-----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, RorZUJqpk7SwAo7ZnDEZ2lFgm4MiHrV7prBfAGOhrhhT/XOc1Wu3TF+ojMCmsOBN DsBViKgQWmsCeP7F/SwUxw== 0000915127-99-000057.txt : 19991130 0000915127-99-000057.hdr.sgml : 19991130 ACCESSION NUMBER: 0000915127-99-000057 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19991129 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: 99765534 BUSINESS ADDRESS: STREET 1: 200 LAKE ST STE 102 CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 9785362777 MAIL ADDRESS: STREET 1: 200 LAKE ST STREET 2: STE 102 CITY: PEABODY STATE: MA ZIP: 01960 10-K/A 1 AMENDMENT #2 TO 10-KSB FILED 10/13/99 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A2 [X] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 [FEE REQUIRED] for the fiscal year ended June 30, 1999 [ ] Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from to Commission file number: 0-22916 PHC, INC. (Name of small business issuer in its charter) MASSACHUSETTS 04-2601571 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 200 LAKE STREET, SUITE 102, PEABODY, MA 01960 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (978) 536-2777 (New area code) Securities registered under Section 12(b) of the Act: NONE. Securities registered under Section 12(g) of the Act: CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of class) (1) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. No Disclosure X The issuer's revenues for the fiscal year ended June 30, 1999 were $ 19,139,496. The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of September 15, 1999, was $6,353,776. (See definition of affiliate in Rule 12b-2 of Exchange Act). At September 15, 1999, 5,610,194 shares of the issuer's Class A Common Stock and 727,170 shares of the issuer's Class B Common Stock were outstanding. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes No X (2) Changes in this amendment include: 1. Item 6. Management's discussion and analysis or plan of operation is being amended to more clearly define refinement of collection and reserve policies, collection difficulties and increases in other assets. 2. Item 7. The footnotes to the financial statements are being expanded to include further explanation of accounting policies, additional information with regard to certain capital transactions, notes, taxes and acquisitions and detailed financial information by operating segment. (2) ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following is a discussion and analysis of the financial condition and results of operations of the Company for the years ended June 30, 1999 and 1998. It should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. During the fiscal years several businesses were acquired or closed which makes comparability of period results difficult. See Psychiatric Service Industry - Operating Statistics" in Part One, Item One of this report for further detail. Overview The Company presently provides health care services through two substance abuse treatment centers, a psychiatric hospital and seven outpatient psychiatric centers (collectively called "treatment facilities"). The Company's revenue for providing behavioral health services through these facilities is derived from Medicare and Medicaid and contracts with managed care companies, state agencies, railroads, gaming industry corporations and individual clients. The profitability of the Company is largely dependent on the level of patient census and the payor mix at these treatment facilities. The Company's administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases because of the fixed components of these expenses. The Company's most recent addition, Behavioral Health Online, Inc., is a provider of behavioral health information and education through its web site. Revenues from the web site are expected to be derived from behavioral health professionals for educational units required by professional standards, sponserships and advertising for behavioral health suppliers and the sale of books, tapes and other behavioral health related items to behavioral health professionals and other consumers. The healthcare industry is subject to extensive federal, state and local regulation governing, among other things, licensure and certification, conduct of operations, audit and retroactive adjustment of prior government billings and reimbursement. In addition, there are ongoing debates and initiatives regarding the restructuring of the health care system in its entirety. The extent of any regulatory changes and their impact on the Company's business is unknown. Managed care has had a profound impact on the Company's operations, in the form of shorter lengths of stay, extensive certification of benefits requirements and reduced payment for services. (3) Results of Operations Years Ended June 30, 1999 and 1998 The Company experienced an increase in profitability from its continuing operations. Earnings before taxes, interest, depreciation and amortization for currently operating facilities increased by $1,351,169 for the year ended June 30, 1999 to $845,747 from a loss for the year ended June 30, 1998 of $505,422. These amounts exclude income and loss for both years for the California, Rhode Island, and Virginia operations. Although net revenue for the operating facilities decreased by 2%, approximately $337,000, for the year ended June 30, 1999, many changes toward more efficient operations resulted in non-proportional decreases in many operating expenses. Total consultant fees related to patient care decreased 16% to $2,273,601 for the year ended June 30, 1999 from $2,721,960 for the year ended June 30, 1998. While patient care related payroll expense increased only 2% to $5,507,138 for the year ended June 30, 1999 from $5,417,628 for the year ended June 30, 1998. This is a combined 4% reduction in the cost of salaries related to patient care as a result of the more efficient use of salaried employees time and the reduction in the use of non-employee therapists for patient care. More efficient ordering has resulted in a decrease of 62% in the cost of hospital supplies excluding food, laboratory fees and pharmacy, which also decreased. A change in laboratory service provider and more efficient management of requests for lab tests resulted in a 37%, approximately $76,000, decrease in laboratory fees expense for the fiscal year ended June 30, 1999. A change in pharmacy and a shift in some pharmacy billing from our facilities to the vendor resulted in a 7%, approximately $14,000, decrease in pharmacy costs for the operating facilities. Savings were also evident in administrative expenses for the operating facilities. More efficient ordering also resulted in a decrease of 10.8%, approximately $25,000, in the cost of general office supplies and expense. Consolidating marketing efforts contributed toward a 24%, approximately $74,000, decrease in marketing, promotion, and travel expenses. More efficient staffing in administrative positions resulted in a decrease of 17%, approximately $458,000, in administrative payroll, while the cost of administrative consultants also decreased 26% or approximately $63,000. Bad debt expenses also decreased 27%, approximately $775,000, due to the considerable charge to bad debt expense in the previous year and the current decline in accounts receivable. Because most of the changes outlined above were in place for all of the year ended June 30, 1999, the Company does not expect to experience the same decreases in expenses in future years but intends to work at maintaining the current level of expenses. The Company will, however, continue to evaluate operations looking for less expensive alternatives to provide the same quality service. The Company reduced its total loss by $5,090,703 for the fiscal year ended June 30, 1999 compared to June 30, 1998. The Company also continued to divest itself of facilities operating at a loss. The remaining Pioneer Counseling of Virginia clinic was closed in January 1999 resulting in approximately $300,000 in expenses to write-down intangible assets. The total loss recorded for Pioneer Counseling of Virginia, including this expense was approximately $810,000. The final cost of the release from two of the Michigan outpatient clinic leases is also reflected in the current fiscal year. The Company also experienced a loss of approximately $160,000 through its start up operations for Behavioralhealthonline.com. None of the start-up costs of the web site have been capitalized. Except for the purchase of equipment, all costs have been expensed (4) as incurred. The web site produces minimal revenues during the development stages when operating costs are high. To date, no revenues have been recorded for the web site. The web site is expected to be fully operational in the third quarter of the fiscal year 2000. In the fiscal year ended June 30, 1998 the Company experienced a loss from the discontinued operations of Franvale Nursing and Rehabilitation Center of approximately $2,200,000. The environment the Company operates in today makes collection of receivables, particularly older receivables, more difficult than in previous years. Accordingly, the Company has increased staff, standardized some procedures for collecting receivables and instituted a more aggressive collection policy, which has resulted in an overall decrease in its accounts receivable. In response to today's healthcare environment, the Company's collection policy calls for earlier contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process. Our collectors also seek assistance through every legal means, including the State insurance commissioner's office, when appropriate, to collect claims. This early concentration on claim collection allows facility staff to become aware of minor billing errors early and correct them before the claim can be denied for timely and accurate submission. Any valid claims denied due to billing errors on the part of the Company which require write-off are charged to bad debt expense in the period the account is written off. Any invalid claims result in a charge against revenue not reserves. An amount is recorded as a contractual adjustment only if an agreement with the insurance carrier is on file before the patient is admitted. Although the Company's receivables have decreased, the Company continues to reserve for bad debts based on managed care denials and past difficulty in collections. Changing conditions in healthcare required the Company to reevaluate its methods for determining collectability. The growth of managed care has negatively impacted reimbursement for behavioral health services with a higher rate of denials requiring higher reserves. The collection difficulties experienced are due to the denial of claim, that had been previously approved. Managed care companies frequently deny claims although authorization for treatment is on file. The Company has limited success in challenging these denials. Accordingly, the Company has adopted a more aggressive reserve policy to reserve amounts sooner to address these changing conditions in the healthcare environment. During the year ended June 30, 1998 the Company increased its bad debt reserve by approximately $300,000 to write down the receivables of the closed Rhode Island facility, Good Hope Center, and during the year ended June 30, 1999 the Company increased its bad debt reserve by approximately $33,000 to write down the receivables of the closed Virginia facility, Pioneer Counseling of Virginia, Inc. Total patient care revenue from all facilities, decreased 10% to $19,139,496 for the year ended June 30, 1999 from $21,246,189 for the year ended June 30, 1998. This decline in revenue is due primarily to the decline in census and closure of Good Hope Center in Rhode Island. Net inpatient care revenue from psychiatric services decreased 12% to $11,955,143 for the fiscal year ended June 30, 1999 compared to $13,640,801 for the year ended June 30, 1998 and net outpatient care revenue decreased 7% to $5,574,835 for the year ended June 30, 1999 from $6,008,552 for the year ended June 30, 1998. Revenues from Practice Management and Pioneer Development and Support Services ("PDSS") increased 3% to $1,519,518 for the year ended June 30, 1999 from $1,476,836 for the year ended June 30, 1998. All revenues reported above and in the accompanying statement of operations are shown net of estimated contractual adjustments and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated appropriate adjustments are made in the period the payment is received in accordance with the AICPA Audit and Accounting Guide for Health Care Organizations. Total patient care expenses for all facilities decreased 12% to $9,384,070 for the year ended June 30, 1999 from $10,706,639 for the year ended June 30, 1998. This decrease in patient care expenses is largely a result of the closure (5) of Good Hope Center and the Virginia clinics. The Company expects these expenses to decline in fiscal 2000 as compared to fiscal 1999. Total administrative expenses for all facilities decreased 17% to $7,865,013 for the year ended June 30, 1999 from $9,488,631 for the year ended June 30, 1998. This decrease in administrative expense is due largely to the one-time charges recorded in the fiscal year ended June 30, 1998. Expenses for the closure of Good Hope Center and the Blacksburg Clinic were among these one-time charges. There was significant increase in other assets in the year ended June 30, 1999. Other assets consist of deposits and other deferred expenses. This increase is primarily due to the deferred expenses of Quality Care Centers recorded during the year. These deferred expenses are legal expenses and other closure expenses relating to the move of records from the facility and production of facility records for various litigations as listed under ITEM 3 LEGAL PROCEEDINGS in this report. The deferred expenses will be offset against an expected gain to be realized upon the final resolution of the closing of Quality Care Centers. Year 2000 Compliance The Company was unable to reach an agreement with its Information Systems Vendor to upgrade its current accounts receivable software to accommodate a four-digit year. The Company has identified alternative software solutions, which are year 2000 compliant. The software installation is anticipated to be operational by the deadline; however, as a precaution, the Company has contacted each of its facilities' fiscal intermediaries and has been granted an extension of time beyond the HCFA deadline for year 2000 compliance. In the event that installation of the software is delayed, each facility is making plans to complete the billing process by adding the four-digit year manually for those bills that are not currently processed through a third party electronic biller. Although this is a time consuming and costly alternative, it will allow the Company to continue processing bills. The Company has already upgraded the network software at the corporate offices and most of its facilities and is currently upgrading hardware to accommodate all required software upgrades. The Company is currently in the process of contacting each third party payor of accounts receivable, financial institution, major supplier of essential products and utility to request the status of their year 2000 compliance. The company has received responses from approximately 60% of all vendors contacted. All operation critical equipment, telephones, elevators, etc., has been tested and found to be compliant. There are a few suppliers of goods and services critical to operations that have not yet responded. The Company is in the process of identifying alternate sources for these goods and services. To date the Company has expended approximately $60,000 on items relating to the year 2000 issues and anticipates approximately $165,000 in additional expenses relating to the upgrade of Company's computer systems. Liquidity and Capital Resources For the two fiscal years ended June 30, 1999, the Company met its cash flow needs through accounts receivable financing and by issuing debt and equity securities as follows: (6) DATE TRANSACTION TYPE NUMBER OF PROCEEDS MATURITY TERMS STATUS SHARES DATE 9/97 Common Stock 172,414 $500,000 N/A Issued with Common Stock warrants at a Sold 3.3% discount 9/97 Warrant issued as 86,207 -- 09/30/2002 exercise price outstanding part of the units $2.90 in the Private Placement of Common Stock 9/97 Warrant issued in 150,000 -- 05/31/2002 exercise price outstanding exchange for cash and $2.50 financial advisory services 12/97 Mortgage advance -- $500,000 10/31/2001 Prime Plus 5% outstanding 3/98 Warrant issued as 3,000 -- 03/10/2003 exercise price outstanding a penalty for late $2.90 registration of Private Placement Common Stock 3/98 Note Payable -- $350,000 05/10/99 Prime Plus outstanding as extended 3.5% 3/98 Warrants issued as 52,500 -- 03/10/2003 exercise price outstanding additional interest on $2.38 3/98 debt (7) 3/98 Common Stock issued 227,347 $534,265 N/A N/A N/A to the former owners of BSC-NY, Inc. for the earn out agreement in lieu of cash 3/98 Convertible Preferred 950 $950,000 03/18/2000 6% Interest outstanding Stock per Yr. convertible at 80% of 5 day average bid price 3/98 Warrants issued in 49,990 -- 03/18/2001 exercise price outstanding connection with the $2.31 Private Placement of Convertible Preferred Stock on 3/98 5/98 Note Payable - -- $50,000 on demand 12% annual outstanding Related Party interest rate 6/98 Note Payable - -- $50,000 on demand 12% annual outstanding Related Party interest rate (8) 7/98 Warrants issued as 52,500 -- 07/10/2003 exercise price outstanding additional interest on $1.81 extension of 3/98 debt 7/98 Warrants issued as 20,000 -- 07/10/2003 exercise price outstanding additional interest on $1.81 extension of 3/98 debt 8/98 Warrants issued for 50,000 -- 08/15/2001 exercise price outstanding services $1.75 8/98 Note Payable - -- $100,000 on demand 12% annual outstanding Related Party interest rate 12/98 Shares issued for 304,097 -- -- -- outstanding price guaratee 12/98 Convertible Debentures -- $500,000 12/02/2004 12% annual outstanding interest convertible at $2.00 in $1,000 increments 12/98 Warrants issued in 165,000 -- 06/2004 issued from outstanding Private Placement Dec thru June; exercisable at $1.00 to $2.00 01/99 Warrants for services 94,000 -- 05/2004 issued from outstanding Jan thru June; exercisable at $1.00 to $1.45
A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. Accounts receivable from patient care, net of allowance for doubtful accounts, decreased 14.6% to $6,938,227 during the year ended June 30, 1999 from $8,126,972 at June 30, 1998. This decrease in accounts receivable is largely the result of the write-down of the accounts receivable for closed facilities, increased staff, standardization of some procedures for collecting receivables and a more aggressive collection policy. The increased staff has allowed the company to concentrate on current accounts receivable and resolve any problem issues before they become uncollectable. The Company's collection policy calls for earlier contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process. Our collectors will also seek assistance through every legal means, including the State insurance commissioner's office, when appropriate, to collect claims. At the same time, the Company continues to increase reserves for bad debt based on potential insurance denials and past difficulty in collections. In February 1998 the Company entered into an accounts receivable funding revolving credit agreement with Healthcare Financial Partners-Funding II, L.P. ("HCFP"), on behalf of five of its subsidiaries, which provides for funding of up to $4,000,000 based on outstanding receivables. The outstanding balance on this receivables financing on June 30, 1999 was approximately $1,669,830. The Company believes that it has sufficient financing available to sustain existing operations for the foreseeable future. The Company also intends to renew the expansion of its existing operations through new product lines and expansion of contracts. The Company will also expand through its web site operations offering the behavioral health professional goods and services unique (9) and specific to their needs for a fee. The liquidation of the assets and liabilities of Franvale may result in a non-cash financial statement gain of approximately $2,000,000. In the quarter ended December 31, 1998 the company was relieved of the HUD mortgage of approximately $6,741,000 and surrendered the underlying assets amounting to approximately $4,329,000. The recognition of the gain has been deferred until final resolution of all contingent liabilities. (10) ITEM 7. FINANCIAL STATEMENTS. AT PAGE Index..............................................................F-1 Independent auditor'report.........................................F-2 Consolidated balance sheets........................................F-3 Consolidated statements of operation...............................F-4 Consolidated statements of changes in stockholders'equity..........F-5 Consolidated statements of cash flows..............................F-6, F-7 Consolidated notes to financial statements.........................F-8 F-1 (11) INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders PHC, Inc. Peabody, Massachusetts We have audited the accompanying consolidated balance sheets of PHC, Inc. and subsidiaries as of June 30, 1999 and 1998 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PHC, Inc. and subsidiaries at June 30, 1999 and 1998 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The consolidated financial statements referred to above as of June 30, 1998 and for the year then ended have been restated (See Note P). BDO Seidman, LLP Boston, Massachusetts September 10, 1999 F2 (12) PHC, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 1999 1998 (as restated) ____ ___________ ASSETS (Notes C and D) Current assets: Cash and cash equivalents (Note A) $ 381,170 $ 227,077 Accounts receivable, net of allowance for doubtful accounts of $3,647,848 at June 30, 1999 and $3,488,029 at June 30, 1998 (Notes A, L and M) 6,343,227 7,441,972 Prepaid expenses 101,865 156,695 Other receivables and advances 334,155 127,064 Deferred income tax asset (Note F) 459,280 515,300 Other receivables, related party 53,517 64,065 ___________ ___________ Total current assets 7,673,214 8,532,173 Accounts receivable, noncurrent 595,000 685,000 Other receivables, noncurrent, related party, net of allowance for doubtful accounts of $782,000 in 1999 and $382,000 in 1998(Note K) 2,908,113 2,941,402 Other receivables 109,165 426,195 Property and equipment, net (Notes A, B and D) 1,483,319 2,128,273 Deferred income tax asset (Note F) 154,700 154,700 Deferred financing costs, net of amortization of $64,041 and $18,065 at June 30, 1999 and 1998, respectively 45,067 53,608 Goodwill, net of accumulated amortization of $116,900 and $307,707 at June 30, 1999 and 1998, respectively (Note A) 1,761,075 2,011,613 Other assets (Note A) 297,781 19,386 ___________ ___________ Total assets $15,027,434 $16,952,350 ___________ ___________ LIABILITIES Current liabilities: Accounts payable $ 1,832,750 $ 2,346,213 Notes payable - related parties (Note E) 200,000 159,496 Current maturities of long-term debt (Note C) 1,286,318 1,107,167 Revolving credit note (Note C) 1,669,830 1,683,458 Current portion of obligations under capital leases (Note D) 60,815 67,492 Accrued payroll, payroll taxes and benefits 333,955 729,194 Accrued expenses and other liabilities 1,459,290 1,004,763 Net Current Liabilities of Discontiuned Operations (Note A and I) 2,641,537 2,641,537 ___________ ___________ Total current liabilities 9,484,495 9,739,320 Long-term debt, less current maturities (Note C) 1,730,230 2,850,089 Obligations under capital leases (Note D) 51,657 93,747 Convertible debentures (Note C) 500,000 -- ___________ ___________ Total noncurrent liabilities 2,281,887 2,943,836 ___________ ___________ Total liabilities 11,766,382 12,683,156 ___________ ___________ Commitments and contingent liabilities (Notes A, D, G, H, J, and K) STOCKHOLDERS' EQUITY (Notes H, J and K) Convertible Preferred stock, $.01 par value; 1,000,000 shares authorized, 813 and 950 shares issued and outstanding June 30, 1999 and 1998 respectively 8 10 Class A common stock, $.01 par value; 20,000,000 shares authorized, 5,612,930 and 4,935,267 shares issued June 30,1999 and 1998, respectively 56,129 49,353 Class B common stock, $.01 par value; 2,000,000 shares authorized, 727,210 and 727,328 issued and outstanding June 30, 1999 and 1998, respectively, convertible into one share of Class A common stock 7,272 7,273 Additional paid-in capital 15,967,176 15,485,895 Treasury stock, 2,776 common shares at cost June 30, 1999 and 1998 (12,122) (12,122) Accumulated deficit (12,757,411) (11,261,215) ___________ ____________ Total stockholders' equity 3,261,052 4,269,194 ___________ ___________ Total liabilities and stockholders' equity $15,027,434 $16,952,350 ___________ ___________ See notes to financial statements F-3 (13) PHC, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Year Ended June 30, 1999 1998 (as restated) Revenues: Patient care, net (Note A) $ 17,529,978 $ 19,649,353 Management fees (Note K) 666,881 833,750 Other 942,637 763,086 Total revenues 19,139,496 21,246,189 Operating expenses: Patient care expenses 9,384,070 10,706,639 Cost of management contracts 259,012 467,065 Provision for doubtful accounts 2,183,139 3,684,452 Administrative expenses 7,865,013 9,488,631 Total operating expenses 19,691,234 24,346,787 ___________ _____________ Loss from operations (551,738) (3,100,598) Other income (expense): Interest income 451,271 391,353 Interest expense (1,258,314) (1,289,642) Other income, net 64,129 58,583 ___________ _____________ Total other expense, net (742,914) (839,706) Loss before income taxes (1,294,652) (3,940,304) Income taxes (Note F) 59,434 219,239 Loss from continuing operations (1,354,086) (4,159,543) Loss from discontinued operations (Notes A and I) -- (2,220,296) Net loss (1,354,086) (6,379,839) Dividends (Note J) (142,110) (207,060) Loss applicable to common shareholders $ (1,496,196) $ (6,586,899) Basic and diluted loss per common share (Note A): Continuing operations $ (.25) $ (.84) Discontinued operations -- (.42) Total $ (.25) $ (1.26) Basic and diluted weighted average number of shares outstanding 6,008,263 5,237,168 See notes to financial statements. F-4 (14) PHC, INC. AND SUBSIDIARIES Consolidated Statements of Changes In Stockholders' Equity (See Notes A, C, H, J, K and N) Class A Class B Class C Common Stock Common Stock Common Stock Preferred Stock Shares Amount Shares Amount Shares Amount Shares Amount Balance - June 30, 1997 2,877,836 $28,778 730,360 $ 7,304 199,816 $ 1,998 500 $ 5 Conversion of debt 1,331,696 13,317 Conversion of preferred stock series A 246,305 2,463 (500) (5) Issuance of shares with acquisition 41,024 410 Issuance private placement shares 172,414 1,724 Conversion of shares 3,032 31 (3,032) (31) Cancel class C common stock (199,816) (1,998) Issue warrants for services Issuance of shares with consulting agreement 20,870 209 Issuance of shares with earn out agreement 227,347 2,274 Issuance of employee stock purchase plan shares 14,743 147 Issuance of preferred stock Series B 950 10 Adjustment related to beneficial conversion feature of convertible preferred stock Warrant issued with debt Treasury stock issued to employees Dividends on preferred stock Costs related to private placements Net Loss - year ended June 30, 1998 -- -- -- -- -- -- -- -- _______ _______ _______ _______ ______ ________ ______ ______ Balance -June 30, 1998 (as restated) 4,935,267 $49,353 727,328 $7,273 0 $0 950 $10 Costs related to private placement Conversion of preferred stock 248,129 2,481 (190) (3) Price guarantee shares 304,097 3,041 Issue warrants for services Issuance of shares with consulting agreement 56,470 564 Issuance of shares with earn out agreement 53,374 534 Issuance of employee stock purchase plan shares 15,475 155 Issue warrants for financing Conversion from class B to class A 118 1 (118) (1) Dividends on preferred stock 53 l Net Loss - year ended June 30, 1999 -- -- -- -- -- -- -- -- _______ _______ _______ _______ ______ ________ ______ ______ Balance - June 30, 1999 5,612,930 $56,129 727,210 $7,272 0 $ 0 813 $ 8 See notes to financial statements.
(15) PHC, INC. AND SUBSIDIARIES (con't) Consolidated Statements of Changes In Stockholders' Equity (See Notes A, C, H, J, K and N) Additional Paid-in Capital, Common Treasury Shares Accumulated Stock Shares Amount Deficit Total _____________ ________ ______ ____________ _____ Balance - June 30, 1997 $10,398,630 8,656 $(37,818) $(4,674,316) $5,724,581 Conversion of debt 2,696,789 2,710,106 Conversion of preferred stock series A (2,458) 0 Issuance of shares with acquisition 79,605 80,015 Issuance private placement shares 498,276 500,000 Conversion of shares -0- Cancel class C common stock 1,998 -0- Issue warrants for services 184,523 184,523 Issuance of shares with consulting agreement 36,249 36,458 Issuance of shares with earn out agreement 531,991 534,265 Issuance of employee stock purchase plan shares 35,750 35,897 Issuance of preferred stock series B 949,990 950,000 Adjustment related to beneficial conversion feature of convertible preferred stock 190,000 (190,000) -0- Warrant issued with debt 48,809 48,809 Treasury stock issued to employees (5,880) 25,696 25,696 Dividends on preferred stock (17,060) (17,060) Costs related to private placements (164,257) (164,257) Net loss-year ended June 30, 1998 -- -- -- (6,379,839) (6,379,839) _____________ ________ ______ ____________ _________ Balance - June 30, 1998 (as restated) $15,485,895 2,776 $(12,122) $(11,261,215) $ 4,269,194 Costs related to private placement (56,565) (56,565) Conversion of preferred stock 91,959 (92,569) 1,868 Price guarantee shares 117,076 120,117 Issue warrants for services 108,354 108,354 Issuance of shares with consulting agreement 38,436 39,000 Issuance of shares with earn out agreement 59,513 60,047 Issuance of employee stock purchase plan shares 18,261 18,415 Issue warrants for financing 51,248 51,248 Conversion from class B to class A Dividends on preferred stock 52,999 (49,541) 3,460 Net Loss-year ended June 30, 1999 -- -- -- (1,354,086) (1,354,086) _____________ ________ ________ ____________ __________ Balance-June 30, 1999 15,967,176 2,776 ($12,122) $(12,757,411) $3,261,052 See notes to financial statements F-5 (16) PHC, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Year Ended June 30, 1999 1998 (as restated) _____________________________ Cash flows from operating activities: Net loss $(1,354,086) $(6,379,839) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 325,764 674,162 Compensatory stock options and stock and warrants issued for obligations 279,719 269,790 Changes in: Accounts receivable 1,188,745 1,544,791 Prepaid expenses and other current assets (141,713) 257,173 Other assets 693,275 (257,941) Accounts payable (513,463) (182,913) Accrued expenses and other liabilities 59,288 758,072 Net liabilities of discontinued operations -- 1,161,903 ____________ _____________ Net cash provided by (used in) operating activities 537,529 (2,154,802) ____________ _____________ Cash flows from investing activities: Acquisition of property and equipment and intangibles (115,254) (212,492) Loan receivable -- 152,749 ____________ _____________ Net cash (used in) investing activities (115,254) (59,743) ____________ _____________ Cash flows from financing activities: Revolving debt, net 13,628 (106,513) Proceeds from borrowings 485,829 950,000 Payments on debt (1,274,969) (557,883) Deferred financing costs -- 6,967 Preferred stock dividends (7,681) (17,060) Issuance of capital stock 15,011 1,321,640 Convertible debt 500,000 -- ____________ _____________ Net cash provided by (used in) financing activities (268,182) 1,597,151 ____________ _____________ Net increase (decrease) in cash and cash equivalents 154,093 (617,394) Beginning balance of cash and cash equivalents 227,077 844,471 ____________ _____________ Ending balance of cash and cash equivalents $ 381,170 $ 227,077 ____________ _____________ Supplemental cash flow information: Cash paid during the period for: Interest $1,227,628 $1,567,763 Income taxes $ 189,027 $ 130,290 See notes to financial statements F-6 (17) Supplemental disclosures of noncash investing and financing activities: Stock issued for acquisitions and earn-out agreement $ 60,047 $614,280 Capital leases 25,010 83,082 Conversion of preferred stock 190,000 500,000 Beneficial conversion feature of preferred stock -- 190,000 Warrant Valuations 159,602 233,332 Conversion of Debt to Common Stock -- 2,710,106 Issuance of Preferred Stock in lieu of cash for Dividends due 53,000 -- Issuance of Common Stock in lieu of Preferred Stock Dividends 81,429 -- See notes to financial statements F-7 (17) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and consolidation: PHC, Inc. ("PHC" or the "Company") operates substance abuse treatment centers in several locations in the United States, a psychiatric hospital in Michigan and psychiatric outpatient facilities in Nevada, Kansas and Michigan. PHC also manages a psychiatric practice in New York, operates an outpatient facility through a physicians practice, and operates behavioral health centers and maintains a behavioral health web site. PHC of Utah, Inc. ("PHU") and PHC of Virginia, Inc. ("PHV") provide treatment of addictive disorders and chemical dependency. PHC of Michigan, Inc. ("PHM") provides inpatient and outpatient psychiatric care. PHC of Nevada, Inc. ("PHN") and PHC of Kansas, Inc. ("PHK") provide psychiatric treatment on an outpatient basis. North Point-Pioneer, Inc. ("NPP") operates four outpatient behavioral health centers under the name of Pioneer Counseling Centers. Behavioral Stress Centers, Inc. ("BSC") provides management and administrative services to psychotherapy and psychological practices (see Note K). Behavioral Health Online, Inc. ("BHO") provides behavioral health information and education through its web site. Quality Care Centers of Massachusetts, Inc. ("Quality Care") operated a long-term care facility known as the Franvale Nursing and Rehabilitation Center (see Note I). The consolidated financial statements include PHC and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Until January 1999, the Company operated Pioneer Counseling of Virginia, Inc. ("PCV"), an 80% owned subsidiary which provided outpatient services through a physicians practice. Until May 31, 1998, the Company operated Good Hope Center, a substance abuse treatment facility in West Greenwich, Rhode Island ("Good Hope"). Until June 1, 1998 the Company also operated a subacute long-term care facility, Franvale Nursing and Rehabilitation Center ("Franvale"), in Braintree Massachusetts. On June 1, 1998 Franvale was placed into state receivership. On October 5, 1998 Franvale filed for protection under the Chapter 7 Bankruptcy code. All financial information for Franvale is reported in the accompanying financial statements as discontinued operations. The liquidation of the assets and liabilities of Franvale may result in a non-cash financial statement gain of approximately $2,000,000. In the quarter ended December 31, 1998 the company was relieved of the HUD mortgage of approximately $6,741,000 and surrendered the underlying assets amounting to approximately $4,329,000. The recognition of the gain has been deferred until final resolution of all contingent liabilities. During the year ended June 30, 1999, the Company recorded an increase in its accounts receivable reserve in line with its more aggressive reserve policy established last year and reserved for the remaining accounts receivable balance for the closed Rhode Island facility and the closed Pioneer Counseling of Virginia facilities. Revenues and accounts receivable: Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare. Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due to periodic changes in the regulatory environment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between the amounts provided and subsequent settlements are recorded in operations in the year of settlement. The provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable. The allowance for doubtful accounts does not include the contractual allowances. (18) F-8 PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues and accounts receivable (continued) Medicaid reimbursements are currently based on established rates depending on the level of care provided and are adjusted prospectively. Medicare reimbursements are currently based on provisional rates that are adjusted retroactively based on annual cost reports filed by the Company with Medicare. The Company's cost reports to Medicare are routinely audited on an annual basis. The Company periodically reviews its provisional billing rates and provides for estimated Medicare adjustments. The Company believes that adequate provision has been made in the financial statements for any adjustments that might result from the outcome of Medicare audits. The Company has $585,714 of receivables from Medicaid and Medicare at June 30, 1999, which constitute a concentration of credit risk should Medicaid and Medicare defer or be unable to make reimbursement payments as due. Long-term assets include accounts receivable-non-current, other receivables-non-current-related party and other receivables. Accounts receivable-non-current consists of amounts due from former patients for service. This amount represents amounts collectable under supplemental payment agreements, arranged by the Company's collection agencies, entered into because of the patients' inability to pay under normal payment terms. All of these receivables have been extended beyond their original due date. Accounts of former patients that do not comply with these supplemental payment agreements are written off. Other receivables-non-current-related party is the amount due from a related professional corporation net of the related allowance for doubtful accounts. This amount consists of the balance due of funds advanced to the professional corporation for acquisition costs, management fees, working capital and interest on the advanced funds (see discussion regarding BSC-NY, Inc. in Note K). Other receivables consists of amounts due to the Company from a third party in a licensure agreement and amounts due from employees for advances. Charity care amounted to approximately $242,000 and $504,000 for the years ended June 30, 1999 and 1998, respectively. Patient care revenue is stated net of charity care in the accompanying statements of operations. Property and equipment: Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets using accelerated and straight-line methods. The estimated useful lives are as follows: Estimated Assets Useful Life ________ _________________ Buildings 39 years Furniture and equipment 3 through 10 years Motor vehicles 5 years Leasehold improvements Term of lease Other assets: Other assets are primarily deposits and deferred expenses. Goodwill, net of accumulated amortization: The excess of the purchase price over the fair market value of net assets acquired is being amortized on a straightline basis over twenty years. F-9 (19) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basic and diluted loss per share: The loss per share is computed by dividing the loss applicable to common shareholders, net of dividends charged directly to retained earnings, by the weighted average number of shares of common stock outstanding for each fiscal year. No common stock equivalents have been included in the calculation of diluted loss per share because their effect would be anti-dilutive. In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings per share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive affects of options, warrants and convertible securities. Dilutive earnings per share is similar to the previously reported fully diluted earnings per share. Diluted loss per share does not include warrants, options, convertible securities or contingently issuable shares that would have an anti-dilutive effect. Estimates and assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash equivalents: Cash equivalents are short-term highly liquid investments with maturities of less than three months, when purchased. Fair value of financial instruments: The carrying amounts of cash, trade receivables, other current assets, accounts payable, notes payable and accrued expenses approximate fair value. Impairment of long-lived assets: During the year ended June 30, 1999 the Company wrote off the carrying value of goodwill for Pioneer Counseling of Virginia, Inc., approximately $305,000, and wrote down the remaining balance of accounts receivable for the facility of approximately $43,000. During the year ended June 30, 1998 the Company wrote off the carrying value of goodwill for PHC of Rhode Island, Inc., approximately $ 23,000, and wrote off equipment and the land and building assets related to the capital lease from that facility aggregating approximately $1,240,000 in total assets and the related liability of approximately $1,300,000. Also in 1998 the Company wrote down the remaining balance of accounts receivable from a closed California facility, approximately $92,000, and the equipment, goodwill and additional closing costs recorded for the Blacksburg facility, approximately $136,000, which was closed in fiscal year 1999 to consolidate operations in Salem, Virginia. All of the above write-downs were considered necessary due to the closing of facilities. The assets had no ongoing value or were written-down to their net realizable value. Write-downs in the carrying value of goodwill and property and equipment are charged to depreciation and amortization expense, which is included in administrative expenses in the Company's statements of operations. Write-downs in accounts receivable were charged to the provision for doubtful accounts in the accompanying statements of operations. F-10 (20) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In accordance with FASB statement no. 121, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long-lived assets. The amount of the impairment losses recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Stock-based compensation: The Company accounts for its employee stock-based compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based method of accounting for stock-based compensation plans. The Company adopted the disclosure only alternative, which requires disclosure of the pro forma effects on loss and loss per share as if SFAS No. 123 had been adopted, as well as certain other information. All of the Company's employees are employed under leasing arrangements. The Company believes that its leased employees meet the common law definition of employee and therefore qualify as employees for purposes of applying SFAS 123. Recent Accounting Pronouncements: In June 1998 and July 1999, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 133 and 137. ("SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities," and ("SFAS No. 137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133 and SFAS No. 137 require companies to recognize all derivative contracts at their fair value as either assets or liabilities on the balance sheet. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (1) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (2) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. These statements are effective for all quarters beginning after July 15, 1999. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect the adoption of the new standard to affect its financial statements. In April 1998 Statement of Position 98-5, Reporting on the Costs of Start-up Activities was issued which required such costs, including organization costs, to be expensed as incurred and is effective for fiscal years beginning after December 15, 1998. The Company does not expect that this Statement of Position will have a material impact on the Company's statement of operations or financial position. F-11 (21) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE B - PROPERTY AND EQUIPMENT Property and equipment is comprised of the following: June 30, 1999 1998 ______ __________ Land $ 69,259 $ 119,859 Buildings 1,136,963 1,676,963 Furniture and equipment 868,722 839,972 Motor vehicles 41,444 41,444 Leasehold improvements 358,207 354,687 __________ ___________ 2,474,595 3,032,925 Less accumulated depreciation and amortization 991,276 904,652 __________ ___________ $1,483,319 $2,128,273 __________ ___________ NOTE C NOTES PAYABLE AND LONG-TERM DEBT Long-term debt is summarized as follows: June 30, 1999 1998 ______ __________ Note payable with interest at 9% requiring monthly payments of $1,150 through May 2001 $23,509 $34,636 9% mortgage note due in monthly installments of $4,850, including interest through July 1, 2012 when the remaining principal balance is payable 462,814 478,582 Note payable due in monthly installments of $21,506 including interest at 10.5% through November 1, 1999 when the remaining principal balance is payable, collateralized by all assets of PHN and certain receivables. Interest only payments were made from May 1998 through October 1998 per subsequent agreement. 261,802 374,190 Note payable due in monthly installments of $26,131 including interest at 11.5% through June 2000 when the remaining principal balance is payable, collateralized by all assets of NPP. Interest only payments were made from May 1998 through October 1998 per subsequent agreement. 471,297 598,848 Note payable due in monthly installments of $5,558 including interest at 9.25% through May 2012 when the remaining principal balance is payable, collateralized by real estate. 0 521,000 Term mortgage note payable with interst only payments through March 1998 principal due in monthly installments of $9,167 beginning April 1998 through February 2001. A balloon payment of approximately $1,300,000 plus interst is due March 2001, interest at prime plus 5% (12.75% at June 30, 1999) collateralized by all assets of PHM. 1,433,333 1,600,000 (22) NOTE C NOTES PAYABLE AND LONG-TERM DEBT (CON'T) Long-term debt is summarized as follows: June 30, 1999 1998 ______ __________ Note payable bearing interest at prime plus 3-1/2% (11.25% at June 30, 1999) with the principal due on November 10, 1998 as extended and collateralized by MRC's real property and BSC's accounts receivable and cross-collateralized with the revolving credit note referred to below. 324,730 350,000 Note payable due in monthly installments of $2,378 including interest at 12% through October 1999. 9,278 0 Note payable due in monthly installments of $7,633 including interest at 12% through October 1999. 29,785 0 __________ __________ 3,016,548 3,957,256 Less current maturities 1,286,318 1,107,167 __________ __________ Noncurrent maturities $ 1,730,230 $ 2,850,089 __________ __________ F-12 (23) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE C - LONG-TERM DEBT (CONTINUED) Maturities of long-term debt are as follows as of June 30, 1999: Year Ending June 30, Amount ___________ _______ 2000 $1,286,318 2001 1,303,527 2002 20,634 2003 22,570 2004 24,687 Thereafter $358,812 ________ $3,016,548 The Company has a revolving credit note under which a maximum of $4,000,000 may be outstanding at any time. At June 30, 1999 the outstanding balance was $1,669,830. Advances are made based on a percentage of accounts receivable and principal is payable upon receipt of proceeds of the accounts receivable. Interest is payable monthly at prime plus 2.25% (10% at June 30, 1999). The agreement is automatically renewable for one-year periods unless terminated by either party. Upon expiration, all remaining principal and interest is due. The notes are collateralized by substantially all of the assets of the Company's subsidiaries excluding Franvale and guaranteed by PHC. On December 7, 1998 the Company issued the principal sum of $500,000 of convertible debentures with interest at 12% per annum that are due on December 2, 2004. Interest is payable quarterly. The debentures and any unpaid interest are convertible into shares of common stock at the rate of $1,000 for 500 shares of common stock, which equates to $2.00 per share of common stock. The traded market price of the Company's common stock at the date of issuance of the convertible debentures was $1.188 per share and accordingly there was no beneficial conversion feature. The holders of the debentures have the right to put all or any portion of the debentures to the Company at the original purchase price plus unpaid interest upon 30 days written notice beginning December 3, 2001. The Company has the right to call the debentures upon the same terms as above. If called, the holders of the debentures then have 20 days from the date of written notice to exercise their conversion privilege as to any debentures not then already converted. NOTE D - CAPITAL LEASE OBLIGATION At June 30, 1999, the Company was obligated under various capital leases for equipment providing for monthly payments of approximately $5,000 for fiscal 2000 and terms expiring from July 1999 through July 2003. The carrying value of assets under capital leases included in property and equipment is as follows: June 30, 1999 1998 _______________________ Equipment and improvements $528,820 $511,517 Less accumulated amortization (259,564) (225,703) __________ __________ $269,256 $285,814 F-13 (24) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED) Future minimum lease payments under the terms of the capital lease agreements are as follows at June 30, 1999: Year Ending June 30, _____________ 2000 $ 65,327 2001 47,302 2002 11,201 2003 2,821 Thereafter 235 __________ Total future minimum lease payments 126,886 Less amount representing interest 14,414 __________ Present value of future minimum lease payments 112,472 Less current portion 60,815 __________ Long-term obligations under capital lease $ 51,657 __________ NOTE E - NOTES PAYABLE - RELATED PARTIES Related party debt is summarized as follows: June 30, 1999 1998 _______________________ Note payable, President and principal stockholder, interest at 8%, due in installments through December 1998 $ -0- $ 39,496 Notes payable, Tot Care, Inc., Company owned by the President and principal stockholder, interest at 12% and payable on demand 100,000 100,000 Note payable, President and principal stockholder, interest at 12% payable on demand 100,000 -0- Notes payable, other related parties, interest at 12% and payable on demand -0- 20,000 ____________ _________ Total $200,000 $159,496 ____________ _________ F-14 (25) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE F - INCOME TAXES The Company has the following deferred tax assets included in the accompanying balance sheets: Year Ended June 30, 1999 l998 ________________________ Temporary differences attributable to: Allowance for doubtful accounts $1,546,000 $1,315,000 Facility Closing Costs 198,000 85,000 Depreciation 237,000 225,000 Other 86,000 2,000 Operating loss carryforward 1,542,000 1,650,000 _________ __________ Total deferred tax asset 3,609,000 3,277,000 Less: Valuation allowance (2,995,000) (2,607,000) _________ __________ Subtotal 614,000 670,000 Current portion (459,300) (515,300) _________ __________ Long-term portion $ 154,700 $ 154,700 _________ __________ The Company had no deferred tax liabilities at June 30, 1999 and 1998. Income tax expense is as follows: Year Ended June 30, 1999 l998 ________________________ Current state income taxes $ 59,434 $219,239 _________ __________ Reconciliations of the statutory U.S. Federal income taxes based on a rate of 34% to actual income taxes is as follows: Year Ended June 30, 1999 l998 ________________________ Income tax benefit at statutory rate $ (440,200) $(2,044,400) State income taxes, net of federal benefit 39,000 144,700 Increase in valuation allowance 388,000 1,780,000 Increase due to nondeductible items, primarily penalties and travel and entertainment expenses 37,000 161,231 Other 35,634 177,708 _________ __________ $ 59,434 $ 219,239 _________ __________ At June 30,1999 the Company had a net operating loss carryforward amounting to approximately $4,500,000 which expires at various dates through 2019. If the Company has significant sales of stock in future years, the utilization of the net operating loss carryforward in any given year may be limited under provisions of the Internal Revenue Code. F-15 (26) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE F - INCOME TAXES (CONTINUED) The Company anticipates that it will have sufficient taxable income in future fiscal years to realize its net deferred tax assets existing as of June 30, 1999. The Company has closed two facilities that contributed the most significantly to its past losses, the Franvale Nursing and Rehabilitation Center and the Good Hope Center. The Company has also implemented procedures to improve the operating efficiency of its remaining centers. The Company also anticipates that it will have a substantial gain on the closing of its Franvale facility of over $2,000,000 (see Note I). NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES Operating leases: The Company leases office and treatment facilities and furniture and equipment under operating leases expiring on various dates through January 31, 2004. Rent expense for the years ended June 30, 1999 and 1998 was approximately $784,000 and $882,000, respectively. Rent expense includes certain short term rentals and, in 1998, additional rent expense associated with the closing of Good Hope Center. Minimum future rental payments under noncancelable operating leases, having remaining terms in excess of one year as of June 30, 1999 are as follows: Year Ending June 30, Amount ___________ ______ 2000 $ 606,854 2001 562,243 2002 552,339 2003 504,989 2004 562,320 Thereafter 14,584 _________ $ 2,803,329 Litigation and contingency: In connection with the liquidation of Franvale, some vendors allege that there are amounts due for services which are the obligation of PHC, Inc. At June 30, 1999 total claims pending amounted to approximately $67,000. In September 1998, the Company and Franvale were each served with subpoenas in connection with an on-going investigation of Franvale being conducted by the Attorney General of the Commonwealth of Massachusetts. The focus is the quality of patient care provided by Franvale during the period of early 1997 until the facility was placed into receivership in June 1998. The Company is cooperating fully with the investigation and currently is engaged in producing documents requested in the subpoenas. The Company does not believe that it has violated any laws and does not believe that any monetary payments required in connection with this matter will be material to the financial position or results of operations of the Company. In addition, the Commonwealth of Massachusetts may institute a claim against PHC, Inc. to recover expenses incurred as a consequence of Franvale's receivership. The Company believes that it has valid defenses to any such claim and, in any event, it believes that there will be adequate assets remaining in Franvale to satisfy any receivership expenses. F-16 (27) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE H - STOCK PLANS [1] Stock plans: The Company has three stock plans: a stock option plan, an employee stock purchase plan and a nonemployee directors' stock option plan. The stock option plan provides for the issuance of a maximum of 1,000,000 shares of Class A common stock of the Company pursuant to the grant of incentive stock options to employees or nonqualified stock options to employees, directors, consultants and others whose efforts are important to the success of the Company. Subject to the provisions of this plan, the compensation committee of the Board of Directors has the authority to select the optionees and determine the terms of the options including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option will not be less than the market price of the Class A common stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options. The employee stock purchase plan provides for the purchase of Class A common stock at 85 percent of the fair market value at specific dates, to encourage stock ownership by all eligible employees. A maximum of 150,000 shares may be issued under this plan. The non-employee directors' stock option plan provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board. Through June 30, 1999, options for 23,500 shares were granted under this plan. A maximum of 50,000 shares may be issued under this plan. Each outside director is granted an option to purchase 2,000 shares of Class A common stock at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant. In February 1997, all 95,375 shares underlying the then outstanding employee stock options were repriced to the current market price, using the existing exercise durations. In September 1998, all 21,875 options due to expire, were extended for an additional five years. Also in September 1998, all 183,875 shares underlying the then outstanding employee stock options were repriced to the current market price, using the existing exercise durations. Under the above plans, at June 30, 1999, 601,580 shares were available for future grant or purchase. F-17 (28) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE H - STOCK PLANS (CONTINUED) The Company had the following activity in its stock option plans for fiscal 1999 and 1998: Number Weighted-Average of Exercise Price Shares Per Share ______ ________________ Option plans: Balance - June 30, 1997 205,375 $4.27 Granted 210,000 $2.37 Cancelled (40,000) $3.21 Balance - June 30, 1998 375,375 $3.32 Granted 218,500 $1.21 Cancelled (71,000) $1.95 Repriced Options Original (183,875) $2.96 Repriced 183,875 $1.25 Balance - June 30, 1999 522,875 $2.02 [2] Stock-based compensation: Options for 252,000 shares are exercisable as of June 30, 1999 at exercise prices ranging from $1.03 to $6.63 and a weighted-average exercise price of approximately $3.08 per share, with a weighted-average remaining contractual life of approximately three years. The exercise prices of options outstanding at June 30, 1999 range from $1.03 to $6.63 per share and have a weighted-average exercise price of approximately $2.02 per share, with a weighted-average remaining contractual life of approximately four years. The Company has adopted the disclosure-only provisions of SFAS No. 123, but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. There was no compensation expense recognized in 1999 or 1998. If the Company had elected to recognize compensation cost for the plans based on the fair value at the grant date for awards granted, consistent with the method prescribed by SFAS No. 123, loss per share would have been changed to the pro forma amounts indicated below: F-18 (29) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE H - STOCK PLANS (CONTINUED) Year Ended June 30, 1999 1998 __________________ Loss applicable As reported to common Continuing Operations $(1,496,196) $(4,366,603) shareholders Discontinued Operations -- (2,220,296) Pro forma Continuing Operations (1,595,475) (4,494,930) Discontinued Operations -- (2,220,296) Loss per share As reported Continuing Operations (.25) (.84) Discontinued Operations -- (.42) Pro forma Continuing Operations (.27) (.86) Discontinued Operations -- (.42) The fair value of the Company's stock options used to compute pro forma loss and loss per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1999 and 1998: dividend yield of 0%; expected volatility of 30%; a risk-free interest rate of 6.5%; and an expected holding period of five years. The per share weighed-average grant-date fair value of options granted during the years ended June 30, 1999 and 1998 was $.48 and $.87, respectively. NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS On May 26, 1998, PHC, Inc.'s wholly owned subsidiary, Quality Care, which operates Franvale filed for reorganization under Chapter 11. On May 29, 1998, the Bankruptcy Court terminated the Chapter 11 proceeding determining that there was no likelihood of reorganization since the prospective acquirer of the facility was now imposing certain terms unacceptable to all interested parties and that the transfer of patients and liquidation of assets could be as readily effectuated in a state court receivership under the aegis of the Massachusetts Health Care Statutes and accordingly dismissed the Chapter 11 case. On June 1, 1998, a receiver was appointed to transfer the patients and close the facility expeditiously. The Company has recorded the losses of Franvale through May 31, 1998 in the accompanying financial statements. The Company's Bankruptcy Attorney was notified that effective September 30, 1998 the patient care receivership for Quality Care had been terminated. On October 5, 1998, in response to the termination of the State Receivership, the Company filed for protection under Chapter 7. F-19 (30) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS (CONTINUED) Although the full extent of the financial impact on PHC, Inc. cannot be determined at this time, the management of PHC, Inc. does not believe that the liquidation of the assets and liabilities of Quality Care will have a substantial negative impact on PHC's financial position or the results of operations. The Company is subject to a guarantee signed by PHC, Inc. for furniture and equipment purchased by Quality Care during the fiscal year ended June 30, 1996. The amount of this debt recorded by Quality Care in the accompanying financial statements is approximately $150,000. The liquidation of the assets and liabilities of Franvale may result in a non-cash financial statement gain of approximately $2,000,000. In the quarter ended December 31, 1998 the company was relieved of the HUD mortgage of approximately $6,741,000 and surrendered the underlying assets amounting to approximately $4,329,000. The recognition of the gain has been deferred until final resolution of all contingent liabilities. As of June 30, 1999 the Company paid approximately $220,000 in costs related to record transfer and litigation surrounding the close of Franvale. This total deferred amount and any litigation settlements or other related costs will be offset against the Quality Care Centers of Massachusetts, Inc. gain when recognized. NOTE J - CERTAIN CAPITAL TRANSACTIONS In addition to the outstanding options under the Company's stock plans (Note H), the Company has the following options and warrants outstanding at June 30, 1999: DATE OF NUMBER OF EXERCISE EXPIRATION ISSUANCE DESCRIPTION SHARES PRICE DATE 03/10/1994 IPO Warrants Equity transaction 1,792,862 shares $5.90 per share March 2000 02/08/1996 Private Placement warrants with common stock issuance Equity transaction 746,662 shares $3.71 per share January 2001 02/27/1996 Warrants issued with the exercise of Bridge warrants Equity transaction 37,002 shares $6.94 per share February 2001 11/01/1996 Warrant for debt placement service $125,000 value charged to interest expense over term of debt 25,000 shares $2.00 per share October 2001 02/18/1997 Warrant for investor relation services $1,210 value passed as an adjustment 3,559 shares $2.95 per share February 2002 03/03/1997 Consultant warrant for investor relations $16,306 value passed as an adjustment 40,000 shares $2.62 per share March 2002 09/17/1998 Consultant warrant for investor $12,776 value passed as an adjustment 40,000 shares $2.00 per share March 2002 03/31/1997 Warrants issued as registration penalty on Convertible Denbeture $46,375 value charged to interest expense over term of debentures 150,000 shares $2.00 per share March 2002 06/04/1997 Warrants issued with preferred stock placement Equity transaction 50,000 shares $2.75 per share June 2000 06/01/1997 Warrants issued for investment banker services $193,748 value charged to professional fees 150,000 shares $2.50 per share May 2002 09/19/1997 Private Placement warrants with common stock issuance Equity transaction 86,207 shares $2.90 per share Sept 2002 03/10/1998 Warrants issued as a penalty for late registration of private placement shares Equity transaction 3,000 shares $2.90 per share March 2003 03/10/1998 Warrants issued as additional interest on debt $48,809 value charged to interest expense over term of loan 52,500 shares $2.38 per share March 2003 03/19/1998 Warrants issued with preferred stock private placement Equity transaction 49,990 shares $2.31 per share March 2001 F-20 (31) PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 AND 1998 NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED) DATE OF NUMBER OF EXERCISE EXPIRATION ISSUANCE DESCRIPTION SHARES PRICE DATE 07/10/1998 Warrants issued with extension of debt $28,740 value charged to interest expense over term of loan 52,500 shares $1.81 per share July 2003 07/10/1998 Warrants issued with extension of debt as price guarantee $14,779 value charged to interest expense over term of loan 20,000 shares $1.50 per share July 2003 12/31/1998 Warrants issued with convertible debenture $9,240 value charged to professional fees over term of debenture 25,000 shares $1.00 per share Dec 2004 12/31/1998 Warrants issued for convertible debentures finders fee $25,873 value charged to professional fees over term of debenture 60,000 shares $1.00 per share Dec 2003 12/31/1998 Warrants issued for convertible debentures finders fee $3,696 value charged to professional fees over term of debenture 10,000 shares $2.00 per share Dec 2003 12/31/1998 Warrants issued for convertible debentures finders fee $3,246 value charged to professional fees over term of debenture 15,000 shares $1.50 per share Dec 2003 12/01/1998 Warrants issued for convertible debentures finders fee $1,302 value charged to professional fees over term of debenture 10,000 shares $1.00 per share Dec 2003 01/01/1999 Warrants issued for convertible debentures finders fee $3,696 value charged to professional fees over term of debenture 10,000 shares $1.00 per share Jan 2004 02/01/1999 Warrants issued for convertible debentures finders fee $3,696 value charged to professional fees over term of debenture 10,000 shares $1.00 per share Feb 2004 03/01/1999 Warrants issued for convertible debentures finders fee $3,696 value charged to professional fees over term of debenture 10,000 shares $1.00 per share March 2004 04/01/1999 Warrants issued for convertible debentures finders fee $3,696 value charged to professional fees over term of debenture 10,000 shares $1.00 per share Apr 2004 05/01/1999 Warrants issued for convertible debentures finders fee $3,696 value charged to professional fees over term of debenture 10,000 shares $1.00 per share May 2004 06/01/1999 Warrants issued for convertible debentures finders fee $3,696 value charged to professional fees over term of debenture 10,000 shares $1.00 per share Jun 2004 01/05/1999 Warrants for investment banker services $18,100 value charged to professional fees over service period 37,500 shares $1.45 per share Jan 2004 04/05/1999 Warrants for investment banker services $18,100 value charged to professional fees over service period 37,500 shares $1.45 per share Apr 2004 02/23/1999 Consultant warrant for investor relations $1,307 value charged to professional fees 3,000 shares $1.20 per share Feb 2004 04/21/1999 Consultant warrant for web site development services $1,547 value charged to professional fees 5,000 shares $1.00 per share Apr 2004 05/18/1999 Consultant warrant for web site advisory services $1,848 value charged to professional fees 5,000 shares $1.00 per share Apr 2004 04/21/1999 Warrant issued for management consultant services $1,547 value charged to professional fees 5,000 shares $1.00 per share Apr 2004 05/18/1999 Warrant issued for management consultant services $370 value charged to professional fees 1,000 shares $1.00 per share May 2004
Warrants issued for services or in connection with debt are valued at fair value at grant date using the Black-Scholes pricing model and charged to operations consistent with the underlying reason the warrants were issued. Charges to operations in connection with these warrants amounted to approximately $160,000 and $233,000 in fiscal 1999 and 1998 respectively. In September 1997, the Company received $500,000 in exchange for 172,414 unregistered shares of PHC, Inc. class A common stock and warrants to purchase 86,207 additional shares of PHC, Inc. class A common stock for $2.90 per share in a private placement. The agreement required that the shares be registered within 90 days of closing date of the private placement. The registration was not complete by the deadline therefore the Company was required to issue warrants to purchase 3,000 additional shares at $2.90 per share. F-21 (32) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED) In February 1998, the Company received $950,000 in exchange for the issuance of Series B convertible preferred stock and warrants to purchase 49,990 shares of Class A common stock. The warrants are exercisable at $2.31 per share and expire in 2001. The number of shares of Class A common stock into which the preferred stock may be converted is equal to 80% of the closing bid price of the Class A common stock as reported by NASDAQ for the five trading days immediately preceding the conversion which resulted in a deemed dividend of $190,000 in fiscal 1998. Cumulative preferred dividends are at the rate of $60 per share per year, payable quarterly. Dividends are payable in cash or in shares of preferred stock at $1,000 per share. For the year ended June 30, 1999 and 1998 dividends amounted to $ 142,110 and $17,060 respectively. During the fiscal year ended June 30, 1999 the Company issued 53 shares of series B preferred stock in payment of dividends in lieu of cash. The series B convertible preferred stock agreement carries with it a $2.00 minimum conversion price guarantee. If the actual computed conversion price is lower than the minimum conversion price, the Company was originally required to issue a promissory note for the difference between the market value of the shares to be issued at the conversion price and at the minimum conversion price. Subsequent to the issuance of the preferred stock, the Company obtained the right to issue either shares of common stock or promissory notes for the "price guarantee" differential. In December 1998, the Company issued $500,000 in 12% convertible debentures to private investors. These debentures require quarterly interest payments and are convertible in $1,000 increments for 500 shares of PHC, Inc. class A common stock. In conjunction with this debt placement the Company has issued or agreed to issue warrants to purchase 10,000 shares of PHC, Inc. class A common stock at $2.00 per share, 15,000 shares of PHC, Inc. class A common stock at $1.50 per share and 175,000 shares of PHC, Inc. class A common stock at $1.00 per share. On March 26, 1998 the Company issued 227,347 shares of the Company's Class A Common Stock to the former owners of Behavioral Stress Centers, Inc. now BSC-NY, Inc. in full payment for the earn-out due to be paid to them for the year ended October 31, 1997 resulting in additional goodwill. Of the 227,347 shares issued 127,924 were issued in lieu of cash and were subject to a price guarantee of $2.35, payable in shares. Under the price guarantee the Company issued an additional 304,097 shares of Common Stock in the quarter ended December 31, 1998. The value of the guarantee shares issued was recorded as interest expense. Under existing dilution agreements with other stockholders the issuance of common stock under agreements other than the employee stock purchase and option plans will increase the number of shares issuable and decrease the exercise price of certain of the above warrant agreements based on the difference between the then current market price and the price at which the new common stock is being issued. The dilutive effect of transactions through June 30, 1999 are reflected in the table above. During fiscal 1998, the Class C common stock was canceled and retired because of restrictions on the release of the stock, due to earnings targets which were not achieved. F-22 (33) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE K - ACQUISITIONS In September 1996, the Company purchased the assets of seven outpatient behavioral health centers located in Michigan ("NPP"). The centers were purchased for $532,559 and 15,000 shares of Class A common stock of PHC, Inc. valued at $5.04 per share. The Company borrowed $900,000 (see Note C) to finance the purchase and to provide working capital for the centers. Concurrent with the asset purchase agreement, NPP entered into an employment agreement with a former owner which requires an annual salary of $150,000 and an annual bonus. The agreement is effective for four years and is automatically extended for successive one year terms unless terminated. The salary and bonus are subject to adjustment based on collected billings. NPP also entered into a management agreement whereby $1,500 per month would be paid for five years to the former owners. During fiscal 1998 in connection with the asset purchase agreement, the Company issued 15,000 unregistered shares of Class A common stock which was accounted for as additional purchase price. On November 1, 1996, BSC-NY, Inc. ("BSC"), merged with Behavioral Stress Centers, Inc., a provider of management and administrative services to psychotherapy and psychological practices in the greater New York City Metropolitan Area. In connection with the merger, the Company advanced 150,000 shares of PHC, Inc. Class A common stock and funds to Shliselberg Physician Services, P.C., formerly Perlow Physicians, P.C., ("Shliselberg"), which were in turn issued to the former owners of Behavioral Stress Centers, Inc. to acquire the assets of the medical practices previously serviced by BSC. At June 30, 1999 Shliselberg owed the Company $3,690,113 which includes some acquisition costs, management fees, working capital advances and interest on the advances net of repayments. Total interest charged to Shliselberg by the Company was $305,121 and $378,768 for the years ended June 30, 1998 and 1999 respectively. The Company expects these amounts to be paid in full; however, in consideration of the period of time expected for repayment, the lack of profitability at Shliselberg in prior years and the changing healthcare environment, the Company established judgmental reserves related to these receivables. During fiscal 1998 the Company established a reserve against this receivable in the amount of $382,000. The Company increased the reserve to $782,000 in the fiscal year ended June 30, 1999. It is expected that collections will be received over the next several years and accordingly, these amounts have been classified as noncurrent related party receivables on the Company's balance sheet. The Company has no ownership interest in Shliselberg. The merger agreement requires additional purchase price to be paid by BSC to the former owners of Behavioral Stress Centers, Inc. for the three years following the merger date. The additional purchase price is based on the income of BSC before taxes and is to be paid in PHC stock, at market value up to $200,000 and the balance, if any, in cash. On March 26, 1998 the Company issued 227,347 shares of the Company's Class A Common Stock to the former owners of Behavioral Stress Centers, Inc. now BSC-NY, Inc. in full payment for the earn-out due to be paid to them for the year ended October 31, 1997 resulting in additional goodwill. Of the 227,347 shares issued 127,924 were issued in lieu of cash and were subject to a price guarantee of $2.35, payable in shares. Under the price guarantee the Company issued an additional 304,097 shares of Common Stock in the fiscal year ended June 30, 1999. The value of the guarantee shares issued was recorded as interest expense. F-23 (34) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE K - ACQUISITIONS (CONTINUED) BSC also entered into a management agreement with Shliselberg whereby management fees are required of Shliselberg on a monthly basis over a five-year period with an automatic renewal for an additional five-year period. The management fee was calculated at 25% of the total monthly expenses of Shliselberg and effective January 1, 1998 the management agreement was amended to provide for a management fee of 20% of the total monthly expenses of Shliselberg. In November 1998 the management fee was further reduced to 18% of the total monthly expenses of Shliselberg. On November 1, 1996, BSC entered into a lease agreement for its facilities. The lease payments are due in equal monthly installments over a three-year period with an option to extend annually for three additional years. The lease is to be paid by Shliselberg in accordance with the management agreement. Summary, unaudited financial information for Shliselberg as of and for the year ended June 30, 1999 is as follows: Total assets $ 3,580,000 Stockholder's deficit $ (782,000) Net revenue $ 2,930,000 Net loss $ (400,349) Effective January 1, 1997, the Company entered into a Stock Exchange Agreement with a Virginia corporation owned by two individuals to whom the Company has an outstanding note payable. The corporation consists of private practices of psychiatry. The Stock Exchange Agreement provided that in exchange for $50,000 in cash and 64,500 shares of restricted Class A common stock, the Company received an 80% ownership interest in the Virginia corporation. The Company also paid $80,444 in legal fees in connection with the Agreement. Concurrent with the Stock Exchange Agreement the two owners of the Virginia corporation each executed Employment Agreements with the Virginia corporation to provide professional services and each was granted an option to purchase 15,000 shares of Class A common stock at an exercise price of $4.87 per share. The options expire on April 1, 2002. Each agreement requires an annual salary of $200,000 and expires in five years. Further, a Plan and Agreement of Merger was executed whereby the Virginia corporation was merged into PCV. F-24 (35) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE K - ACQUISITIONS (CONTINUED) On January 17, 1997 PCV entered into a purchase and sale agreement with an unrelated general partnership, to purchase real estate with buildings and improvements utilized by the Virginia Corporation for approximately $600,000 of which $540,000 was paid through the issuance of a note (Note C). In accordance with the agreement the two owners will be paid a finders fee for all subsequently acquired medical practices within a 200 mile radius of PCV and those medical practices identified by the owners wherever the location. The finders fee is payable in Class A common stock and in cash. On October 1, 1997 PCV purchased the assets of a clinic located in Blacksburg, Virginia in exchange for $50,000 in cash and 26,024 shares of Class A Common Stock. The company entered into a lease with the former owners for the clinic property and an employment agreement with one of the owners. In accordance with the above agreements the purchase price was allocated as follows: Fixed Assets 10,000 Covenant not to compete 50,000 Goodwill 38,632 _________ $ 98,632 _________ During fiscal 1998 the Company consolidated the operations of the Blacksburg clinic with the Salem, Virginia clinic to enhance profitability. The closure of the Blacksburg clinic, including the write down of related assets and buy out of the lease, is reflected in the June 30, 1998 financial statements. During fiscal 1999 the Company decided to close the remaining Pioneer Counseling of Virginia clinic located in Salem, Virginia. Since the Company was required by contract to give 30-days notice to contract therapists before closing the clinic, in January 1999 the Company closed its 80% owned outpatient operations in Virginia, Pioneer Counseling of Virginia, Inc. The Company sold this business, excluding accounts receivable and most fixed assets, to the minority owners in exchange for their shares of stock in Pioneer Counseling of Virginia, Inc. approximately $25,000, release from the first mortgage on the property of approximately $506,000 and release from notes payable to the minority owners of $20,000. The closure of this clinic resulted in a loss of approximately $300,000 which was charged to administrative expenses in the accompanying statement of operations. Information is not available to present pro forma financial information relating to the October 1997 acquisition. The Company so advised the Securities and Exchange Commission and received a no action letter with respect to this matter. Had the Blacksburg acquisition made during the fiscal year ended June 30, 1998 (October 1, 1997), been made as of July 1, 1997, the pro forma effect on the Company's results of operations would have been immaterial and therefore are not shown. F-25 (36) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE L - SALE OF RECEIVABLES The Company had a sale and purchase agreement whereby third-party receivables were sold at a discount with recourse. In February 1998 the Company entered into a finance agreement with Healthcare Financial Partners, Inc. to provide for receivables funding and liquidate the debt due to the above referenced sale and purchase agreement and provide receivables funding for PHC of Virginia, Inc., PHC of Rhode Island, Inc. and Pioneer Counseling of Virginia, Inc. NOTE M - FOURTH QUARTER ADJUSTMENTS The Company recorded significant adjustments in the fourth quarter of fiscal 1998 related to the closure of Good Hope Center, the write down of receivables of the closed California facility, the write down of the amount due BSC from Shliselberg, the closure of the Blacksburg facility and an increase in accounts receivable reserves of the other facilities. In the quarter ended December 31, 1998 the Company recognized a gain of approximately $1,100,000 in its form 10-QSB related to the liquidation of the assets and liabilities of Franvale (See Note I). The Company subsequently determined that it was more appropriate to defer recognition of any gain until final resolution of all potential liabilities. Accordingly, the Company will amend its December 31, 1998 10-QSB to reverse recognition of this gain in fiscal 1999. The Company wrote-down the amount due BSC from Shliselberg by approximately $368,000 in the fourth quarter of fiscal 1999 due to slow collections at Shliselberg. NOTE N - EVENTS SUBSEQUENT TO JUNE 30, 1999 On July 1, 1999 the Company issued warrants to purchase 10,000 shares of PHC, Inc. Class A Common Stock, exercisable at $1.00 per share, to George H. Gordon as part of the December 1998 private placement agreement. On July 5, 1999 the Company issued warrants to purchase 37,500 shares of PHC, Inc. Class A Common Stock, exercisable at $1.45 per share, to National Securities Corporation as part of a service agreement. On August 1, 1999 the Company issued warrants to purchase 10,000 shares of PHC, Inc. Class A Common Stock, exercisable at $1.00 per share, to George H. Gordon as part of the December 1998 private placement agreement. On August 11, 1999 the Company borrowed approximately $310,000 from Heller Healthcare Finance, Inc. f/k/a HCFP Funding, Inc. through an extension of the February 18, 1998 Loan and Security Agreement. F-26 (37) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE O - BUSINESS SEGMENT INFORMATION The Company's nine operating business units have separate management teams and infrastructures that offer behavioral health treatment through different delivery systems. PHC of Michigan, Inc. ("PHM") provides inpatient and outpatient psychiatric care. PHC of Utah, Inc. ("PHU") provides inpatient and outpatient treatment of addictive disorders and chemical dependency. PHC of Nevada, Inc. ("PHN") provides psychiatric treatment on an outpatient basis through fee for service and capitated rate contracts with employers and insurance carriers. North Point Pioneer, Inc. ("NPP") operates four outpatient behavioral health centers under the name of Pioneer Counseling Centers. PHC of Virginia, Inc. ("PHV") provides inpatient and outpatient treatment of addictive disorders and chemical dependency. Behavioral Stress Centers, Inc. ("BSC") provides management and administrative services to psychotherapy and psychological practices. PHC of Kansas, Inc. ("PHK") provides psychiatric treatment on an outpatient basis. Behavioral Health Online, Inc. ("BHO") provides behavioral health information and education through its web site. PHC, Inc. ("PHC"), the parent Company, operates primarily as a management and holding company for its subsidiaries and, through PDSS, provides clinical support, referrals management and professional services for a number of the Company's national contracts. As allowed by Statement of Financial Accounting Standards 131, PHM, PHU, PHN, NPP, PHV, BSC and PHK have been aggregated. None of the other operating units of the Company exceed the quantitative thresholds of the Standard for separately reporting segment information. Accordingly the following information is presented as required by SFAS 131: Aggregated Segmemts All Others Total __________________________________________________________ 1999 Revenues $17,569,171 $1,570,325 $19,139,496 Segment profit (loss) (1,541,087) 187,001 (1,354,086) Total assets 13,575,413 1,452,021 15,027,434 Capital expenditures 101,384 13,870 115,254 Depreciation & Amortization 257,143 68,621 325,764 1998 Revenues $18,056,015 $3,190,174 $21,246,189 Segment profit (loss) (2,054,601) (2,104,942) (4,159,543) Total assets 13,966,730 2,985,620 16,952,350 Capital expenditures 198,930 13,562 212,492 Depreciation & Amortization 294,305 379,857 674,162 F-27 (38) PHC, INC. AND SUBSIDIARIES Notes to Financial Statements June 30, 1999 and 1998 NOTE P - RESTATEMENT OF FINANCIAL STATEMENTS The Company has restated its financial statements as of June 30, 1998 and for the year then ended. The restatement related to the Company's accounting for a beneficial conversion feature of a preferred stock issuance and the amortization of the value of warrants issued to a financial advisor. The Company has determined that the beneficial conversion feature, amounting to $190,000, should have been recorded in the 1998 financial statements as a dividend. The Company also determined that the value of the warrants issued to the financial advisor should have been fully amortized in 1998, resulting in an additional expense in 1998 of $147,618. The table below reflects the impact of the restatement. AS REPORTED AS RESTATED Loss from continuing operations $(4,011,925) $(4,159,543) Loss from discontinued operations (2,220,296) (2.220.296) _____________ ____________ Loss (6,232,221) (6,379,839) Dividends ( 17,060) ( 207,060) _____________ ____________ Loss applicable to common shareholders $(6,249,281) $(6,586,899) _____________ ____________ Basic and diluted loss per common share: Continuing operations $ (0.77) $ (0.84) Discontinued operations (0.42) (0.42) Total $ (1.19) $ (1.26) F-28 (39) SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHC, INC. Date: November 29, 1999 /s/ Bruce A. Shear as amended President, Chief Executive Officer and Director, (principal executive officer) -----END PRIVACY-ENHANCED MESSAGE-----