-----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, Qykk/QZyANcy9SpxrBpgLwWCZgH9MKlvquqH+EXmJMb8Ti7AFeOLcJ85cWUzYHOg nJNjM1xTG4XqMzvYzCqqiQ== 0000915127-99-000063.txt : 19991208 0000915127-99-000063.hdr.sgml : 19991208 ACCESSION NUMBER: 0000915127-99-000063 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19991207 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: 99770133 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 ADMENDMENT TO 10-K FILED U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A [X] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 [FEE REQUIRED] for the fiscal year ended June 30, 1998 [ ] Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from to Commission file number: 0-22916 PHC, INC. (Name of small business issuer in its charter) MASSACHUSETTS 04-2601571 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 200 LAKE STREET, SUITE 102, PEABODY, MA 01960 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (978) 536-2777 (New area code) Securities registered under Section 12(b) of the Act: NONE. Securities registered under Section 12(g) of the Act: CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. The issuer's revenues for the fiscal year ended June 30, 1998 were $ 21,246,189. The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of September 15, 1998, was $4,615,671. (See definition of affiliate in Rule 12b-2 of Exchange Act). At September 15, 1998, 4,935,267 shares of the issuer's Class A Common Stock and 727,328 shares of the issuer's Class B Common Stock were outstanding. TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes No X - 1 - This amendment to the Company's report on form 10-KSB for the year ended June 30, 1998 filed with the Securities and Exchange Commission on October 13, 1998, is being filed to reflect the following information: 1. Item 3. Legal Proceedings expanded to include detail previously reported under "Closed and Discontinued operations-Franvale". 2. Item 6. Management Discussion and Analysis or Plan of Operation expanded to included the changes in the restatement of the financial statements. 3. Item 7. Financial Statements restated to include: a. To dual date auditors' report to include information related to QCC as of October 5, 1998 and reflected in Note I. b. An additional expense of approximately $148,000 for warrants issued in lieu of cash for investor relations services. c. Dividends of $190,000 charged to retained earnings for the beneficial conversion feature of the series B convertible preferred stock. d. Expanded footnote A to the financial statements relating to business segment reporting. e. Expanded footnote J to the financial statements relating to equity transactions 4. Item 11. Security Ownership of Certain Beneficial Owners and Management to include an additional 5% owner previously omitted. - 2 - PART I ITEM 3. LEGAL PROCEEDINGS. In September 1998, the Company and Franvale were each served with subpoenas in connection with an on-going investigation of Franvale being conducted by the Attorney General of the Commonwealth of Massachusetts. While the investigation apparently is in a preliminary phase, the focus appears to be the quality of patient care provided by Franvale during the period of early 1997 until the facility was placed into receivership in June 1998. The Company is cooperating fully with the investigation and currently is engaged in producing documents requested in the subpoenas. The Company does not believe that it has violated any laws. The Company has been named as a defendant in a proceeding captioned HEALTHCARE SERVICES GROUP, INC. V .QUALITY CARE CENTERS OF MASSACHUSETTS, INC. AND PHC, INC., C.A. No. 98-132 (Sup. Ct., Suffolk Co., MA). The plaintiff, a supplier of housekeeping and laundry services to Franvale, recently filed a motion to add the Company as a party defendant. The plaintiff has alleged two causes of action against the Company in the Substitute First Amended Complaint. In Count III (Accord and Satisfaction), Plaintiff seeks $51,845.61 for the Company's alleged breach of an agreement to pay plaintiff the money owed to it by Franvale. In Count IV (Guaranty), plaintiff alleges that the Company agreed to pay Franvale's debt but did not do so and plaintiff seeks a judgment of $67,412.60. The Court has not yet ruled on the plaintiff's motion to add the Company as a defendant and the Company has not been formally served with process. If the Company is joined as a defendant, it intends vigorously to contest the plaintiff's claims. At this time it is not possible to evaluate the likelihood of an unfavorable outcome or to predict the Company's potential loss. Based on the AD DAMNUM clause of the Substitute First Amended Complaint, the maximum potential loss to the Company is alleged to be $67,412.60, plus costs and interest from the date of demand. The Company has been named as a defendant in a proceeding captioned THE HARTFORD PROVISION COMPANY V. PHC, INC., Civil Action No. 9886 CV 0395 (District Court Department of the Trial Court, Peabody Division, Mass.). Hartford alleges that it provided food products and other goods to Franvale pursuant to the Company's Credit Application and Guaranty Agreement. Hartford claims that Franvale has a balance due and owing of $25,579.16. Count I alleges breach of contract and Count II alleges violation of G. L. c. 93A, Massachusetts' unfair and deceptive trade practices act. The Company filed a Motion to Dismiss Count II for failure to allege anything other than a simple breach of contract action. With regard to Count I, Hartford has thus far been unable to produce the written contract with the Company's signature on it, as they allege. The Company denies any liability and asserts that the goods were provided to Franvale and that the Company never signed any Credit Application and it intends to vigorously contest Plaintiff's claims. Although the results of these litigations cannot be estimated at this time, the Company does not believe that any monetary payments will be material to the financial position or results of operations of the Company. - 3 - PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following is a discussion and analysis of the financial condition and results of operations of the Company for the years ended June 30, 1998 and 1997. It should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. During the fiscal years several businesses were acquired or closed which makes comparability of period results difficult. OVERVIEW The Company presently provides health care services through two substance abuse treatment centers, a psychiatric hospital and nine outpatient psychiatric centers (collectively called "treatment facilities"). The profitability of the Company is largely dependent on the level of patient census at these treatment facilities. The Company's administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases because of the fixed components of these expenses. The healthcare industry is subject to extensive federal, state and local regulation governing, among other things, licensure and certification, conduct of operations, audit and retroactive adjustment of prior government billings and reimbursement. In addition, there are ongoing debates and initiatives regarding the restructuring of the health care system in its entirety. The extent of any regulatory changes and their impact on the Company's business is unknown. RESULTS OF OPERATIONS YEARS ENDED JUNE 30, 1998 AND 1997 The Company experienced a significant loss for fiscal year ended June 30, 1998 including increased expenses incurred related to the closure and buy out of the lease at PHC of Rhode Island, Inc., approximately $500,000, the final write-down of receivables of the California facility, approximately $100,000, the write down of approximately 10% of the amount due to BSC-NY, Inc., approximately $380,000, from the related Professional Corporation due to cash flow problems and slow collections, an additional increase in reserve for bad debts excluding the above of approximately $950,000 and, although the actual closure of the Blacksburg, Virginia clinic happened subsequent to year end, the effect of the closure and buy out of the lease of the Blacksburg Virginia clinic, approximately $140,000, is also reflected in the June 30, 1998 financial statements. Adjustments relating to the foregoing matters were primarily recorded in the fourth quarter of fiscal 1998. There are also additional losses for Franvale Nursing and Rehabilitation Center since the Company was unable to complete the sale of the facility as originally planned when operations were reported as discontinued (see `Business - Closed and Discontinued Operations - Franvale' for additional details related to the sale of the facility). The environment the Company operates in today makes collection of receivables, particularly older receivables, more difficult than in previous years. Accordingly, the Company recorded an increase in its accounts receivable reserve in the year ended June 30, 1997 and has continued with a more stringent reserve policy through the year ended June 30, 1998 including a significant increase in reserve amounts during the fourth quarter of 1998. The company also instituted a more aggressive collection policy in response to today's healthcare environment, which has begun to produce results. The Company's collection policy calls for earlier contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process. This early concentration on claim collection allows facility staff to become aware of minor billing errors early and correct them before the claim can be denied for timely and accurate submission. Total patient care revenue from all facilities, excluding Franvale which is reported as discontinued operations, decreased 3% to $21,246,189 for the year ended June 30, 1998 from $21,927,655 for the year ended June 30, 1997. This decline in revenue is due primarily to a decline in census and closure of Good Hope Center in Rhode Island. Net inpatient care revenue from psychiatric services increased slightly to $13,640,801 for the fiscal year ended June 30, 1998 compared to $13,557,703 for the year ended June 30, 1997 and net outpatient care revenue decreased 13.5% to $6,128,552 for the year ended June 30, 1998 from $7,089,340 for the year ended June 30, 1997. Revenues from Practice Management and Pioneer Development and Support Services ("PDSS") increased 15% to $1,476,836 for the year ended June 30, 1998 from $1,280,613 for the year ended June 30, 1997. Total patient care expenses for all facilities excluding Franvale increased 3% to $10,706,639 for the year ended June 30, 1998 from $10,346,111 for the year ended June 30, 1997. This increase in patient care expenses is largely a result in increases in outpatient and capitated rate services provided which have a higher percentage of total expenses related directly to patient care. Total Administrative expenses for all facilities excluding Franvale increased 10% to $9,488,631 for the year ended June 30, 1998 from $8,622,946 for the year ended June 30, 1997. Approximately 40% of this increase is due to the accrual of additional employee earned time benefits. During the fiscal year ended June 30, 1998 the Company changed its vacation/sick time policy to an earned time policy. Prior to 1998 the company accrued vacation time but did not accrue sick time since the Company was not obligated to pay sick time at termination of employment. In fiscal 1998 the Company put in place an earned time policy which provides for more days accrued per person with no distinction between vacation, holiday or sick time. This created a greater potential liability for payment if employment is terminated for any reason since federal law views earned time as part of salary and due to the employee in full at termination. The Company decided to adopt this more costly plan to improve employee morale and bring benefits more in line with the Company's competition. Approximately 14% of this increase is due to the costs related to the closing of the Blacksburg Clinic primarily the write-off of intangible assets related to that clinic and approximately 8% of this increase is due to additional accounting and legal cost related to the registration of securities. YEAR 2000 COMPLIANCE The Company has contracted with its Information Systems Vendor to upgrade its current accounts receivable software to accommodate a four digit year and bill, track and age receivables accordingly. This software is expected to be installed in test form by December 31, 1998. The Company has also contracted with another company to provide case management software that is year 2000 compliant. This software has already been installed at Pioneer Development and Support Services in Utah and is currently being modified to meet the needs of Harmony Healthcare in Nevada. The Company has already upgraded Network software at some locations and is currently upgrading hardware to accommodate the software upgrade at all other locations. If the Company is unable to make required changes prior to January 1, 2000 it will be required to change current electronic billing to paper billing and insert the eight digit year on all paper bills manually. Although this is a costly and time consuming process, it would allow the company to continue processing claims. The Company is currently in the process of contacting each third party payor of accounts receivable, financial institution, major supplier of essential products and utility to request the status of their year 2000 compliance. As of June 30, 1998 only 10% of vendors notified have responded to our requests. We are sending second notices and will explore alternative sources if responses are not received by fiscal year end June 30, 1999. To date the Company has expended approximately $26,000 on items relating to the year 2000 issues and anticipates approximately $150,000 in additional expenses relating to the upgrade of Company's computer and telephone systems. - 4 - LIQUIDITY AND CAPITAL RESOURCES For the two fiscal years ended June 30, 1998, the Company met its cash flow needs through accounts receivable financing and by issuing debt and equity securities as follows: DATE TRANSACTION TYPE NUMBER OF PROCEEDS MATURITY TERMS STATUS SHARES DATE 11/96 Warrant issued as payment of commision 25,000 10/7/2001 $2.00 exercise outstanding on Convertible price as Debentures adjusted 7/97 issued for services 11/96 Convertible Debentures $3,125,000 12/31/98 7% Interest Converted per Yr. 8/97 2/97 Warrant issued in 3,000 2/18/2002 $2.80 per outstanding exchange for investor $1.25 shares relations services adjusted for dilution issued for services 3/97 Warrant issued in 160,000 3/31/2002 exercise price outstanding exchange for investor $2.62 issued relations services for services 3/97 Warrants issued as 150,000 3/31/2002 $2.00 exercise outstanding registration penalty price issued as on Convertible Debentures registration penalty 5/97 Convertible Preferred 1,000 $1,000,000 05/31/99 6% Interest per Converted Stock per Yr. 6/97 through convertible 8/97 at 80% of 5 day average bid price 6/97 Warrant issued in 50,000 06/04/2000 exercise price outstanding conjuction with $2.75 the Private Placement of Convertible Preferred Stock 5/97 9/97 Common Stock 172,414 $500,000 N/A Issued with Common warrants at a Stock 3.3% discount Sold 9/97 Warrant issued as 86,207 09/30/2002 exercise price outstanding part of the units $2.90 in the Private Placement of Common Stock 9/97 Warrant issued in 150,000 05/31/2002 exercise price outstanding exchange for cash $2.50 and financial advisory services 12/97 Mortgage advance $500,000 10/31/2001 Prime Plus 5% outstanding 3/98 Warrant issued as a 3,000 03/10/2003 exercise price outstanding penalty for late $2.90 registration of Private Placement Common Stock 3/98 Note Payable $350,000 11/10/98 Prime Plus 3.5% outstanding as extended 3/98 Warrants issued 52,500 03/10/2003 exercise price outstanding as additional $2.38 interest on 3/98 debt 3/98 Common Stock issued 227,347 $534,265 N/A N/A N/A to the former owners of BSC-NY, Inc. for the earn out agreement in lieu of cash 3/98 Convertible Preferred 950 $950,000 03/18/2000 6% Interest per outstanding Stock Yr. convertible at 80% of 5 day average bid price 3/98 Warrants issued 49,990 03/18/2001 exercise price outstanding in connection with $2.31 the Private Placement of convertible Preferred Stock on 3/98 5/98 Note Payable - $50,000 on demand 12% annual outstanding Related Party interst rate 6/98 Note Payable - $50,000 on demand 12% annual outstanding Related Party interest rate
- 5 - DATE TRANSACTION TYPE NUMBER OF PROCEEDS MATURITY TERMS STATUS SHARES DATE 7/98 Warrants issued 52,500 07/10/2003 exercise price outstanding as additional $1.81 intrerest on extension of 3/98 debt 7/98 Warrants issued 20,000 07/10/2003 exercise price outstanding as additional $1.81 intrerest on extension of 3/98 debt 8/98 Warrants issued for 50,000 8/15/2001 exercise price outstanding services $1.75 8/98 Note Payable - $100,000 on demand 12% annual outstanding Related Party interest rate
A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. Accounts receivable from patient care decreased 15.9% to $8,126,972 during the year ended June 30, 1998 from $9,671,763 at June 30, 1997. This decrease in accounts receivable is primarily due to the write off of uncollectable California receivables, the write down of Good Hope Center accounts receivable with the close of the facility and the overall increase in reserve for bad debts. The Company continues to closely monitor its accounts receivable balances and implement procedures and policies, including more aggressive collection techniques, to manage accounts receivable growth and keep it consistent with growth in revenues. In February 1998 the Company entered into an accounts receivable funding revolving credit agreement with Healthcare Financial Partners-Funding II, L.P. ("HCFP"), on behalf of five of its subsidiaries, which provides for funding of up to $4,000,000 based on outstanding receivables. The outstanding balance on this receivables financing on June 30, 1998 was approximately $1,680,000. The Company believes that it will meet future financing needs through the accounts receivable funding to sustain existing operations for the foreseeable future. The Company also intends to renew the expansion of its operations through the acquisition or establishment of additional treatment facilities after the close of Franvale is completed and the residual costs of Good Hope Center are final. The Company's expansion plans will be dependent upon obtaining adequate financing as opportunities arise. The liquidation of the assets and liabilities of Franvale may result in a non-cash financial statement gain of approximately $2,000,000 during the year ending June 30, 1999. ITEM 7. FINANCIAL STATEMENTS Independent auditors' reports F-2, F3 Consolidated balance sheets F-4 Consolidated statements of operations F-5 Consolidated statements of changes in stockholders' equity F-6 Consolidated statements of cash flows F-7 Consolidated notes to financial statements F-8 F-1 - 6 - INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders PHC, Inc. Peabody, Massachusetts We have audited the accompanying consolidated balance sheet of PHC, Inc. and subsidiaries as of June 30, 1998 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PHC, Inc. and subsidiaries at June 30, 1998 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. BDO Seidman, LLP Boston, Massachusetts September 18, 1998 October 5, 1998 as to the subsidiary Quality Care Centers of Massachusetts, Inc. Chapter 7 Bankruptcy filing. (See Note I) F2 - 7 - INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders PHC, Inc. Peabody, Massachusetts We have audited the accompanying consolidated balance sheet of PHC, Inc. and subsidiaries as of June 30, 1997 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements enumerated above present fairly, in all material respects, the consolidated financial position of PHC, Inc. and subsidiaries at June 30, 1997 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Richard A. Eisner & Company, LLP New York, New York September 19, 1997 F3 - 8 - PHC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 1997 ______________________ Current assets: Cash and cash equivalents (Note A) $ 227,077 $ 844,471 Accounts receivable, net of allowance for doubtful accounts of $3,488,029 at June 30, 1998 and $1,942,602 at June 30, 1997 (Notes A, L and M) 7,441,972 9,066,763 Prepaid expenses 156,695 346,091 Other receivables and advances 127,064 249,218 Deferred income tax asset (Note F) 515,300 515,300 Other receivables, related party (Note K) 64,065 80,000 ___________ ___________ Total current assets 8,532,173 11,101,843 Accounts receivable, noncurrent 685,000 605,000 Other receivables, noncurrent, related party, net of allowance for doubtful accounts of $382,000 in 1998 (Note K) 2,941,402 2,983,177 Other receivables 426,195 134,284 Property and equipment, net (Notes A, B and D) 2,128,273 3,525,195 Deferred income tax asset (Note F) 154,700 154,700 Deferred financing costs, net of amortization of $18,065 and $83,026 at June 30, 1998 and 1997 respectively 53,608 60,575 Goodwill, net of accumulated amortization of $307,707 and $208,133 at June 30, 1998 and 1997, respectively (Note A) 2,011,613 1,644,252 Other assets (Note A) 19,386 214,150 ___________ ___________ Total assets $ 16,952,350 $ 20,423,176 ___________ ___________ LIABILITIES Current liabilities: Accounts payable $ 2,346,213 $ 2,529,126 Notes payable - related parties (Note E) 159,496 51,600 Current maturities of long-term debt (Note C) 1,107,167 560,914 Revolving credit note 1,683,458 1,789,971 Current portion of obligations under capital leases (Note D) 67,492 97,038 Accrued payroll, payroll taxes and benefits 729,194 303,731 Accrued expenses and other liabilities 1,004,763 672,154 Net current liabilities of discontinued operations (Note A and I) 2,641,537 334,349 ___________ ___________ Total current liabilities 9,739,320 6,338,883 ___________ ___________ Long-term debt, less current maturities (Note C) 2,850,089 3,021,540 Obligations under capital leases (Note D) 93,747 1,434,816 Notes payable - related parties (Note E) -- 23,696 Convertible debentures ($3,125,000 less discount $390,625) -- 2,734,375 Net long term liabilities of discontinued operations (Note A and I) -- 1,145,285 ___________ ___________ Total noncurrent liabilities 2,943,836 8,359,712 ___________ ___________ Total liabilities 12,683,156 14,698,595 Commitments and contingent liabilities (Notes A, D, G, H, J, and K) STOCKHOLDERS' EQUITY (NOTES H, J AND K) Convertible Preferred stock, $.01 par value; 1,000,000 shares authorized, 950 and 500 shares issued and outstanding June 30, 1998 and June 30, 1997 respectively (liquidation Preference $950,000) 10 5 Class A common stock, $.01 par value; 20,000,000 shares authorized, 4,935,267 and 2,877,836 shares issued June 30, 1998 and June 1997, respectively 49,353 28,778 Class B common stock, $.01 par value; 2,000,000 shares authorized, 727,328 and 730,360 issued and outstanding June 30, 1998 and 1997, respectively, convertible into one share of Class A Common Stock 7,273 7,304 Class C common stock, $.01 par value; 200,000 shares authorized, no shares outstanding June 30, 1998 and 199,816 shaers issued and outstanding June 30, 1997 -- 1,998 Additional paid-in capital 15,485,895 10,398,630 Treasury stock, 2,776 and 8,656 common shares at cost June 30, 1998 and June 30, 1997, respectively (12,122) (37,818) Accumulated deficit (11,261,215) (4,674,316) ___________ __________ Total stockholders' equity 4,269,194 5,724,581 ___________ ___________ Total liabilities and stockholders' equity $ 16,952,350 $ 20,423,176 SEE NOTES TO FINANCIAL STATEMENTS F-4 - 9 - PHC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED JUNE 30, 1998 1997 ______________________________ Revenues: Patient care, net (Note A) $ 19,649,353 $ 20,700,616 Management fees (Note K) 833,750 597,278 Other 763,086 629,761 _____________ ____________ Total revenue 21,246,189 21,927,655 Operating expenses: Patient care expenses 10,706,639 10,346,111 Cost of management contracts 467,065 324,440 Provision for doubtful accounts 3,684,452 2,593,573 Administrative expenses 9,488,631 8,622,946 _____________ ____________ Total operating expenses 24,346,787 21,887,070 _____________ ____________ Income (loss) from operations (3,100,598) 40,585 _____________ ____________ Other income (expense): Interest income 391,353 199,976 Interest expense (1,289,642) (1,441,030) Other income, net 58,583 490,019 Gain from operations held for sale (Note I) -- 26,853 _____________ ____________ Total other expense, net (839,706) (724,182) _____________ ____________ LOSS BEFORE INCOME TAXES (3,940,304) (683,597) Income taxes (Note F) 219,239 197,311 _____________ ____________ LOSS FROM CONTINUING OPERATIONS (4,159,543) (880,908) LOSS FROM DISCONTINUED OPERATIONS (NOTES A AND I) (2,220,296) (1,958,756) _____________ ____________ Net loss $ (6,379,839) $ (2,839,664) Dividends (207,060) (204,330) _____________ _____________ Loss applicable to common shareholders $(6,586,899) $(3,043,994) Basic and Diluted Loss per common share: Continuing Operations $ (.84) $ (.33) Discontinued Operations (.42) (.60) _____________ ____________ Total $ (1.26) $ (.93) _____________ ____________ Basic and Diluted Weighted average number of shares outstanding 5,237,168 3,270,175 See Notes to Financial Statements F-5 - 10 - PHC, INC. AND SUBSIDIARIES Consolidated Statements of Changes In Stockholders' Equity Class A Class B Class C Common Stock Common Stock Common Stock Preferred Stock Shares Amount Shares Amount Shares Amount Shares Amount ________________________________________________________________________ BALANCE - JUNE 30, 1996 2,293,568 $ 22,936 812,237 $ 8,122 199,816 $1,998 Issuance of shares with 229,500 2,295 acquisitions (Note K) NPP 15,000 BSC 150,000 PCV 64,500 Exercise of options 13,475 135 Payment of notes receivable Conversion of shares 81,877 818 (81,877) (818) Issuance of employee stock purchase plan shares 9,452 94 Issuance of shares in connection with consulting agreement (Note J) 20,000 200 Issuance of warrants with convertible debentures (Note C) Cancellation of notes receivable Payment of notes receivable Issuance of preferred stock, Series A (Note J) 1,000 $10 Adjustment related to beneficial conversion feature of convertible preferred stock and convertible debenture (Notes C and J) Conversion of preferred stock Series A (Note J) 229,964 2,300 (500) (5) Dividend on preferred stock Costs related to private placements Net loss, year ended June 30, 1997 ________ ________ _______ _______ _______ _______ ________ ______ BALANCE - JUNE 30, 1997 2,877,836 28,778 730,360 7,304 199,816 1,998 500 5 Conversion of debt (Note C) 1,331,696 13,317 Conversion of preferred stock Series A (Note J) 246,305 2,463 (500) (5) Issuance of shares with Acquisition (Note K) 41,024 410 Issuance private placement shares (Note J) 172,414 1,724 Conversion of shares 3,032 31 (3,032) (31) Cancel Class C Common Stock (199,816)(1,998) Issue warrants for services (Note J) Issuance of shares with consulting agreement (Note J) 20,870 209 Issuance of Shares with earn out agreement (Note K) 227,347 2,274 Issuance of employee stock purchase plan shares 14,743 147 Issuance of preferred stock Series B 950 10 Adjustment related to beneficial conversion feature of convertible preferred stock Warrant issued with debt Treasury stock issued to employees Dividends on preferred stock Costs related to private placements Net Loss - year ended June 30, 1998 BALANCE - JUNE 30, 1998 4,935,267 $49,353 727,328 $7,273 0 $0 950 $10 (as restated) _________ _______ _______ ______ ______ ______ _____ _____ See Notes to Financial Statements
- 11 - PHC, INC. AND SUBSIDIARIES (con't) Consolidated Statements of Changes In Stockholders' Equity Additional Paid-In Capital Notes Common Receivable Treasury Shares Accumulated Stock for Stock Shares Amount Deficit Total _______________________________________________________________________ BALANCE - JUNE 30, 1996 $8,078,383 $ (63,928) $(1,630,322) $6,417,189 Issuance of shares with Acquisitions (Note K) 838,524 840,819 NPP 15,000 BSC 150,000 PCV 64,500 Exercise of options 59,709 59,844 Payment of notes receivable 662 662 Conversion of shares -0- Issuance of employee stock Purchase Plan Shares 30,530 30,624 Issuance of shares in connection with consulting agreement (Note J) 79,800 80,000 Issuance of warrants with convertible debentures (Note C) 125,000 125,000 Cancellation of notes receivable 37,818 8,656 $(37,818) -0- Payment of notes receivable 25,448 25,448 Issuance of preferred stock Series A (Note J) 999,990 1,000,000 Adjustment related to beneficial conversion feature of convertible preferred stock and convertible debentures (Notes C and J) 330,284 (200,000) 130,284 Conversion of preferred stock Series A (Note J) (2,295) -0- Dividend on preferred stock (4,330) (4,330) Costs related to private placements (141,295) (141,295) Net loss, year ended June 30, 1997 (2,839,664) 2,839,664) ____________________________________________________________________ BALANCE - JUNE 30, 1997 10,398,630 0 8,656 (37,818) (4,674,316) 5,724,581 Conversion of debt (Note C) 2,696,789 2,710,106 Conversion of preferred stock Series A (Note J) (2,458) 0 Issuance of shares with acquisition (Note K) 79,605 80,015 Issuance Private Placement shares (Note J) 498,276 500,000 Conversion of Shares -0- Cancel Class C Common Stock 1,998 -0- Issue warrants for services (Note J) 184,523 184,523 Issuance of shares with consulting agreement (Note J) 36,249 36,458 Issuance of shares with earn out agreement (Note K) 531,991 534,265 Issuance of employee stock purchase plan shares 35,750 35,897 Issuance of preferred stock Series B 949,990 950,000 Adjustment related to beneficial conversion feature of convertible preferred stock 190,000 (190,000) -0- Warrant issued with debt 48,809 48,809 Treasury stock issued to employees (5,880) 25,696 25,696 Dividends on Preferred Stock (17,060) (17,060) Costs related to private placements (164,257) (164,257) Net Loss-year ended June 30, 1998 (6,379,839) 6,379,839) _____________________________________________________________________ BALANCE - JUNE 30, 1998 $15,485,895 $-0- 2,776 $(12,122)$(11,261,215) $4,269,194 (as restated) SEE NOTES TO FINANCIAL STATEMENTS
F-6 - 12 - PHC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended June 30, 1998 1997 ___________________________ Cash flows from operating activities: Net loss $(6,379,839) $(2,839,664) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 674,162 469,118 Beneficial conversion feature of convertible debt -- 130,284 Compensatory stock options and stock and warrants issued for obligations 269,790 205,000 Changes in: Accounts receivable 1,544,791 (2,929,003) Prepaid expenses and other current assets 257,173 (349,017) Other assets (257,941) 196,339 Net assets of operations held for sale -- 56,682 Accounts payable (182,913) 884,299 Accrued expenses and other liabilities 758,072 (143,943) Net liabilities of discontinued operations 1,161,903 1,299,795 ____________ ___________ Net cash used in operating activities (2,154,802) (3,020,110) ____________ ___________ Cash flows from investing activities: Acquisition of property and equipment and intangibles (212,492) (682,425) Loan receivable 152,749 (3,063,177) ____________ ___________ Net cash used in investing activities (59,743) (3,745,602) ____________ ___________ Cash flows from financing activities: Revolving debt, net (106,513) 1,789,981 Proceeds from borrowings 950,000 2,767,373 Payments on Debt (557,883) (696,886) Deferred financing costs 6,967 21,498 Preferred Stock Dividends (17,060) -- Issuance of Capital Stock 1,321,640 944,173 Convertible Debt -- 2,500,000 ____________ ___________ Net cash provided by financing activities 1,597,151 7,326,139 ____________ ___________ Net increse (decrease) in cash and cash equivalents (617,394) 560,427 Beginning balance of cash and cash equivalents 844,471 284,044 ____________ ___________ Ending balance of cash and cash equivalents $ 227,077 $ 844,471 ____________ ___________ Supplemental cash flow information: Cash paid during the period for: Interest $1,567,763 $ 1,279,862 Income taxes $130,290 $86,414 ____________ ___________ Supplemental disclosure of noncash investing and financing Stock issued for acquisitions and earn-out agreement $ 614,280 $840,819 Capital leases 83,082 284,048 Conversion of preferred stock 500,000 500,000 Beneficial conversion feature of preferred stock 190,000 200,000 Warrant Valuations 233,332 0 Conversion of Debt to Common Stock 2,710,106 0 SEE NOTES TO FINANCIAL STATEMENTS F-7 - 13 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION: PHC, Inc. ("PHC" or the "Company") operates substance abuse treatment centers in several locations in the United States, a psychiatric hospital in Michigan and psychiatric outpatient facilities in Nevada, Kansas and Michigan. PHC also manages a psychiatric practice in New York, operates an outpatient facility through a physicians practice, and operates behavioral health centers. PHC of Utah, Inc. ("PHU") and PHC of Virginia, Inc. ("PHV") provide treatment of addictive disorders and chemical dependency. PHC of Michigan, Inc. ("PHM") provides inpatient and outpatient psychiatric care. PHC of Nevada, Inc. ("PHN") and PHC of Kansas, Inc. ("PHK") provide psychiatric treatment on an outpatient basis. North Point-Pioneer, Inc. ("NPP") operates five outpatient behavioral health centers under the name of Pioneer Counseling Centers. Behavioral Stress Centers, Inc. ("BSC") provides management and administrative services to psychotherapy and psychological practices (see Note K). Pioneer Counseling of Virginia, Inc. ("PCV'), an 80% owned subsidiary provides outpatient services through a physicians practice (see Note K). Quality Care Centers of Massachusetts, Inc. ("Quality Care") operated a long-term care facility known as the Franvale Nursing and Rehabilitation Center (see Note I). The consolidated financial statements include PHC and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Until May 31, 1998, the Company operated Good Hope Center, a substance abuse treatment facility in West Greenwich, Rhode Island ("Good Hope"). Until June 1, 1998 the Company also operated a subacute long-term care facility, Franvale Nursing and Rehabilitation Center ("Franvale"), in Braintree Massachusetts. On June 1, 1998 Franvale was placed into state receivership. All financial information for Franvale is reported in the accompanying financial statements as discontinued operations. The liquidation of the assets and liabilities of Franvale may result in a non-cash financial statement gain of approximately $2,000,000 during the year ending June 30, 1999. During the year ended June 30, 1998, the Company recorded an increase in its accounts receivable reserve in line with its more aggressive reserve policy established last year, reserved for the remaining accounts receivable balance from a closed California facility and allowed for a higher reserve for the closed Rhode Island facility. REVENUES AND ACCOUNTS RECEIVABLE: Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare. Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due to periodic changes in the regulatory environment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between the amounts provided and subsequent settlements are recorded in operations in the year of settlement. The provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable. The allowance for doubtful accounts does not include the contractual allowances. Medicaid reimbursements are currently based on established rates depending on the level of care provided and are adjusted prospectively. Medicare reimbursements are currently based on provisional rates that are adjusted retroactively based on annual cost reports filed by the Company with Medicare. The Company's cost reports to Medicare are routinely audited on an annual basis. The Company periodically reviews its provisional billing rates and provides for estimated Medicare adjustments. The Company believes that adequate provision has been made in the financial statements for any adjustments that might result from the outcome of Medicare audits. F-8 - 14 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUES AND ACCOUNTS RECEIVABLE: (CONTINUED) The Company has $769,982 of receivables from Medicaid and Medicare at June 30, 1998, which constitute a concentration of credit risk should Medicaid and Medicare defer or be unable to make reimbursement payments as due. This amount does not include receivables due to Franvale Nursing and Rehabilitation which is reported as net current liabilities of discontinued operations on the accompanying Balance Sheet. Charity care amounted to approximately $504,000 and $725,000 for the years ended June 30, 1998 and 1997, respectively. Patient care revenue is stated net of charity care in the accompanying statements of operations. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets using accelerated and straight-line methods. The estimated useful lives are as follows: Estimated Assets Useful Life ______ ____________ Buildings 39 years Furniture and equipment 3 through 10 years Motor vehicles 5 years Leasehold improvements Term of lease OTHER ASSETS: Other assets are primarily deposits and covenants not to compete. Covenants not to compete are amortized over the life of the underlying agreement using the straight line method. GOODWILL, NET OF ACCUMULATED AMORTIZATION: The excess of the purchase price over the fair market value of net assets acquired are being amortized on a straightline basis over twenty years. BASIC AND DILUTED LOSS PER SHARE: Net loss per share is computed by dividing net loss applicable to common stock by the weighted average number of shares of common stock for each fiscal year excluding Class C Common Shares. In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings per share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive affects of options, warrants and convertible securities. Dilutive earnings per share is similar to the previously reported fully diluted earnings per share. Diluted loss per share does not include warrants, options, convertible securities or contingently issuable shares that would have an anti-dilutive effect. F-9 - 15 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ESTIMATES AND ASSUMPTIONS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS: Cash equivalents are short-term highly liquid investments with maturities of less than three months, when purchased. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash, trade receivables, other current assets, accounts payable, notes payable and accrued expenses approximate fair value. IMPAIRMENT OF LONG-LIVED ASSETS: During the year ended June 30, 1998 the Company wrote off the carrying value of goodwill for PHC of Rhode Island, Inc., approximately $ 23,000, and wrote off equipment and the land and building assets related to the capital lease from that facility which was closed May 31, 1998 aggregating approximately $1,240,000 in total assets less the liability of approximately $1,300,000, in an agreement to release the company from the lease. The company also wrote down the remaining balance of accounts receivable from a closed California facility, approximately $92,000, and the equipment, goodwill and additional closing costs recorded for the Blacksburg facility, approximately $136,000, which is being closed in fiscal year 1999 to consolidate operations in the Salem, Virginia facility. During the year ended June 30, 1997 the Company wrote off the carrying value of the goodwill for PHC of Kansas, one of its subsidiaries in the amount of approximately $50,000. All of the above write-downs were considered necessary due to the closing of facilities. The assets had no ongoing value or were written-down to their net realizable value. Write-downs in the carrying value of goodwill and property and equipment are charged to depreciation and amortization expense, which is included in administrative expenses in the Company's statements of operations. Write-downs in accounts receivable were charged to the provision for doubtful accounts in the accompanying statements of operations. In accordance with FASB statement no. 121, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long-lived assets. The amount of the impairment losses recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. STOCK-BASED COMPENSATION: The Company accounts for its employee stock-based compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based method of accounting for stock-based compensation plans. The Company adopted the disclosure only alternative which requires disclosure of the pro forma effects on loss and loss per share as if SFAS No. 123 had been adopted, as well as certain other information. All of the Company's employees are employed under leasing arrangements. The Company believes that its leased employees meet the common law definition of employee and therefore qualify as employees for the purposes of applying SFAS 123. RECENT ACCOUNTING PRONOUNCEMENTS With the closure of Quality Care Centers of Massachusetts, Inc., the Company's operations are conducted in one business segment, the operation of behavioral health treatment centers, and all of the Company's operations are in the United States therefore, there is no additional requirement for segment reporting placed on the company by SFAS 131. F-10 - 16 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE B - PROPERTY AND EQUIPMENT Property and equipment is comprised as follows: JUNE 30, 1998 1997 _________________________________ Land $ 119,859 $ 119,859 Buildings 1,676,963 3,154,799 Furniture and equipment 839,972 855,226 Motor vehicles 41,444 50,889 Leasehold improvements 354,687 358,644 __________ __________ 3,032,925 4,539,417 Less accumulated depreciation and amortization 904,652 1,014,222 __________ __________ $2,128,273 $3,525,195 NOTE C - LONG-TERM DEBT JUNE 30, 1998 1997 _________________________________ Long-term debt is summarized as follows: Note payable with interest at 9% requiring monthly payments of $1,150 through May 2001 $34,636 $44,816 Note payable due in monthly installments of $2,000 including imputed interest at 8%. Approximately $21,000 of this obbligation was canceled in connection with the closing of GHC. -- 40,574 9% mortgage note due in monthly installments of $4,850, including interest through July 1, 2012, when the remaining principal balance is payable 478,582 492,996 Note payable due in monthly installments of $21,506 including interest at 10.5% through November 1, 1999, collateralized by all assets of PHN and certain receivables. Interest only payments have been made since May 1998 per subsequent agreement. 374,190 547,092 Note payable due in monthly installments of $26,131 including interest at 11.5% through June 2000 when the remaining principal balance is payable, collateralized by all assets of NPP. Interest only payments have been made since May 1998 per subsequent agreement. 598,848 818,371 Note payable due in monthly installments of $5,558 including interest at 9.25% through May 2012 when the remaining principal balance is payable, collateralized by real estate. 521,000 538,605 Term mortgage note payable with interest only payments through March 1998 principal due in monthly installments of $9,167 beginning April 1998 through February 2001, a balloon payment of approximately $1,300,000 plus interest is due March 2001, interest at prime plus 5% (13.5% at June 30, 1998) collateralized by all assets of PHM. 1,600,000 1,100,000 Note payable bearing interest at prime plus 3-1/2% (12% at June 30, 1998)with the principal due on November 10, 1998 collateralized by MRC's real property and BSC's accounts receivable and cross-collateralized with the revolving credit note referred to below. 350,000 -- __________ __________ 3,957,256 3,582,454 Less current maturities 1,107,167 560,914 _________ _________ Noncurrent maturities $2,850,089 $ 3,021,540 __________ ___________ F-11 - 17 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE C - LONG-TERM DEBT (CONTINUED) Maturities of long-term debt are as follows as of June 30, 1998: YEAR ENDING JUNE 30, AMOUNT ____________ 1999 $ 1,107,167 2000 560,171 2001 1,863,216 2002 20,634 2003 22,570 Thereafter 383,498 ___________ $ 3,957,256 ___________ The Company has a revolving credit note under which a maximum of $4,000,000 may be outstanding at any time. At June 30, 1998 the outstanding balance was $1,683,458. Advances are made based on a percentage of accounts receivable and principal is payable upon receipt of proceeds of the accounts receivable. Interest is payable monthly at prime plus 2.25% (10.75% at June 30, 1998). The agreement is automatically renewable for one-year periods unless terminated by either party. Upon expiration, all remaining principal and interest is due. The notes are collateralized by substantially all of the assets of the Company's subsidiaries excluding Franvale and guaranteed by PHC. In fiscal 1997, the Company issued 7% convertible debentures due December 31, 1998 in the aggregate principal amount of $3,125,000. The number of shares of Class A common stock into which the debentures were convertible was determined by dividing the principal amount to be converted by the conversion price. The conversion price was equal to 94% of the average closing bid price of the Class A common stock as reported by NASDAQ for the five trading days immediately preceding the date of conversion. The beneficial conversion feature, valued at $130,284, was recorded as additional interest. In addition, on March 31, 1997 the Company issued warrants to the debenture holders as compensation for amending the debenture agreement to allow for a later filing of the Registration Statement which was originally required to be filed in December 1996. The warrants provide for the purchase of 150,000 shares of Class A common stock at $2.00 per share and expire in 2003. The warrants were valued at $125,000. During fiscal 1998, all of the convertible debentures were converted into 1,331,696 shares of Class A common stock. NOTE D - CAPITAL LEASE OBLIGATION At June 30, 1998, the Company was obligated under various capital leases for equipment providing for monthly payments of approximately $7,000 for fiscal 1999 and terms expiring from July 1998 through February 2002. The carrying value of assets under capital leases is as follows: June 30 ______________________ 1998 1997 ____ ____ Building (Good Hope Center - Capital Lease) $ -- $1,477,800 Equipment and improvements 511,517 485,004 Less accumulated depreciation and amortization (225,703) (501,732) --------- ---------- $285,814 $1,461,072 F-12 - 18 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED) Future minimum lease payments under the terms of the capital lease agreements are as follows at June 30, 1998: Year Ending JUNE 30, EQUIPMENT ___________ _________ 1999 $83,203 2000 59,897 2001 40,807 2002 3,138 Thereafter -- ________ Total future minimum lease payments 187,045 Less amount representing interest 25,806 ________ Present value of future minimum lease payments 161,239 Less current portion 67,492 _______ Long-term obligations under capital lease $93,747 ========= NOTE E - NOTES PAYABLE - RELATED PARTIES Related party debt is summarized as follows: JUNE 30, ____________________ 1998 1997 ____________________ Note payable, President and principal stockholder, interest at 8%, due in installments through December 1998 $39,496 $ 55,296 Notes payable, Tot Care, Inc., Company owned by the President and principal stockholder, interest at 12% and payable on demand 100,000 -- Notes payable, other related parties, interest at 12% and payable on demand 20,000 20,000 _______ ________ 159,496 75,296 Less current maturities 159,496 51,600 _______ _______ $ -0- $23,696 F-13 - 19 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE F - INCOME TAXES The Company has the following deferred tax assets included in the accompanying balance sheets: YEAR ENDED June 30 ________________________ 1998 1997 ________________________ Temporary differences attributable to: Allowance for doubtful accounts $1,315,000 $1,007,000 Facility Closing Costs 85,000 -- Depreciation 225,000 147,000 Other 2,000 3,000 Operating loss carryforward 1,650,000 340,000 _________ __________ Total deferred tax asset 3,277,000 1,497,000 Less: Valuation allowance (2,607,000) (827,000) ___________ __________ Subtotal 670,000 670,000 Current portion (515,300) (515,300) ___________ __________ Long-term portion $ 154,700 $ 154,700 _________ __________ The Company had no deferred tax liabilities at June 30, 1998 and 1997. Income tax expense (benefit) is as follows: YEAR ENDED ____________________ 1998 1997 ____________________ Current state income taxes $ 219,239 $197,311 _________ ________ Reconciliations of the statutory U.S. Federal income taxes based on a rate of 34% to actual income taxes is as follows: YEAR ENDED ____________________ 1998 1997 ____________________ Income tax benefit at statutory rate $(2,044,400) (898,400) State income taxes, net of federal benefit 144,700 130,200 Increase in valuation allowance 1,780,000 827,000 Increase due to nondeductible items, primarily penalties and travel and entertainment expenses 161,231 12,000 Other 177,708 126,511 ___________ ________ $219,239 $197,311 ___________ ________ At June 30,1998 the Company had a net operating loss carryforward amounting to approximately $4,865,000 which expires at various dates through 2013. If the Company has significant sales of stock in future years, the utilization of the net operating loss carryforward in any given year may be limited under provisions of the Internal Revenue Code. The Company anticipates that it will have sufficient taxable income in future fiscal years to realize its net deferred tax assets existing as of June 30, 1998. The Company has closed two facilities that contributed most significantly to its past losses, the Franvale Nursing and Rehabilitation Center and the Good Hope Center. The Company has also implemented procedures to improve the operating efficiency of its remaining centers. The Company also anticipates that it will have a substantial gain on the closing of its Franvale facility of over $2,000,000 (see Note I). F-14 - 20 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES OPERATING LEASES: The Company leases office and treatment facilities and furniture and equipment under operating leases expiring on various dates through January 31, 2004. Rent expense for the years ended June 30, 1998 and 1997 was approximately $882,000 and $752,000, respectively. Rent expense includes certain short term rentals and, in 1998 additional rent expense associated with the closing of Good Hope Center. Minimum future rental payments under noncancelable operating leases, having remaining terms in excess of one year as of June 30, 1998 are as follows: YEAR ENDING JUNE 30, AMOUNT ____________ ____________ 1999 $413,364 2000 280,974 2001 186,820 2002 120,061 2003 97,165 Thereafter 42,490 ___________ $1,140,874 LITIGATION: In connection with the liquidation of Franvale, some vendors allege that there are amounts due for services which are the obligation of PHC, Inc. At June 30, 1998 total claims pending amounted to approximately $93,000. In September 1998, the Company and Franvale were each served with subpoenas in connection with an on-going investigation of Franvale being conducted by the Attorney General of the Commonwealth of Massachusetts. While the investigation apparently is in a preliminary phase, the focus appears to be the quality of patient care provided by Franvale during the period of early 1997 until the facility was placed into receivership in June 1998. The Company is cooperating fully with the investigation and currently is engaged in producing documents requested in the subpoenas. The Company does not believe that it has violated any laws. CONTINGENCY: In addition, the Commonwealth of Massachusetts may institute a claim against PHC, Inc. to recover expenses incurred as a consequence of Franvale's receivership. The Company believes that it has valid defenses to any such claim and, in any event, it believes that there will be adequate assets remaining in Franvale to satisfy any receivership expenses. NOTE H - STOCK PLANS [1] Stock plans: The Company has three stock plans: a stock option plan, an employee stock purchase plan and a nonemployee directors' stock option plan. F-15 - 21 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE H - STOCK PLANS (CONTINUED) [1] STOCK PLANS: (CONTINUED) The stock option plan provides for the issuance of a maximum of 400,000 shares of Class A common stock of the Company pursuant to the grant of incentive stock options to employees or nonqualified stock options to employees, directors, consultants and others whose efforts are important to the success of the Company. Subject to the provisions of this plan, the compensation committee has the authority to select the optionees and determine the terms of the options including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option will not be less than the market price of the Class A common stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options. The employee stock purchase plan provides for the purchase of Class A common stock at 85 percent of the fair market value at specific dates, to encourage stock ownership by all eligible employees. A maximum of 150,000 shares may be issued under this plan. The non-employee directors' stock option plan provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board. Through June 30, 1998, options for 17,500 shares were granted under this plan. A maximum of 50,000 shares may be issued under this plan. Each outside director is granted an option to purchase 2,000 shares of Class A common stock at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant. In February 1997, all 95,375 shares underlying the then outstanding employee stock options were repriced to the current market price, using the existing exercise durations. Under the above plans, at June 30, 1998, 164,555 shares were available for future grant or purchase. The Company had the following activity in its stock option plans for fiscal 1998 and 1997: NUMBER WEIGHTED-AVERAGE OF EXERCISE PRICE SHARES PER SHARE _______________________________ Option plans: Balance - June 30, 1996 114,750 $5.56 Granted 125,500 $4.56 Repriced options: Original (95,375) $5.99 Repriced 95,375 $3.50 Cancelled (21,400) $6.05 Exercised (13,475) $5.16 __________ Balance - June 30, 1997 205,375 $4.27 Granted 210,000 $2.37 Cancelled (40,000) $3.21 __________ Balance - June 30, 1998 375,375 $3.32 __________ F-16 - 22 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE H - STOCK PLANS (CONTINUED) [2] STOCK-BASED COMPENSATION: Options for 169,000 shares are exercisable as of June 30, 1998 at exercise prices ranging from $2.00 to $6.63 and a weighted-average exercise price of approximately $3.08 per share, with a weighted-average remaining contractual life of approximately three years. The exercise prices of options outstanding at June 30, 1998 range from $2.00 to $6.63 per share and have a weighted-average exercise price of approximately $3.03 per share, with a weighted-average remaining contractual life of approximately four years. Subsequent to June 30, 1998 223,875 of the outstanding stock options were repriced to $1.25 and 50,000 were repriced to $1.50. Of the outstanding stock options 101,500 are held by Directors and former employees and were not repriced. The weighted average exercise price of the options that were not repriced is $3.15. The Company has adopted the disclosure-only provisions of SFAS No. 123, but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. There was no compensa- tion expense recognized in 1998 or 1997. If the Company had elected to recognize compensation cost for the plans based on the fair value at the grant date for awards granted, consistent with the method prescribed by SFAS No. 123, net loss per share would have been changed to the pro forma amounts indicated below: YEAR ENDED JUNE 30, 1998 1997 _____________________________ Net loss As reported Continuing Operations $(4,011,925) $ (880,908) Discontinued Operations (2,220,296) (1,958,756) Pro forma Continuing Operations (4,140,252) (934,516) Discontinued Operations (2,220,296) (1,958,756) Net loss per share As reported Continuing Operations (.77) (.27) Discontinued Operations (.42) (.60) Pro forma Continuing Operations (.79) (.28) Discontinued Operations (.42) (.60) The fair value of the Company's stock options used to compute pro forma net loss and net loss per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1998 and 1997: dividend yield of 0%; expected volatility of 30%; a risk-free interest rate of between 5% and 7%; and an expected holding period of five years. The per share weighed-average grant-date fair value of options granted during the years ended June 30, 1998 and 1997 was $.84 and $3.44, respectively. F-17 - 23 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS On May 26, 1998, PHC, Inc.'s wholly owned subsidiary, Quality Care, which operates Franvale filed for reorganization under Chapter 11. On May 29, 1998, the Bankruptcy Court terminated the Chapter 11 proceeding determining that there was no likelihood of reorganization since the prospective acquirer of the facility was now imposing certain terms unacceptable to all interested parties and that the transfer of patients and liquidation of assets could be as readily effectuated in a state court receivership under the aegis of the Massachusetts Health Care Statutes and accordingly dismissed the Chapter 11 case. On June 1, 1998, a receiver was appointed to transfer the patients and close the facility expeditiously. The Company has recorded the losses of Franvale through May 31, 1998 in the accompanying financial statements. Subsequent to year end the Company's Bankruptcy Attorney was notified that effective September 30, 1998 the patient care receivership for Quality Care had been terminated. On October 5, 1998, in response to the termination of the State Receivership, the Company filed for protection under Chapter 7. Although the full extent of the financial impact on PHC, Inc. cannot be determined at this time, the management of PHC, Inc. does not believe that the liquidation of the assets and liabilities of Quality Care will have a substantial negative impact on PHC's financial position and results of operations. The liquidation of the assets and liabilities of Franvale may result in a non-cash financial statement gain of approximately $2,000,000 during the year ending June 30, 1999. The Company is subject to a guarantee signed by PHC, Inc for furniture and equipment purchased by Quality Care during the fiscal year ended June 30, 1996. The amount of this debt recorded by Quality Care in the accompanying financial statements is approximately $148,000. NOTE J - CERTAIN CAPITAL TRANSACTIONS In addition to the outstanding options under the Company's stock plans (Note H), the Company has the following options and warrants outstanding at June 30, 1998: - 24 - NUMBER of EXERCISE EXPIRATION DATE DESCRIPTION UNITS PRICE DATE SHARE ___________________________________________________________________________________________________________________ 09/01/93 Warrants to purchase units issued with bridge financing 5,946 units $3.70 per unit September 1998 Equity treatment 03/10/94 Unit purchase option issued as part of the IPO 156,271 units $5.60 per unit March 1999 Equity transaction 03/10/94 IPO warrants 1,772,073 $5.97 per share March 1999 Equity transaction 02/08/96 Private placement warrants with common stock issuance 737,170 $3.76 per share January 2001 Equity transaction 02/27/96 Warrants issued with the exercise of Bridge warrants 36,573 $7.02 per share February 2001 Equity transaction 11/01/96 Warrants for debt placement service 25,000 $2.00 per share October 2001 $125,000 value charged to interest expense over term of debt 02/18/97 Warrant for investor relation services 3,753 $2.80 per share February 2002 $1,210 value passed as an adjustment 03/03/97 Consultant warrant for investor relations 160,000 $2.62 per share March 2002 $16,306 value passed as an adjustment 03/31/97 Warrants issued as registration penalty on 150,000 $2.00 per share March 2002 Convertible Debentures $46,375 value charged to interest expense over term of debenture 06/04/97 Warrants issued with preferred stock placement 50,000 $2.75 per share June 2000 Equity transaction 06/01/97 Warrants issued for investment banker services 150,000 $2.50 per share May 2002 $193,748 value charged to professional fees 09/19/97 Private Placement warrants with common stock issuance 86,207 $2.90 per share March 2003 Equity transaction 03/10/98 Penalty warrants issued for late registration of private 3,000 $2.90 per share March 2003 placement shares Equity transaction 03/10/98 Warrants issued as additional interest on debt 52,500 $2.38 per share March 2003 $48,809 value charged to interest expense over term of loan 03/19/98 Warrants issued with preferred stock private placement 49,990 $2.31 per share March 2001 Equity transaction
F-18 - 25 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE J - CERTAIN CAPITAL TRANSACTIONS Each unit consists of one share of Class A common stock and a warrant to purchase one share of Class A common stock at $7.50 per share. In February 1998, the Company received $950,000 in exchange for the issuance of Series B convertible preferred stock and warrants to purchase 49,990 shares of Class A common stock. The warrants are exercisable at $2.31 per share and expire in 2001. The number of shares of Class A common stock into which the preferred stock may be converted is equal to 80% of the closing bid price of the Class A common stock as reported by NASDAQ for the five trading days immediately preceding the conversion. Cumulative preferred dividends are at the rate of $60 per share per year, payable quarterly. Dividends are payable in cash or in shares of preferred stock at $1,000 per share. For the year ended June 30, 1998 and 1997 dividends amounted to $ 17,060 and $4,330 respectively. On July 1, 1998 the Company issued 13 shares of series B preferred stock in payment of dividends payable for the fiscal year ended June 30, 1998. As part of the Consultant Warrant agreement to purchase 160,000 shares as listed in the table above, 80,000 may be canceled if certain stock prices, as defined in the agreement, are not achieved by March 31, 1999 and June 30, 1999. Under existing dilution agreements with other stockholders the issuance of common stock under agreements other than the employee stock purchase and option plans will increase the number of shares issuable and decrease the exercise price of certain of the above warrant agreements based on the difference between the then current market price and the price at which the new common stock is being issued. The dilutive effect of transactions prior to June 30, 1998 are reflected in the table above. During fiscal 1998, the Class C common stock was canceled and retired because of restrictions on the release of the stock, due to earnings targets which were not achieved. In June 1997, the Company received $1,000,000 in exchange for the issuance of Series A Convertible preferred stock and warrants to purchase 50,000 shares of Class A common stock. The warrants are exercisable at $2.75 per share and expire in 2000. The warrants were valued at $30,000. The number of shares of Class A common stock into which the preferred stock was converted was equal to 80% of the closing bid price of the Class A common stock as reported by NASDAQ for the five trading days immediately preceding the conversion. The beneficial conversion feature, due to the 80% discount above, valued at $200,000 was recorded as additional dividends. In June 1997, 500 shares of preferred stock were converted into 229,640 shares of Class A common stock. In fiscal 1998, the 500 remaining shares of preferred stock were converted into 246,305 shares of Class A common stock. The issuance of these securities will result in the issuance of some additional Class A common shares under existing dilution agreements with other stockholders. In September 1997, the Company sold units consisting of four shares of common stock and a warrant to purchase two shares of common stock for $500,000. The common shares sold under this arrangement amounted to 172,414 shares and the warrants allow the holder to purchase an additional 86,207 common shares. The exercise price of the warrants is $2.90 per share of common stock and the warrants expire in September 2002. The agreement required that the shares be registered within 90 days of the closing date of the private placement. The registration was not complete by the deadline therefore the Company was required to issue warrants to purchase 3,000 additional shares of class A common stock at $2.90 per share. F-19 - 26 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED) In connection with the acquisition of a business in fiscal 1996, the Company entered into a consulting agreement with the former owner of the business whereby the former owner would be granted, as partial compensation, 20,000 shares of common stock for each of the four fiscal years ending June 30, 2000. The consulting agreement provides that if the traded market value is less than $60,000, then the number of shares issued will be increased to raise the traded market value to $60,000. The shares issued pursuant to the consulting agreement have been charged to compensation expense. The consulting agreement also provides for an annual salary of approximately $24,000 through October 1999. NOTE K - ACQUISITIONS In September 1996, the Company purchased the assets of seven outpatient behavioral health centers located in Michigan ("NPP"). The centers were purchased for $532,559 and 15,000 shares of Class A common stock of PHC, Inc. valued at $5.04 per share. The Company borrowed $900,000 (see Note C) to finance the purchase and to provide working capital for the centers. The purchase price was allocated as follows: Office equipment $ 18,000 Covenants not to compete 20,000 Goodwill 597,746 Deposits 15,072 Liabilities assumed (42,659) ------- $ 608,159 Concurrent with the asset purchase agreement, NPP entered into an employment agreement with a former owner which requires an annual salary of $150,000 and an annual bonus. The agreement is effective for four years and is automatically extended for successive one year terms unless terminated. The salary and bonus are subject to adjustment based on collected billings. NPP also entered into a management agreement whereby $1,500 per month would be paid for five years to the former owners. During fiscal 1998 in connection with the asset purchase agreement, the Company issued 15,000 unregistered shares of Class A common stock which was accounted for as additional purchase price. On November 1, 1996, BSC-NY, Inc. ("BSC"), merged with Behavioral Stress Centers, Inc., a provider of management and administrative services to psychotherapy and psychological practices in the greater New York City Metropolitan Area. In connection with the merger, the Company advanced 150,000 shares of PHC, Inc. Class A common stock to Shliselberg Physician Services, P.C. formerly Perlow Physicians, P. C. ("Perlow"), which were in turn issued to the former owners of Behavioral Stress Centers, Inc. to acquire the assets of the medical practices previously serviced by BSC. At June 30, 1998 Perlow owed the Company $3,292,428 which includes some acquisition costs, management fees and interest on the advances of approximately $481,119. During fiscal 1998 the Company established a reserve against this receivable in the amount of $382,000. It is expected that collections will be received over the next several years and accordingly, these amounts have been classified as noncurrent. The Company has no ownership interest in Perlow and therefore does not consolidate its operations. F-20 - 27 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE K - ACQUISITIONS (CONTINUED) The purchase price of BSC was allocated as follows: Goodwill $63,600 Equipment and other assets 20,000 _______ $83,600 _______ The merger agreement requires additional purchase price to be paid by BSC to the former owners of Behavioral Stress Centers, Inc. for the three years following the merger date. The additional purchase price is based on the income of BSC before taxes and is to be paid in PHC stock, at market value up to $200,000 and the balance, if any, in cash. On March 26, 1998 the Company issued 227,347 shares of the Company's Class A Common Stock to the former owners of Behavioral Stress Centers, Inc. now BSC-NY, Inc. in full payment for the earn-out due to be paid to them for the year ended October 31, 1997 resulting in additional goodwill. Of the 227,347 shares issued 127,924 were issued in lieu of cash and are subject to a price guarantee of $2.35, payable in shares. The Company is required to issue shares for the difference between the selling price and the guarantee price if the selling price is less than $2.35. At September 15, 1998 the market price per share was $.938. Subsequent to year end a former owner sold 30,382 shares. If that owner sells the additional 320 shares he owns, the Company will issue approximately $50,000 in additional shares of stock in accordance to the price guarantee agreement. BSC also entered into a management agreement with Perlow whereby management fees are required of Perlow on a monthly basis over a five-year period with an automatic renewal for an additional five-year period. The management fee was calculated at 25% of the total monthly expenses of Perlow and effective January 1, 1998 the management agreement was amended to provide for a management fee of 20% of the total monthly expenses of Perlow. ......... On November 1, 1996, BSC entered into a lease agreement for its facilities. The lease payments are due in equal monthly installments over a three year period with an option to extend annually for three additional years. The lease is to be paid by Perlow in accordance with the management agreement. Summary, unaudited financial information for Perlow as of and for the year ended June 30, 1998 is as follows: Total assets $3,783,000 Stockholder's deficit $ (382,000) Net revenue $3,110,000 Net loss $ (304,000) Effective January 1, 1997, the Company entered into a Stock Exchange Agreement with a Virginia corporation owned by two individuals to whom the Company has an outstanding note payable. The corporation consists of private practices of psychiatry. The Stock Exchange Agreement provided that in exchange for $50,000 in cash and 64,500 shares of restricted Class A common stock, the Company received an 80% ownership interest in the Virginia corporation. The Company also paid $80,444 in legal fees in connection with the Agreement. Concurrent with the Stock Exchange Agreement the two owners of the Virginia corporation each executed Employment Agreements with the Virginia corporation to provide professional services and each was granted an option to purchase 15,000 shares of Class A common stock at an exercise price of $4.87 per share. The options expire on April 1, 2002. Each agreement requires an annual salary of $200,000 and expires in five years. Further, a Plan and Agreement of Merger was executed whereby the Virginia corporation was merged into PCV. F-21 - 28 - PHC INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE K - ACQUISITIONS (CONTINUED) On January 17, 1997 PCV entered into a purchase and sale agreement with an unrelated general partnership, to purchase real estate with buildings and improvements utilized by the Virginia Corporation for approximately $600,000 of which $540,000 was paid through the issuance of a note (Note C). In accordance with the above agreements the purchase price was allocated as follows: Land 50,600 Building 540,000 Covenant not to compete 50,000 Goodwill 285,038 _________ $ 925,638 __________ In accordance with the agreement the two owners will be paid a finders fee for all subsequently acquired medical practices within a 200 mile radius of PCV and those medical practices identified by the owners wherever the location. The finders fee is payable in Class A common stock and in cash. On October 1, 1997 PCV purchased the assets of a clinic located in Blacksburg, Virginia in exchange for $50,000 in cash and 26,024 shares of Class A Common Stock. The company entered into a lease with the former owners for the clinic property and an employment agreement with one of the owners. In accordance with the above agreements the purchase price was allocated as follows: Fixed Assets 10,000 Covenant not to compete 50,000 Goodwill 38,632 ________ $ 98,632 ________ During fiscal 1998 the Company consolidated the operations of the Blacksburg clinic with the Salem Virginia clinic to enhance profitability. The closure of the Blacksburg clinic including the write down of related assets and buy out of the lease is reflected in the June 30, 1998 financial statements. Information is not available to present pro forma financial information relating to the 1997 acquisitions. The Company so advised the Securities and Exchange Commission and received a no action letter with respect to this matter. Had the Blacksburg acquisition made during the fiscal year ended June 30, 1998 (October 1, 1997), been made as of July 1, 1997, the pro forma effect on the Company's results of operations would have been immaterial and therefore are not shown. NOTE L - SALE OF RECEIVABLES The Company had a sale and purchase agreement whereby third-party receivables were sold at a discount with recourse. The amount of receivables subject to recourse at June 30, 1997 totaled approximately $577,000. Proceeds from the sale of these receivables totaled approximately $3,000,000 for the year ended June 30, 1997. The purchase fees related to the agreement amount to approximately $127,000 for the year ended June 30, 1997 and are included in interest expense in the accompanying consolidated statement of operations. In February 1998 the Company entered into a finance agreement with Healthcare Financial Partners, Inc. to provide for receivables funding and liquidate the debt due to Finova Capital from the above referenced sale and purchase agreement and provide receivables funding for PHC of Virginia, Inc., PHC of Rhode Island, Inc. and Pioneer Counseling of Virginia, Inc. F-22 - 29 - PHC, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 AND 1997 NOTE M - FOURTH QUARTER ADJUSTMENTS The Company recorded significant adjustments in the fourth quarter of fiscal 1998 related to the closure of Good Hope Center, the write down of receivables of the closed California facility, the write down of the amount due BSC from Perlow, the closure of the Blacksburg facility and an increase in accounts receivable reserves of the other facilities. NOTE N - EVENTS SUBSEQUENT TO JUNE 30, 1998 On July 10, 1998 the Company issued warrants to purchase 52,500 and 20,000 shares of PHC, Inc. Class A Common Stock, exercisable at $1.81 per share, to Healthcare Financial Partners, Inc. in conjunction with the payment extension granted on the $350,000 financing provided to PHC, Inc. On August 13, 1998 the Company borrowed $100,000 from Bruce A. Shear, President and Principal Stockholder. This amount bears interest at 12% and is payable on demand. Subsequent to year end the Company issued a warrant to purchase 50,000 shares of PHC, Inc. Class A Common Stock, exercisable at $1.75 per share. The warrant may be canceled if certain stock prices, as defined in the agreement, are not achieved. NOTE O - BUSINESS SEGMENT INFORMATION The Company's operations are conducted in one business segment, the operation of behavioral health treatment centers. All of the Company's operations are in the United States. F-23 - 30 - PART III ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of shares of the Company's Class A Common Stock and Class B Common Stock (the only classes of capital stock of the Company currently outstanding) as of August 15, 1998 by (i) each person known by the Company to beneficially own more than 5% of any class of the Company's voting securities, (ii) each director of the Company, (iii) each of the named executive officers as defined in 17 CFR 228.402(a)(2) and (iv) all directors and officers of the Company as a group. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law. In preparing the following table, the Company has relied on the information furnished by the persons listed below: Amount Name And Address and Nature of Beneficial of Beneficial Percent Title of Class Owner Owner Class (12) _______________________________________________________________________________ Class A Common Stock Gerald M. Perlow 19,750(1) * c/o PHC, Inc. 200 Lake Street Peabody MA 01960 Donald E. Robar 13,875(2) * c/o PHC, Inc. 200 Lake Street Peabody MA 01960 Bruce A. Shear 36,000(3) * c/o PHC, Inc. 200 Lake Street Peabody MA 01960 Robert H. Boswell 43,587(4) * c/o PHC, Inc. 200 Lake Street Peabody MA 01960 Howard W. Phillips 41,504(5) * P. O. Box 2047 East Hampton NY 11937 William F. Grieco 63,280(6)(7) 1.3% 115 Marlborough Street Boston MA 02116 J. Owen Todd 59,280(7) 1.2% c/o Todd and Weld 1 Boston Place Boston MA 02108 ProFutures Special 482,397(8) 8.9% Equities Fund, L.P. 11612 Bee Cave RD-STE 216 Austin TX 78733 All Directors and Officers as a Group 240,420(9) 4.9% (7 persons) Class B Common Stock (10)....... Bruce A. Shear 671,259(11) 92.3% c/o PHC, Inc. 200 Lake Street Peabody MA 01960 All Directors and Officers as a Group 671,259 92.3% (7 persons) * Less than 1%. (1) Includes 9,750 shares issuable pursuant to currently exercisable stock options or stock options which will become exercisable within sixty days, having an exercise price range of $2.06 to $6.63 per share. (2) Includes 12,375 shares issuable pursuant to currently exercisable stock options or stock options which will become exercisable within sixty days, having an exercise price range of $2.06 to $6.63 per share. (3) Includes 25,000 shares of Class A Common Stock issuable pursuant to currently exercisable stock options, having an exercise price of $2.63 per share. Excludes an aggregate of 59,280 shares of Class A Common Stock owned by the Shear Family Trust and the NMI Trust, of which Bruce A. Shear is a remainder beneficiary. (4) Includes an aggregate of 36,500 shares of Class A Common Stock issuable pursuant to currently exercisable stock options at an exercise price range of $2.00 to $3.50 per share. (5) Includes 37,504 shares issuable upon the exercise of a currently exercisable Unit Purchase Option for 18,752 Units, at a price per unit of $5.60, of which each unit consists of one share of Class A Common Stock and one warrant to purchase an additional share of Class A Common Stock at a price per share of $7.50 and 4,000 shares issuable pursuant to currently exercisable stock options having an exercise price range of $2.06 to $3.50 per share. (6) Includes 4,000 shares of Class A Common Stock issuable pursuant to currently exercisable stock options, having an exercise price range of $2.06 to $3.50 per share (7) Messrs. Todd and Grieco are the two trustees of the Trusts which collectively hold 59,280 shares of the Company's outstanding Common Stock. Gertrude Shear, Bruce A. Shear's mother, is the lifetime beneficiary of the Trusts. In addition to the shares held by the Trusts, to the best of the Company's knowledge, Gertrude Shear currently owns less than 1% of the Company's outstanding Class B Common Stock. (8) Includes 165,522 shares of Class A Common Stock issuable upon the exercise of outstanding warrants and 316,875 shares of Class A Common Stock estimated to be issuable upon the conversion of Series B Convertible Preferred Stock. (9) Includes an aggregate of 110,625 shares issuable pursuant to currently exercisable stock options. Of those options, 4,125 have an exercise price of $6.63 per share, 68,250 have an exercise price of $3.50 per share, 35,000 have an exercise price of $2.63 and 2,000 have an exercise price of $2.06 and 1,250 have an exercise price of $2.00. Also includes 37,504 shares issuable upon the exercise of the Unit Purchase Option as described in (5). (10) Each share of Class B Common Stock is convertible into one share of Class A Common Stock automatically upon any sale or transfer thereof or at any time at the option of the holder. (11) Includes 56,369 shares of Class B Common Stock pledged to Steven J. Shear of 2 Addison Avenue, Lynn, Massachusetts 01902, Bruce A. Shear's brother, to secure the purchase price obligation of Bruce A. Shear in connection with his purchase of his brother's stock in the Company in December 1988. In the absence of any default under this obligation, Bruce A. Shear retains full voting power with respect to these shares. (12) Represents percentage of equity of class, based on numbers of shares listed under the column headed "Amount and Nature of Beneficial Ownership". Each share of Class A Common Stock is entitled to one vote per share and each share of Class B Common Stock is entitled to five votes per share on all matters on which stockholders may vote (except that the holders of the Class A Common Stock are entitled to elect two members of the Company's Board of Directors and holders of the Class B Common Stock are entitled to elect all the remaining members of the Company's Board of Directors). Based on the number of shares listed under the column headed "Amount and Nature of Beneficial Ownership," the following persons or groups held the following percentages of voting rights for all shares of common stock combined as of August 15, 1998: Bruce A. Shear ........................................39.28% J. Owen Todd..............................................0.7% William F. Grieco.........................................0.7% ProFutures Special Equities Fund, LP......................5.3% All Directors and Officers as a Group (7 persons).......40.23% - 31 - ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. Exhibits Index Exhibit No. Description 23.1 Consent of Independent Auditors. 23.2 Consent of Independent Auditors. - 32 - SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHC, INC. Date: December 7, 1999 By: /s/ Bruce A. Shear President Chief Executive Officer - 33 - Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We hereby consent to the incorporation by reference in this Registration Statement on Form S-8 of PHC, Inc. (the "Company") of our report dated September 18, 1998 (October 5, 1998 as to the second paragraph of Note I and September 10, 1999 as to Note P) relating to the consolidated financial statements of the Company appearing in the Company's Annual Report on Form 10-KSB for the year ended June 30, 1998. BDO Seidman, LLP Boston, Massachusetts December 6, 1999 - 34 - Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We hereby consent to the incorporation by reference in this Registration Statement on Form S-8 of PHC, Inc. (the "Company") of our report dated September 19, 1997, relating to the consolidated financial statements of the Company appearing in the Company's Annual Report on Form 10-KSB for the year ended June 30, 1997. /s/ Richard A. Eisner Company, LLP New York, New York December 6, 1999 - 35 - -----END PRIVACY-ENHANCED MESSAGE-----