlement $ 225,000 Capital leases $ 284,048 $ 94,699 Conversion of preferred stock $ 500,000 Beneficial conversion feature of preferred stock $ 200,000 See notes to financial statements F-6 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1997 and 1996 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and consolidation: PHC, Inc. ("PHC") operates substance abuse treatment centers in several locations in the United States, a nursing home in Massachusetts, a psychiatric hospital in Michigan and psychiatric outpatient facilities in Nevada, Kansas and Michigan. PHC, Inc. also manages a psychiatric practice in New York, operates an outpatient facility through a physicians practice, and operates behavioral health centers through its newest acquisitions. PHC of Utah, Inc. ("PHU"), PHC of Virginia, Inc. ("PHV") and PHC of Rhode Island, Inc. ("PHR") provide treatment of addictive disorders and chemical dependency. PHC of Michigan, Inc. ("PHM") provides inpatient and outpatient psychiatric care. PHC of Nevada, Inc. ("PHN") and PHC of Kansas, Inc. ("PHK") provide psychiatric treatment on an outpatient basis. North Point-Pioneer, Inc. ("NPP") operates six outpatient behavioral health centers under the name of Pioneer Counseling Centers. Behavioral Stress Centers, Inc. ("BSC") provides management and administrative services to psychotherapy and psychological practices (see Note L). Pioneer Counseling of Virginia, Inc. ("PCV'), an 80% owned subsidiary provides outpatient services through a physicians practice (see Note L). Quality Care Centers of Massachusetts, Inc. ("Quality Care") operates a long-term care facility known as the Franvale Nursing and Rehabilitation Center. STL, Inc. ("STL") operated day care centers (see Note J). The consolidated financial statements include PHC and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. For the year ended June 30, 1996, the Company incurred start-up costs related to an addition at Quality Care prior to obtaining a license to admit patients. These costs, amounting to $128,313, are included in other expense in the accompanying statement of operations under the caption "Start-up Costs". During the year ended June 30, 1997, the Company recorded an increase in its accounts receivable reserve, a substantial portion of the increase was recorded in the fourth fiscal quarter. The Company is currently reviewing these adjustments to determine if some of these adjustments should have been made in prior fiscal quarters. Revenues and accounts receivable: Patient care revenues are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare. Revenues under third-party payor agreements are subject to examination and adjustment, and amounts realizable may change due to periodic changes in the regulatory environment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between the amounts accrued and subsequent settlements are recorded in operations in the year of settlement. A substantial portion of the Company's revenue at the Franvale Nursing and Rehabilitation Center is derived from patients under the Medicaid and Medicare programs. There have been, and the Company expects that there will continue to be, a number of proposals to limit Medicare and Medicaid reimbursement, as well as reimbursement from certain private payor sources for both Franvale and substance abuse treatment center services. The Company cannot predict at this time whether any of these proposals will be adopted or, if adopted and implemented, what effect such proposals would have on the Company. Medicaid reimbursements are currently based on established rates depending on the level of care provided and are adjusted prospectively at the beginning of each calendar year. Medicare reimbursements are currently based on provisional rates that are adjusted retroactively based on annual calendar cost reports filed by the Company with Medicare. The Company's calendar year cost reports to Medicare are routinely audited on an annual basis. The Company periodically reviews its provisional billing rates and provides for estimated Medicare adjustments. The Company believes that adequate provision has been made in the financial statements for any adjustments that might result from the outcome of Medicare audits. F-7 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30,1997 and 1996 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues and accounts receivable: (continued) The Company has $1,787,000 receivables, from Medicaid and Medicare, at June 30, 1997, which constitutes a concentration of credit risk should Medicaid and Medicare defer or be unable to make reimbursement payments as due. Charity care amounted to approximately $725,000 and $865,000 at June 30, 1997 and 1996, respectively and is classified as patient care revenue and an equal amount of cost is charged to patient care expenses in the statements of operations. Property and equipment: Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets using accelerated and straight-line methods. The estimated useful lives are as follows: Estimated Assets Useful Life _______ __________________ Buildings 20 through 39 years Furniture and equipment 3 through 10 years Motor vehicles 5 years Leasehold improvements Term of lease Other assets: Other assets represent deposits, deferred expenses and covenants not to compete. Covenants not to compete are amortized over the life of the underlying agreement using the straight line method. Goodwill, net of accumulated amortization: The excess of the purchase price over the fair market value of net assets acquired are being amortized on a straightline basis over their estimated useful lives, generally twenty years. Loss per share: Net loss per share is based on the weighted average number of shares of common stock outstanding during each period excluding Class C common shares held in escrow. Common stock equivalents have been excluded since they are antidilutive. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-8 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30,1997 and 1996 NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTIN POLICIES (CONTINUED) Cash equivalents: Cash equivalents are short-term highly liquid investments with original maturities of less than three months. Fair value of financial instruments: The carrying amounts of cash, trade receivables, other current assets, accounts payable, notes payable and accrued expenses approximate fair value. Impairment of long-lived assets: During the year ended June 30, 1997 the Company wrote-off the carrying value of the goodwill for one of its subsidiaries in the amount of approximately $50,000. Stock-based compensation: The Company accounts for its employee stock-based compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based method of accounting for stock-based compensation plans. The Company adopted the disclosure only alternative in fiscal year 1997 which requires disclosure of the pro forma effects on loss and loss per share as if SFAS No. 123 had been adopted, as well as certain other information. NOTE B - PROPERTY AND EQUIPMENT Property and equipment is comprised as follows: June 30, ________ 1997 1996 _____________________ Land $ 302,359 $ 251,759 Buildings 7,854,419 7,338,838 Furniture and equipment 1,760,359 1,404,716 Motor vehicles 50,889 50,889 Leasehold improvements 385,543 301,067 __________ __________ 10,353,569 9,347,269 Less accumulated depreciation and amortization 1,945,358 1,463,206 __________ __________ $8,408,211 $7,884,063 __________ __________ NOTE C - LONG-TERM DEBT At June 30, 1996, the Company had substantially completed an addition and renovation to the Quality Care facility in which 37 new beds were added. The Company financed this addition and renovation through the United States Department of Housing and Urban Development ("HUD"). At June 30, 1997 and June 30, 1996 unamortized deferred financing costs related to the construction note payable totalled $690,750 and $711,960, respectively, and are being amortized over the life of the note. Interest costs capitalized in conjunction with the construction approximated $65,250. F-9 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, l997 and 1996 NOTE C - LONG-TERM DEBT (CONTINUED) Long-term debt is summarized as follows: June, 30, 1997 1996 ______________________ Note payable with interest at 9% requiring monthly payments of $1,150 through May 2001 $44,816 $58,154 Note payable due in monthly installments of $2,000 including imputed interest at 8% through April 1, 1999 40,574 60,163 9% mortgage note due in monthly installments of $4,850 through July 1, 2012, when the remaining principal balance is payable 492,996 505,485 Note payable due in monthly installments of $21,506 including interest at 10.5% through November 1, 1999, collateralized by all assets of PHN and certain receivables 547,092 735,213 Construction obligations: Construction note payable collateralized by real estate and insured by HUD due in monthly installments of $53,635, including interest at 9.25%, through December 2035 6,757,422 6,301,986 Other construction obligations to be added to note payable 344,802 Note payable to a former vendor, payable in monthly installments of $19,728 including interest at 9.5% 152,353 Note payable due in monthly installments of $26,131 including interest at 11.5% through June 2000 when the remaining principal balance is payable, collateralized by all assets of NPP (see Note L) 818,371 Note payable due in monthly installments of $5,558 including interest at 9.25% through May 2012 when the remaining principal balance is payable, collateralized by the real estate 538,605 Term mortgage note payable with interest only payments through March 1998 principal due in monthly installments of $9,167 beginning April 1998 through February 2001, a balloon payment of approximately $780,000 plus interest is due March 2001, interest at prime plus 5% (13.5% at June 30, 1997) collateralized by all assets of PHM 1,100,000 __________ __________ 10,339,876 8,158,156 Less current maturities 580,275 403,894 __________ __________ Noncurrent maturities $9,759,601 $7,754,262 __________ __________ F-10 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30,1997 and 1996 NOTE C - LONG-TERM DEBT (CONTINUED) Maturities of long-term debt are as follows as of June 30, 1997: Year Ending June 30, Amount ___________ ___________ 1998 $580,275 1999 692,681 2000 583,450 2001 1,388,742 2002 48,624 Thereafter 7,046,104 $10,339,876 In 1997, the Company issued 7% convertible debentures due December 31, 1998 in the aggregate principal amount of $3,125,000. The number of shares of Class A common stock into which the debentures may be converted is determined by dividing the principal amount to be converted by the conversion price. The conversion price is equal to 94% of the average closing bid price of the Class A common stock as reported by NASDAQ for the five trading days immediately preceding the date of conversion. The beneficial conversion feature, valued at $130,284, was recorded as additional interest. In addition, on March 31, 1997 the Company issued warrants to the debenture holders as compensation for amending the debenture agreement to allow for a later filing of the Registration Statement which was originally required to be filed in December 1996. The warrants provide for the purchase of 150,000 shares of Class A common stock at $2.00 per share and expire in 2003. The warrants were valued at $125,000. Subsequent to June 30, 1997, all of the convertible debentures were converted into 1,331,696 shares of Class A common stock. The Company has entered into a revolving credit note and a secured note with maximum advances of $1,500,000 and $1,000,000, respectively. Advances are made based on a percentage of accounts receivable and principal is payable upon receipt of proceeds of the accounts receivable. Interest is payable monthly at prime plus 2.25% (10.75% at June 30, 1997). These agreements expire on February 1999 and July 1998, respectively, automatically renewable for one-year periods thereafter unless terminated by either party. Upon expiration, all remaining principal and interest is due. The notes are collateralized by substantially all of the assets of the Company's subsidiaries. NOTE D - CAPITAL LEASE OBLIGATION At June 30, 1997, the Company is obligated under various capital leases for equipment and real estate providing for monthly payments of approximately $31,000 for fiscal 1998 and terms expiring from December 1997 through February 2014. The carrying value of assets under capital leases is as follows: June 30, 1997 1996 _______________________ Building $1,477,800 $1,477,800 Equipment and improvements 485,004 214,754 Less accumulated depreciation and (501,732) (400,768) amortization $ 1,461,07 1,291,786 __________ __________ F-11 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30,1997 and 1996 NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED) Future minimum lease payments under the terms of the capital lease agreements are as follows at June 30, 1997: Year Ending June 30, Real Equipment Property Total ____________ __________ __________ __________ 1998 $140,307 $ 231,000 $371,307 1999 117,083 239,000 356,083 2000 95,121 259,248 354,369 2001 70,828 272,208 343,036 2002 13,557 295,188 308,745 Thereafter 4,641,341 4,641,348 __________ __________ __________ Total future minimum lease 436,896 5,937,992 6,374,888 payments Less amount representing interest 83,804 4,556,574 4,640,378 __________ __________ __________ Present value of future minimum lease payments 353,092 1,381,418 1,734,510 Less current portion 102,632 37,316 139,948 __________ __________ __________ Long-term obligations under capital lease $250,460 $1,344,102 $1,594,562 __________ __________ __________ The Company has an irrevocable option to purchase the real property noted above for $1,150,000 on March 1, 1998 or $1,100,000 on March 1, 1999 or any subsequent March 1 through the end of the lease. NOTE E - NOTES PAYABLE - RELATED PARTIES Related party debt is summarized as follows: June 30, 1997 1996 _______________________ Note payable, President and principal stockholder, interest at 8%, due in installments through 1998 $55,296 $ 78,996 Notes payable, other related parties, interest at 12% and payable on demand 20,000 24,998 ________ ________ 75,296 103,994 Less current maturities 51,600 56,600 ________ ________ $23,696 47,394 ________ ________ Maturities of related party debt are as follows at June 30, 1997: Year Ending June 30, Amount ___________ ___________ 1998 $51,600 1999 23,696 __________ $75,296 __________ Related party interest on notes receivable related to the purchase of Class A common stock approximated $1,699 and $4,295 for the years ended June 30, 1997 and 1996, respectively. F-12 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30,1997 and 1996 NOTE F - INCOME TAXES The Company has the following deferred tax assets included in the accompanying balance sheets: Year Ended June 30, ____________ 1997 1996 ___________ ________ Temporary differences attributable to: Allowance for doubtful accounts $1,007,000 $ 510,000 Depreciation 147,000 154,700 Other 3,000 5,300 Operating loss carryforward 340,000 ___________ ________ Total deferred tax asset 1,497,000 670,000 Less: Valuation allowance (827,000) Current portion (515,300) (515,300) ___________ ________ Long-term portion $154,700 $154,700 ___________ ________ The Company had no deferred tax liabilities at June 30, 1997 and 1996. Income tax expense (benefit) is as follows: YearEnded June 30, ____________ 1997 1996 __________ _________ Deferred income taxes benefit $(418,137) Current income taxes $197,311 206,546 __________ _________ $197,311 $(211,591) __________ _________ Reconciliations of the statutory U.S. Federal income taxes based on a rate of 34% to actual income taxes is as follows: YearEnded June 30, ____________ 1997 1996 __________ _________ Income tax benefit at statutory rate $(898,400) $(271,000) Increase in valuation allowance 827,000 Increase due to nondeductible items, primarily penalties and travel and entertainment expenses 12,000 12,100 Other 59,400 (33,541) __________ _________ $ 197,311 $(211,591) __________ _________ The Company has a net operating loss carryforward amounting to approximately $994,000 which expires at various dates through 2012. Subsequent to June 30, 1997, the Company may be subject to Internal Revenue Code provisions which limit the loss carryforward available for use in any given year. F-13 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30,1997 and 1996 NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES Operating leases: The Company leases office and treatment facilities and furniture and equipment under operating leases expiring on various dates through January 2003. Rent expense for the years ended June 30, 1997 and 1996 was approximately $752,000 and $450,000, respectively. Minimum future rental payments under noncancelable operating leases, having remaining terms in excess of one year as of June 30, 1997 are as follows: Year Ending June 30, Amount _____________ __________ 1998 $ 688,105 1999 441,833 2000 297,780 2001 202,876 2002 93,450 Thereafter 136,864 ____________ $1,860,908 ____________ Litigation: The Company is involved in litigation related to the use of its trademark name, PIONEER HEALTHCARE, in an action pending before a federal court. If the Company were required to discontinue using the PIONEER HEALTHCARE mark, the costs and/or monetary damages related to the litigation involved could have an adverse effect on the Company's financial performance. NOTE H - STOCK PLANS [1] Stock plans: The Company has three stock plans: a stock option plan, an employee stock purchase plan and a nonemployee directors' stock option plan. The stock option plan provides for the issuance of a maximum of 300,000 shares of Class A common stock of the Company pursuant to the grant of incentive stock options to employees or nonqualified stock options to employees, directors, consultants and others whose efforts are important to the success of the Company. Subject to the provisions of this plan, the compensation committee has the authority to select the optionees and determine the terms of the options including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option will not be less than the market price of the Class A common stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options. The employee stock purchase plan provides for the purchase of Class A common stock at 85 percent of the fair market value at specific dates, to encourage stock ownership by all eligible employees. A maximum of 1 00,000 shares may be issued under this plan. Also in October 1995, the Company adopted a nonemployee directors' stock option plan that provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board. Through June 30, 1997, options for 1 1,500 shares were granted under this plan. A maximum of 30,000 shares may be issued under this plan. Each outside director shall be granted an option to purchase 2,000 shares of Class A F-14 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30,1997 and 1996 NOTE H - STOCK PLANS (CONTINUED) [1] Stock plans: (continued) common stock at fair market value, vesting 25% immediately and 25% on each of the first three anniversaries of the grant. In February 1997, all 95,375 shares underlying the then outstanding employee stock options were repriced to the current market price, using the existing exercise durations. Under the above plans 179,198 shares are available for future grant or purchase. The Company had the following activity in its stock option plans for fiscal 1997 and 1996: Number Weighted-Average of Exercise Price Shares Per Share _________ ________________ Option plans: Balance - June 30, 1995 92,000 $5.10 Granted 46,500 $6.20 Cancelled (1,250) $5.00 Exercised (22,500) $5.06 _________ Balance - June 30, 1996 114,750 $5.56 Granted 125,500 $4.56 Repriced options: Original (95,375) $5.99 Repriced 95,375 $3.50 Cancelled (21,400) $6.05 Exercised (13,475) $5.16 _________ Balance - June 30, 1997 205,375 $4.27 _________ Options for 89,250 shares are exercisable as of June 30, 1997 at exercise prices ranging from $2.87 to $6.63 and a weighted-average exercise price of approximately $3.71 per share, with a weighted-average remaining contractual life of approximately three years. The exercise prices of options outstanding at June 30, 1997 range from $2.87 to $6.63 per share and have a weighted-average exercise price of approximately $3.07 per share, with a weighted-average remaining contractual life of approximately four years. (2) Stock-based compensation: The Company has adopted the disclosure-only provisions of SFAS No. 123, but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. There was no compensation expense recognized in 1997 or 1996. If the Company had elected to recognize compensation cost for the plans based on the fair value at the grant date for awards granted, consistent with the method prescribed by SFAS No. 123, net loss per share would have been changed to the pro forma amounts indicated below: Year Ended June 30, ___________ 1997 1996 ______________________________ Net loss As reported $(2,839,664) $(585,315) Pro forma (2,893,272) (610,497) Net loss per As reported share $(0.87) $(0.22) Pro forma (0.88) (0.23) F-15 PHC, INC.AND SUBSIDIARIES Notes to Financial Statements June 30, 1997 and 1996 NOTE H - STOCK PLANS (CONTINUED) [2] Stock-based compensation: (continued) The fair value of the Company's stock options used to compute pro forma net loss and net loss per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1997 and 1996: dividend yield of 0%; expected volatility of 30%; a risk-free interest rate of between 5% and 7%; and an expected holding period of five years. The per share weighed-average grant-date fair value of options granted during the years ended June 30, 1997 and 1996 was $3.44 and $2.07, respectively. NOTE I - SEGMENT INFORMATION The Company's continuing operations are classified into two primary business segments: substance abuse/psychiatric services and long-term care. Year Ended June 30, _____________ 1997 1996 ___________________________ Revenue: Substance abuse/psychiatric services $20,700,616 $16,525,672 Long-term care 5,306,717 5,043,922 Other 629,761 233,164 Management fees 597,278 ____________ ____________ $27,234,372 $21,802,758 ____________ ____________ Income (loss) from operations: Substance abuse/psychiatric services $ 627,341 $1,024,245 Long-term care (1,447,468) (826,463) Other (PDSS) 305,321 86,757 General corporate (427,272) (180,966) Interest and other income expense, net (1,700,275) (900,479) ____________ ____________ Loss before income taxes $(2,642,353) $ (796,906) ____________ ____________ Depreciation and amortization: Substance abuse/psychiatric services $ 449,641 $ 349,437 Long-term care 210,130 176,450 ____________ ____________ General corporate 19,477 28,138 $ 679,248 $ 554,025 ____________ ____________ Capital expenditures: Substance abuse/psychiatric services $ 729,661 $ 233,466 Long-term care 213,489 982,978 General corporate 63,150 16,583 ____________ ____________ $1,006,300 $ 1,233,027 ____________ ____________ Identifiable assets: Substance abuse/psychiatric services $18,352,342 $10,877,197 Long-term care 7,437,633 8,619,133 General corporate 2,070,834 1,264,205 Net assets of operations held for sale 56,682 ____________ ____________ 27,860,809 $20,817,217 ____________ ____________ F-16 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1997 and 1996 NOTE J - OPERATIONS HELD FOR SALE The Company has systematically phased out its day care center operations (STL). At June 30, 1996, the Company had net assets relating to its day care centers amounting to approximately $57,000, which primarily represented the depreciated cost of one remaining real estate parcel. The parcel was sold in October 1996 at a gain of approximately $38,000. NOTE K - CERTAIN CAPITAL TRANSACTIONS In addition to the outstanding options under the Company's stock plans (Note H), the Company has the following options and warrants outstanding at June 30, 1997: Number of Exercise Expiration Description Units/Shares Price Date _____________________________________________________________________________ Bridge warrants 5,024 units $4.38 per unit September 1998 Unit purchase option 148,171 units $5.91 per unit March 1999 IPO warrants 1,681,832 shares $6.29 per share March 1999 Private placement warrants 715,682 shares $3.93 per share January 1999 Bridge warrants 34,710 shares $7.39 per share March 1999 Warrant for services 25,000 shares $6.88 per share October 2001 Warrant for services 3,093 shares $3.39 per share February 2002 Consultant warrant (see below) 160,000 shares $2.62 per share March 2002 Convertible debenture warrants (Note C) 150,000 shares $2.00 per share March 2002 Preferred stock warrant 50,000 shares $2.75 per share June 2000 Each unit consists of one share of Class A common stock and a warrant to purchase one share of Class A common stock at $7.50 per share. In June 1997, the Company received $1,000,000 in exchange for the issuance of Series A convertible preferred stock and warrants to purchase 50,000 shares of Class A common stock. The warrants are exercisable at $2.75 per share and expire in 2000. The warrants were valued at $30,000. The number of shares of Class A common stock into which the preferred stock may be converted is equal to 80% of the closing bid price of the Class A common stock as reported by NASDAQ for the five trading days immediately preceding the conversion. The beneficial conversion feature, due to the 80% discount above, valued at $200,000 was recorded as additional dividends. In June 1997, 500 shares of preferred stock were converted into 229,640 shares of Class A common stock. Subsequent to year-end the 500 remaining shares of preferred stock were converted into 246,305 shares of Class A common stock. The issuance of these securities will result in the issuance of some additional Class A common shares under existing dilution agreements with other stockholders. Cumulative preferred dividends are at the rate of $60 per share per year, payable quarterly. Dividends are payable in cash or in shares of preferred stock at $1,000 per share. At June 30, 1997, accrued dividends amounted to $4,330. Certain Consultant Warrants may be canceled if certain stock prices, as defined in the agreement, are not achieved by March 3, 1998. In February 1996, the Company issued, in a private placement, units comprised of 6,250 shares of Class A common stock and warrants to purchase 9,375 shares of Class A common stock. A total of 79 units, representing 493,750 shares of Class A common stock and 740,625 warrants were issued in the offering at a gross purchase price of $1,975,000. Fees and expenses payable in connection with the offering total $442,395. Subject to the terms and conditions of the applicable warrant agreement, each warrant is exercisable for one share of Class A common stock at an exercise price of $4.00, subject to adjustment upon certain events. The warrants expire in January 1999. Upon the issuance of the units described above, certain additional shares of Class A common stock or securities exercisable therefor become issuable under the antidilution provisions of certain outstanding securities of the Company. F-17 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1997 and 1996 NOTE K - CERTAIN CAPITAL TRANSACTIONS (CONTINUED) Subsequent to June 30, 1997, the Class C common stock was canceled and retired because of restrictions on the release of the stock, due to earnings targets which were not achieved. Subsequent to June 30, 1997, the Company issued a warrant for the purchase of 150,000 shares of common stock in exchange for services. The exercise price of the warrant is $2.50 per share and the warrant expires May 2002. NOTE L - ACQUISITIONS On November 1, 1995, the Company purchased an outpatient facility located in Nevada ("PHN") which provides psychiatric services to patients. The Company acquired the tangible and intangible property owned by the seller of the business for consideration consisting of $631,000 in cash and 75,000 shares of Class A common stock of PHC, Inc. which were valued at $323,000. The purchase price was allocated as follows: Accounts receivable $231,509 Equipment and other assets 54,397 Covenant not to compete 10,500 Goodwill 671,359 Accrued benefits payable (13,765) _____________ $954,000 _____________ On March 29, 1996 PHN entered into a lease agreement for the real estate. The lease payments, which increase annually, are due in equal monthly installments over a period of four years. On March 16, 1996, the Company purchased an outpatient facility located in Kansas ("PHK'') which provides psychiatric services to patients. The Company acquired the tangible and intangible property owned by the seller of the business for consideration consisting of 12,000 shares of Class A common stock of PHC, Inc., valued at $70,548. The purchase price was allocated as follows: Equipment and other assets $20,000 Covenant not to compete 10,000 Goodwill 40,548 _____________ $70,548 _____________ In connection with the acquisition, PHK entered into a lease agreement for the real estate. The lease payments, which increase annually, are due in equal monthly installments over a period of three years. In September 1996, the Company purchased the assets of seven outpatient behavioral health centers located in Michigan ("NPP"). The centers were purchased for $532,559 and 15,000 shares of Class A common stock of PHC, Inc. valued at $5.04 per share. The Company borrowed $900,000 (see Note C) to finance the purchase and to provide working capital for the centers. The purchase price was allocated as follows: Office equipment $ 18,000 Covenants note-to-compete 20,000 Goodwill 597,746 Deposits 15,072 Liabilities assumed (42,659) _____________ $608,159 _____________ F-18 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1997 and 1996 NOTE L - ACQUISITIONS (CONTINUED) Concurrent with the asset purchase agreement, NPP entered into an employment agreement with a former owner which requires an annual salary of $150,000 and an annual bonus. The agreement is effective for four years and is automatically extended for successive one year terms unless terminated. The salary and bonus are subject to adjustment based on collected billings. NPP also entered into a management agreement whereby $1,500 per month would be paid for five years to the former owners. Subsequent to year-end, under the employment agreement, the Company issued 15,000 unregistered shares of Class A common stock. On November 1, 1996, BSC-NY, Inc. ("BSC"), merged with Behavioral Stress Centers, Inc., a provider of management and administrative services to psychotherapy and psychological practices in the greater New York City Metropolitan Area. In connection with the merger, the Company issued 150,000 shares of PHC, Inc. Class A common stock to the former owners of Behavioral Stress Centers, Inc. Also, in connection with the merger, another entity was formed, Perlow Physicians, P.C. ("Perlow"), to acquire the assets of the medical practices theretofore serviced by BSC. The Company advanced Perlow the funds to acquire those assets and at June 30, 1997 Perlow owed the Company $3,063,177 which includes in addition to acquisition costs, management fees of approximately $511,000 and interest on the advances of approximately $176,000. It is expected that the obligations will be paid over the next several years and accordingly, most of these amounts have been classified as noncurrent. The Company has no ownership interest in Perlow. The purchase price of BSC was allocated as follows: Goodwill $63,600 Equipment and other assets 20,000 ________ $83,600 ________ The merger agreement requires additional purchase price to be paid by BSC to the former owners of Behavioral Stress Centers, Inc. for the three years following the merger date. The additional purchase price is based on the income of BSC before taxes and is to be paid in PHC stock, at market value up to $200,000 and the balance, if any, in cash. BSC also entered into a management agreement with Perlow. The agreement requires Perlow to pay 25% of its practice expenses to BSC on a monthly basis over a five-year period with an automatic renewal for an additional five-year period. On November 1, 1996, BSC entered into a lease agreement for its facilities. The lease payments are due in equal monthly installments over a three year period with an option to extend annually for three additional years. The lease is to be paid by Perlow in accordance with the management agreement. On January 17, 1997, with an effective date of January 1, 1997, the Company entered into a Stock Exchange Agreement with a Virginia corporation owned by two individuals to whom the Company has an outstanding note payable. The corporation consists of private practices of psychiatry. The Stock Exchange Agreement provided that in exchange for $50,000 in cash and 64,500 shares of restricted Class A common stock, the Company received an 80% ownership interest in the Virginia corporation. The Company also paid $80,444 in legal fees in connection with the Agreement. Concurrent with the Stock Exchange Agreement the two owners of the Virginia corporation each executed Employment Agreements with the Virginia corporation to provide professional F-19 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1997 and 1996 NOTE L - ACQUISITIONS (CONTINUED) services and each was granted an option to purchase 15,000 shares of Class A common stock at an exercise price of $4.87 per share. The options expire on April 1, 2002. Each agreement requires an annual salary of $200,000 and expires in five years. Further, a Plan and Agreement of Merger was executed whereby the Virginia corporation was merged into PCV. On January 17, 1997 PCV entered into a purchase and sale agreement with an unrelated general partnership, to purchase real estate with buildings and improvements utilized by the Virginia Corporation for approximately $600,000 of which $540,000 was paid through the issuance of a note (Note C). In accordance with the above agreements the purchase price was allocated as follows: Land $ 50,600 Building 540,000 Covenant not-to-compete 50,000 Goodwill 285,038 _____________ $925,638 _____________ In accordance with the agreement the two owners will be paid a finders fee for all subsequently acquired medical practices within a 200 mile radius of PCV and those medical practices identified by the owners wherever the location. The finders fee is payable in Class A common stock and in cash. Information is not available to present pro forma financial information relating to the 1997 acquisitions. The Company has so advised the Securities and Exchange Commission and has received a no action letter with respect to this matter. Had the acquisitions made during the fiscal years ended June 30, 1996, been made as of July 1, 1995, the pro forma effect on the Company's results of operations is immaterial. NOTE M - SALE OF RECEIVABLES The Company has entered into a sale and purchase agreement whereby third-party receivables are sold at a discount with recourse. The interest rate is calculated at 5.5% plus the six-month LIBOR rate which is 11.5% and 11.3% at June 30, 1997 and 1996, respectively. The amount of receivables subject to recourse at June 30, 1997 totaled approximately $577,000 and the agreement states that total sales of such outstanding receivables are not to exceed $4,000,000. Proceeds from the sale of these receivables totalled approximately $3,000,000 and $3,500,000 for the years ended June 30, 1997 and 1996, respectively. The purchase fees related to the agreement amount to approximately $127,000 and $73,720 for the years ended June 30, 1997 and 1996, respectively, and are included in interest expense in the accompanying consolidated statement of operations. The agreement expires December 31, 1997. NOTE N - SUBSEQUENT FINANCING In September 1997, the Company received $500,000 in exchange for the issuance of 170,414 shares of unregistered Class A common stock. Also, subsequent to June 30, 1997, the Company purchased the assets of an outpatient clinic in Virginia for 26,024 shares of Class A common stock and $50,000 in cash. The clinic's operations will be included in PCV. F-20 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed in behalf by the undersigned, thereunto duly authorized. PHC, INC. Date: October 29, 1997 By: /S/ BRUCE A. SHEAR Bruce A. Shear, President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----