PHC, INC.
200 Lake Street
Suite 102
Peabody, MASSACHUSETTS 01960
November 27, 1996
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
PHC, Inc., which will be held on Tuesday, December 31, 1996, at 3:00 p.m., at
the offices of Choate, Hall & Stewart, Exchange Place, 53 State Street, 36th
FloorBoston, Massachusetts 02109.
The following Notice of Annual Meeting of Stockholders and Proxy Statement
describes the items to be considered by the stockholders and contains certain
information about PHC, Inc.'s officers and directors.
Please sign and return the enclosed proxy card as soon as possible in the
envelope provided so that your shares can be voted at the meeting in accordance
with your instructions. Even if you plan to attend the meeting, we urge you to
sign and promptly return the enclosed proxy. You can revoke it at any time prior
to the meeting, or vote your shares personally if you attend the meeting. We
look forward to seeing you.
Sincerely,
Bruce A. Shear
President
<PAGE>
PHC, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 31, 1996
The Annual Meeting of Stockholders of PHC, Inc. (the "Company") will be
held at the offices of Choate, Hall & Stewart, Exchange Place, 53 State Street,
Boston, Massachusetts, on Tuesday, December 31, 1996, at 3:00 p.m., for the
following purposes:
1. To elect four directors (two to be elected by the holders of the
Company's Class A Common Stock and two to be elected by the
Company's Class B Common Stock) to hold office until the annual
meeting next following their election and until their successors are
duly elected and qualified;
2. To approve the proposal to amend the Company's Restated Articles
of Organization to increase the number of shares of authorized
Class A Common Stock from 10,000,000 to 20,000,000;
3. To ratify the selection by the Board of Directors of Richard A.
Eisner & Company, LLP as the Company's independent auditors; and
4. To transact such other business as may properly come before the
meeting or any adjournment of the meeting.
Stockholders of record at the close of business on November 25, 1996, will
be entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting.
By order of the Board of Directors
PAULA C. WURTS, ASSISTANT CLERK
Peabody, Massachusetts
November 27, 1996
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER
TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF MAILED IN
THE UNITED STATES.
<PAGE>
PHC, INC.
200 Lake Street
Suite 102
Peabody, MASSACHUSETTS 01960
(508) 536-2777
PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of PHC, Inc. (the "Company") for use at the
Annual Meeting of Stockholders to be held at the offices of Choate, Hall &
Stewart, Exchange Place, 53 State Street, Boston, Massachusetts on Tuesday,
December 31, 1996 at 3:00 p.m. (Boston time), and at any adjournment of that
meeting (the "Annual Meeting"). Each proxy will be voted in accordance with the
instructions specified, and if no instruction is specified, the proxy will be
voted in favor of the proposals set forth in the Notice of Annual Meeting. Any
proxy may be revoked by a stockholder at any time before it is exercised by
filing a later dated proxy or written notice of revocation with Paula C. Wurts,
Assistant Clerk of the Company, or by voting in person at the Annual Meeting.
The Company's Annual Report on Form 10-KSB for the year ended June 30,
1996 is being mailed to stockholders together with this Proxy Statement. The
Company will furnish any exhibit to the Company's Annual Report on Form 10-KSB
upon the payment of a fee of ten cents per page plus mailing costs. The date of
mailing of this Proxy Statement is expected to be on or about November 27, 1996.
The Board of Directors has fixed November 25, 1996 as the record date for
the determination of stockholders entitled to vote at the Annual Meeting (the
"Record Date"). On that date there were outstanding and entitled to vote [ ]
shares of Class A Common Stock and [ ] shares of Class B Common Stock of the
Company (the shares of Class A Common Stock and Class B Common Stock are
referred to collectively herein as the "Shares"). Each share of Class A Common
Stock is entitled to one vote and each share of Class B Common Stock is entitled
to five votes. The holders of the Company's Class A Common Stock are entitled to
elect two members of the Company's Board of Directors (the "Class A Directors")
and holders of the Company's Class B Common Stock are entitled to elect all the
remaining members of the Company's Board of Directors (the "Class B Directors").
Holders of Class A Common Stock will receive white proxy cards which will be
different from those received by the holders of Class B Common Stock. The proxy
cards received by the holders of Class A Common Stock will contain a proposal
relating to the election of the two members of the Board of Directors to be
elected by the holders of the Class A Common Stock, in addition to any other
proposals to be voted upon during the General Session. Holders of Class B Common
Stock will receive blue proxy cards which will contain a proposal relating to
the election of two members of the Board of Directors to be elected by the
holders of the Class B Common Stock, in addition to any other proposals to be
voted upon during the General Session.
The Annual Meeting will comprise three related but separate sessions: (i)
a special session of the holders of Class A Common Stock, during which session
only holders of Class A Common Stock are entitled to vote, for the separate
election by such holders of two directors, and no other business may properly
come before the meeting (the "Class A Session"); (ii) a special session of the
holders of Class B Common Stock, during which session only holders of Class B
Common Stock are entitled to vote, for the separate election by such holders of
two directors, and no other business may properly come before the meeting (the
"Class B Session"); and (iii) a general session of the holders of the Class A
Common Stock and the Class B Common Stock for the approval of a proposal to
amend the Company's Restated Articles of Organization to increase the authorized
number of shares of the Company's Class A Common Stock from 10,000,000 to
20,000,000, ratification of the selection of independent auditors and for the
conduct of such other business as may properly come before the Annual Meeting
(the "General Session"). The presence in person or by proxy of holders of shares
of Class A Common Stock and Class B
<PAGE>
Common Stock outstanding as of the Record Date which, combined, have the right
to cast a majority of the votes which may be cast with respect to matters
arising during the General Session will constitute a quorum for the conduct of
business at the General Session. The presence in person or by proxy of holders
of shares of Class A Common Stock and Class B Common Stock outstanding as of the
Record Date which have the right to cast a majority of the votes which may be
cast with respect to matters arising during the Class A Session and the Class B
Session, respectively, will constitute a quorum for purposes of the Class A
Session and the Class B Session, respectively.
The affirmative vote of the holders of a plurality of the shares of each
of Class A Common Stock and Class B Common Stock represented at the meeting is
required for the election of the Class A Directors and the Class B Directors,
respectively. The affirmative vote of at least a majority of the votes
represented by the outstanding shares of Class A Common Stock and Class B Common
Stock, voting together as a single class, is required for the approval of the
proposal to amend the Company's Restated Articles of Organization. Approval of
each of the other matters which are before the meeting will require the
affirmative vote of the holders of shares representing the majority of votes
represented at the meeting. No votes may be taken at the meeting, other than a
vote to adjourn, unless the appropriate quorum (as set forth in the preceding
paragraph) has been constituted. Shares voted to abstain or to withhold as to a
particular matter, or as to which a nominee (such as a broker holding shares in
street name for a beneficial owner) has no voting authority in respect of a
particular matter, shall be deemed represented for quorum purposes. Such shares,
however, shall not be deemed to be voting on such matters, and therefore will
not be the equivalent of negative votes as to such matters. Votes will be
tabulated by the Company's transfer agent subject to the supervision of persons
designated by the Board of Directors as inspectors.
The following table sets forth, to the knowledge of the Company, the only
beneficial owners of more than 5% equity of any class of the Company's
outstanding voting common stock as of October 31, 1996.
Shares of
Class Percent
Name and address of Beneficialliy of
Title of Class Beneficial Owner Owned Class
Class A Common Stock None
Class B Common Stock Bruce A. Shear 681,259 84.5%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
J. Owen Todd, as Trustee 59,280 7.3%
of the Shear Family Trust
and the NMI Trust
c/o Todd and Weld
1 Boston Place
Boston, MA 02108
William F. Grieco, as 59,280 7.3%
Trustee of the Shear
Family Trust and the NMI
Trust
115 Marlborough Street
Boston, MA 02116
The percentages of voting rights for certain persons or groups are set
forth in the footnotes to the table contained under the heading, "Security
Ownership of Certain Beneficial Owners and Management."
<PAGE>
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, Class B Common Stock and Class
C Common Stock (the only classes of capital stock of the Company currently
outstanding) as of October 31, 1996 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.
Name and Amount and Nature Percent
Address of of Beneficial of
Title of Class Beneficial Owner Owner Class(8)
-------------- ---------------- ----- --------
Class A Common Stock . . Gerald M. Perlow 15,250 (1) *
c/o PHC, Inc.
200 Lake Street
Peabody MA 1960
Donald E. Robar 7,375 (2) *
c/o PHC, Inc.
200 Lake Street
Peabody MA 01960
Bruce A. Shear 5,000 *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors 114,208 (3) 4.7%
and Officers as
a Group (8
persons)
Class B Common Stock (7) Bruce A. Shear 681,259 (4) 84.5%
c/o PHC, Inc.
200 Lake Street
Peabody MA 01960
J. Owen Todd 59,280 (5) 7.3%
c/o Todd and Weld
1 Boston Place
Boston MA 02108
William F. Grieco 59,280 (5) 7.3%
115 Marlborough Street
Boston MA 02116
All Directors 681,259 84.5%
and Officers as
a Group (6
persons)
<PAGE>
Name and Amount and Nature Percent
Address of of Beneficial of
Title of Class Beneficial Owner Owner Class(8)
- - -------------- ---------------- ----- --------
Class C Common Stock Bruce A. Shear 156,502 (6) 78.3%
c/o PHC, Inc.
200 Lake Street
Peabody MA 01960
J. Owen Todd 13,173 (5) 6.5%
c/o Todd and Weld
1 Boston Place
Boston, MA 02108
William F.Grieco 13,173 (5) 6.5%
115 Marlborough Street
Boston MA 02116
All Directors 156,502 78.3%
and Officers
as a Group (8
persons)
* Less than 1%.
(1) Includes 250 shares issuable pursuant to currently exercisable stock
options, having an exercise price of $6.63 per share.
(2) Includes 1,125 shares issuable pursuant to currently exercisable
stock options, having an exercise price of $6.63 per share.
(3) Includes an aggregate of 81,933 shares issuable pursuant to
currently exercisable stock options. Of those options, 17,529 have
an exercise price of $5.13 per share, 20,000 have an exercise price
of $5.00 per share, 3,000 have an exercise price of $6.37 per share,
20,000 have an exercise price of $5.13 per share, 2,500 have an
exercise price of $5.25 per share, 1,375 have an exercise price of
$6.63 per share and 17,529 have an exercise price of $7.50 per
share.
(4) 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. Excludes an aggregate of 59,280 shares of Class B
Common Stock owned by the Shear Family Trust and the NMI Trust, of
which Bruce A. Shear is a remainder beneficiary.
(5) Messrs. Todd and Grieco are the two trustees of the Trusts which
collectively hold 72,453 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 A
Common Stock, less than 1% of the Company's outstanding Class B
Common Stock and 4.97% of the Company's outstanding Class C Common
Stock.
(6) Includes 12,526 shares of Class C 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. Excludes an aggregate of 13,173 shares of Class C
Common Stock owned by the Shear Family Trust and the NMI Trust (the
"Trusts"), of which Bruce A. Shear is a remainder beneficiary.
(7) 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.
(8) 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 the
holders of
<PAGE>
the Class B Common Stock are entitled to elect all the remaining
members of the Company's board of directors). The Class C Common
Stock is non-voting.
Based on the numbers 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 October 31, 1996:
Bruce A. Shear 52.9%
J. Owen Todd 4.6%
William F. Grieco 4.6%
All Directors and Officers as a Group (8 persons) 54.6%
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and officers of the Company are as follows:
Name Age Position
---- --- ---------------
Bruce A. Shear 41 Director, President, and Chief Executive
Officer
Robert H. Boswell 47 Executive Vice President
Gerald M. Perlow, M.D. 58 Director and Clerk
(1)(2)
Donald E. Robar (1)(2) 59 Director and Treasurer
Mark Cowell (3) 50 Vice President of Communications
Paula C. Wurts 47 Controller, Assistant Clerk, and
Assistant Treasurer
Howard W. Phillips(4) 66 Director
Katherine A. Flaherty(5) 39 Vice President of Corporate Services and
Legal Counsel and Assistant Clerk
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Mr. Cowell resigned from the Company effective July 15, 1996.
(4) Mr. Phillips was elected to the Board of Directors effective
August 27, 1996.
(5) Ms. Flaherty resigned from the Company effective March 15, 1996.
All of the directors hold office until the annual meeting of stockholders
next following their election, or until their successors are elected and
qualified. The Company is required, upon request of Americorp Securities, Inc.,
the underwriter of the Company's initial public offering in March 1994 (the
"Underwriter"), to use its best efforts to elect a designee of the Underwriter
to the Board of Directors for a period of three years from March 3, 1994. The
underwriter has advised the Company that it has no current plans to designate a
director. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board. There are no family relationships among any of the
directors or officers of the Company.
Information with respect to the business experience and affiliations of
the directors and officers of the Company is set forth below.
BRUCE A. SHEAR has been President, Chief Executive Officer and a Director
of the Company since 1980 and Treasurer of the Company from September 1993 until
February 1996. From 1976 to 1980 he served as Vice President, Financial Affairs,
of the Company. Mr. Shear has served on the Board of Governors of the Federation
of American Health Systems for over ten years. Mr. Shear received an M.B.A. from
Suffolk University in 1980 and a B.S. in Accounting and Finance from Marquette
University in 1976.
ROBERT H. BOSWELL has served as the Executive Vice President of the
Company since 1992. From 1989 until Spring of 1994 Mr. Boswell served as the
Administrator of the Company's Highland Ridge Hospital facility where he is
based. Mr. Boswell is principally involved with the Company's substance abuse
facilities. From 1981 until 1989, he served as the Associate Administrator at
the Prevention Education Outpatient Treatment
<PAGE>
Program--the Cottage Program, International. Mr. Boswell graduated from
Fresno State University in 1975 and from 1976 until 1978 attended Rice
University's doctoral program in philosophy.
KATHERINE A. FLAHERTY served as the Company's in-house Legal Counsel
from 1988 until 1996 and as the Company's Vice President of Corporate
Services from 1989 until 1996. Ms. Flaherty served as the Company's
Assistant Clerk from 1988 until 1996. From 1988 to 1989, Ms. Flaherty was
the Director of Administrative Services of the Company. Prior to joining the
Company, Ms. Flaherty was an administrator for the Department of Anatomy and
Cellular Biology at Harvard Medical School. Ms. Flaherty received a B.S.
from Trinity College (Hartford, Connecticut) in 1978, a Master of Health
Services Administration from the University of Michigan School of Public
Health in 1980 and a J.D. from Suffolk University in 1987.
MARK COWELL served as Vice President of Communications of the Company
from 1984 until July of 1996 and as Administrator of Mount Regis Center from
1989 until July of 1996. Mr. Cowell received his B.A. in Journalism from
Northeastern University in 1969 and is currently completing courses for an
M.B.A. at Virginia Polytechnic University.
GERALD M. PERLOW, M.D. has served as a Director of the Company since
May 1993 and as Clerk since February, 1996. Dr. Perlow is a cardiologist in
private practice in Lynn, Massachusetts, and has been Associate Clinical
Professor of Cardiology at the Tufts University School of Medicine since
1972. Dr. Perlow is a Diplomat of the National Board of Medical Examiners and
the American Board of Internal Medicine (with a subspecialty in
cardiovascular disease) and a Fellow of the American Heart Association, the
American College of Cardiology, the American College of Physicians and the
Massachusetts Medical Center. From 1987 to 1990, Dr. Perlow served as the
Director, Division of Cardiology, at AtlantiCare Medical Center in Lynn,
Massachusetts. Dr. Perlow received a B.A. from Harvard College in 1959 and
an M.D. from Tufts University School of Medicine in 1963.
DONALD E. ROBAR has served as a Director of the Company since 1985 and
has served as the Treasurer since February, 1996. Dr. Robar has been a
professor of Psychology since 1961, most recently at Colby-Sawyer College in
New London, New Hampshire. Dr. Robar received a Ed.D. from the University of
Massachusetts in 1978, an M.A. from Boston College in 1968 and a B.A. from
the University of Massachusetts in 1960.
PAULA C. WURTS has served as the Controller of the Company since 1989,
as Assistant Treasurer since 1993, and as Assistant Clerk since January,
1996. Ms. Wurts served as the Company's Accounting Manager from 1985 until
1989. Ms. Wurts received an Associate's degree in Accounting from the
University of South Carolina in 1980, a B.S. in Accounting from Northeastern
University in 1989 and passed the examination for Certified Public
Accountants. She has completed the requirements for a Master's Degree in
Accounting from Western New England College.
HOWARD W. PHILLIPS has served as a Director of the Company since August
27, 1996 and has been employed by the Company as a public relations
specialist since August 1, 1995. From 1982 until October 31, 1995, Mr.
Phillips was the Director of Corporate Finance for D.H. Blair Investment
Corp. From 1969 until 1981, Mr. Phillips was associated with Oppenheimer &
Co. where he was a partner and Director of Corporate Finance. Mr. Phillips
currently is a member of the Board of Directors of Food Court Entertainment
Network Inc., an operator of shopping mall television networks, and Telechips
Corp., a manufacturer of visual phones.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
During fiscal year 1996, the Board of Directors of the Company held seven
meetings. Each incumbent director attended at least 75% of the aggregate number
of the meetings of the Board and the meetings of the committees of the Board on
which he served.
<PAGE>
The current members of the Audit Committee are Mr. Robar and Dr.
Perlow. The principal functions of the Committee are to review matters
relating to the examination of the Company by its independent auditors and
its accounting control procedures. The Committee met once in fiscal year
1996.
The Board of Directors established a Compensation Committee on November
4, 1993. The current members of this Committee are Dr. Robar and Dr.
Perlow. The principal function of the Committee is to review and set
executive compensation. The Committee met once in fiscal year 1996.
The Board of Directors does not have a nominating or similar committee.
In fiscal year 1996, none of the executive officers or directors of the
Company served on a board of directors of any other publicly traded entity
except for Mr. Phillips who serves on the board of directors of Food Court
Entertainment Network Inc., an operator of shopping mall television networks,
and Telechips Corp., a manufacturer of visual phones.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Employment Agreements
The Company has not entered into any employment agreements with its
executive officers. The Company has acquired a $1,000,000 key man life
insurance policy on the life of Bruce A. Shear.
Executive Compensation
Two executive officers of the Company received compensation in the 1996
fiscal year which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 1996:
Compensation of Directors
Directors who are full time employees of the Company receive no
compensation for services as members of the Board of Directors. Directors who
are not employees of the Company receive a $2,500 stipend per year and $1,000
for each meeting of the Board of Directors which they attend. In addition,
directors of the Company are entitled to receive certain stock option grants
under the Company's Non-Employee Director Stock Option Plan (the "Director
Plan"). Pursuant to the Director Plan, in January of 1996, Dr. Perlow was
granted an option to purchase 1,000 shares of the Company's Class A Common Stock
at an exercise price of $6.63 per share and Mr. Robar was granted an option to
purchase 4,500 shares of the Company's Class A Common Stock at an exercise price
of $6.63 per share.
<PAGE>
Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards
------------------- ------
(a) (b) (c) (d) (e) (g) (i)
Other Securities
Name and Annual Annual Underlying All Other
Principa Salary Bonus Compensation Options/ Compensation
Position Year ($) ($) ($) (#) ($)
Bruce A. 1996 $294,063 -- $10,818(1) -- ---
Shear 1995 $237,500 -- $ 8,412(2) -- ---
President 1994 $245,000 -- $ 7,850(3) -- ---
and Chief
Executive
Officer
Robert H. 1996 $80,667 $1,000 $23,750(4) 5,000 $11,250
Boswell 1995 $69,750 -- $ 6,000(5) 15,000 $28,050
Executive 1994 $55,083 $5,000 $ 6,000(6) 14,000 $36,445
Vice
President
(1) This amount represents (i) $2,650 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear,
(ii)) $5,146 in premiums paid by the Company with respect to life
insurance for the benefit of Mr. Shear, and (iii) $3,022 for the
personal use of Company car held by Mr. Shear.
(2) This amount represents (i) $2,450 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear,
(ii) $1,195 paid by the Company for club memberships used by Mr.
Shear for personal activities and (iii) $4,767 in premiums paid by
the Company with respect to life insurance for the benefit of Mr.
Shear.
(3) This amount represents (i) $2,483 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear,
(ii) $600 paid by the Company for club memberships used by Mr. Shear
for personal activities and (iii) $4,767 in premiums paid by the
Company with respect to life insurance for the benefit of Mr. Shear.
(4) This amount represents (i) $3,750 automobile allowance, and (ii)
$20,000 net gain from the exercise of options and subsequent sale of
stock.
(5) This amount represents a $6,000 automobile allowance.
(6) This amount represents a $6,000 automobile allowance.
Stock Plan
The Company's Stock Plan was adopted by the Board of Directors on August
26, 1993 and approved by the stockholders of the Company on November 30, 1993.
The Stock Plan provides for the issuance of a maximum of 300,000 shares of the
Class A Common Stock of the Company pursuant to the grant of incentive stock
options to employees and the grant of nonqualified stock options or restricted
stock to employees, directors, consultants and others whose efforts are
important to the success of the Company.
The Stock Plan is administered by the Board of Directors. Subject to the
provisions of the Stock Plan, the Board of Directors has the authority to select
the optionees or restricted stock recipients and determine the terms of the
options or restricted stock granted, 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 cannot 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. Generally, an option is not transferable by the
optionholder except by will or by the laws of descent and distribution. Also,
generally, no option may be exercised more than 60 days following termination of
employment. However, in the event that termination is due to death or
disability, the option is exercisable for a period of one year following such
termination.
<PAGE>
In March of 1996, the Company issued options to purchase a total of 35,000
shares of Class A Common Stock at an exercise price ranging from $5.25 to $6.50
under the Stock Plan. In May of 1996, the Company issued options to purchase
6,000 shares of Class A Common at an exercise price of $7.00. These options were
immediately exercisable as to 25% of the shares covered thereby. The remaining
option shares are exercisable at the rate of 25% per year over the next three
years after the grant date provided the optionee remains an employee of the
Company as of each exercise date.
Employee Stock Purchase Plan
On October 18, 1995, the Board of Directors voted to provide employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to participate in an Employee Stock Purchase Plan (the "Plan") which
became effective February 1, 1996. No more than 100,000 shares may be sold under
this Plan. The price per share shall be the lesser of 85% of fair market value
on the Offering Date or 85% of the fair market value of a share on the date such
right is exercised. Currently there is an offering period under the plan which
began on February 1, 1996 and will end on January 31, 1997. There are twenty-six
employees participating in this plan period.
Non-Employee Director Stock Plan
The Company's Non-Employee Director Stock Plan (the "Director Plan") was
adopted by the directors on October 18, 1995 and approved by the Stockholders of
the Company on December 15, 1995. Non-qualified options to purchase a total of
30,000 shares of Class A Common Stock are available for issuance under the
Director Plan.
The Director Plan is administered by the Board of Directors or a committee
of the Board. Under the Director Plan, each director of the Company who was a
director at the time of adoption of the Director Plan and who was not a current
or former employee of the Company received an option to purchase that number of
shares of Class A Common Stock as equals 500 multiplied by the years of service
of such director as of the date of the grant. At each annual meeting of the
Board of Directors of the Company following the initial grant described above,
each non-employee director is granted under the Director Plan an option to
purchase 2,000 shares of the Class A Common Stock of the Company. The option
exercise price is the fair market value of the shares of the Company's Class A
Common stock on the date of grant. The options are non-transferable and become
exercisable as follows: 25% immediately and 25% on each of the first, second and
third anniversaries of the grant date. If an optionee ceases to be a member of
the Board of Directors other than for death or permanent disability, the
unexercised portion of the options, to the extent unvested, immediately
terminate, and the unexercised portion of the options which have vested lapse
180 days after the date the optionee ceases to serve on the Board. In the event
of death or permanent disability, all unexercised options vest and the optionee
or his or her legal representative has the right to exercise the option for a
period of 180 days or until the expiration of the option, if sooner.
On January 23, 1996, a total of 5,500 shares were issued under the
Director Plan at an exercise price of $6.63 per share. As of October 31, 1996,
none of these options had been exercised.
<PAGE>
The following table provides information about options granted to the
named executive officers during fiscal 1996 under the Company's Stock Plan,
Employee Stock Purchase Plan and Non-Employee Director Stock Plan.
Option/SAR Grants inLast Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
----------------- -----------
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price Expiration
Name Granted # Fiscal Year ($/Sh) Date 5% 10%
---- --------- ----------- ------ ---- ---- ----
Bruce A. -- -- -- -- -- --
Shear
Robert H. 5,000 12.2% $5.25 3/21/01 $7,250 $16,000
Boswell
The following table provides information about options exercised by the
named executive officers during fiscal 1996 and the number and value of options
held at the end of fiscal 1996.
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at FY-End
at FY-End (#) ($)
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexcercisable
- - ---- ------------ --- ------------- --------------
Bruce A. Shear -- -- -- --
Robert H. 5,000 $20,000 25,250/3,750 $58,807.50/$8,437.50
Boswell
ELECTION OF DIRECTORS
(Item 1 of Notice)
The members of the Board of Directors elected at the Annual Meeting will
be classified into two classes of directors. Two directors will be elected by
the holders of the Company's Class A Common Stock (the "Class A Directors") and
the balance of the directors will be elected by the holders of the Company's
Class B Common Stock (the "Class B Directors"). The terms of the present
directors expire at the Annual Meeting or when the successors are chosen and
qualified, if later. The Board of Directors has fixed at four the number of
directors to be elected at the Annual Meeting.
The nominees for Class A Directors for election at the Annual Meeting
are Donald E. Robar and Gerald M. Perlow. The nominees for Class B Directors
for election at the Annual Meeting are Bruce A. Shear and Howard W.
Phillips. The proxy for holders of Class A Common Stock will be voted to
elect as Class A Directors the two nominees (Dr. Robar and Dr. Perlow),
unless authority to vote for the election of directors is withheld by marking
the proxy to that effect or the proxy is marked with the names of directors
as to whom authority to vote
<PAGE>
is withheld. The proxy for holders of Class B Common Stock will be voted to
elect as Class B Directors the two nominees (Mr. Shear and Mr. Phillips),
unless authority to vote for the election of directors is withheld by marking
the proxy to that effect. Dr. Robar, Dr. Perlow, Mr. Shear and Mr. Phillips
are presently directors of the Company and have consented to serve if
reelected.
Each director will be elected to hold office until the next annual meeting
of stockholders following the 1996 Annual Meeting (1997) and until his successor
is elected and qualified. If a nominee becomes unavailable, the proxy may be
voted, unless authority has been withheld as to the nominee, for the election of
a substitute.
The Board recommends a vote "FOR" the nominees for director.
AMENDMENT TO THE COMPANY'S
RESTATED ARTICLES OF ORGANIZATION
(Item 2 of Notice)
By resolution adopted on November 13, 1996, the Board of Directors of the
Company proposed the adoption by stockholders of an amendment to the Company's
Restated Articles of Organization to increase the number of authorized shares of
Class A Common Stock, $.01 par value, from 10 million shares to 20 million
shares. If the stockholders approve the amendment, the Restated Articles of
Organization will be amended as proposed by the Board of Directors, and the
number of authorized shares of Class A Common Stock increased to 20 million.
Of the 10 million class A shares currently authorized, 2,327,624 were
outstanding at October 31, 1996 and 6,403,730 shares were reserved for issuance
under the Company's Stock Plan, Employee Stock Purchase Plan and Non-employee
Director Stock Plan or were reserved for issuance on the exercise of outstanding
warrants, the conversion of outstanding convertible notes and the conversion of
the outstanding shares of Class B Common Stock. The Company anticipates that
from time to time it will issue Class A Common Stock in connection with certain
acquisitions. While the Company is not presently obligated to issue additional
shares of Class A Common Stock beyond those described herein, the Board of
Directors believes that it is desirable for the Company to have the flexibility
to issue additional shares of Class A Common Stock without the expense and delay
of holding a meeting of stockholders to secure their authorization when a
specific need for shares arises. The availability of additional shares will
enhance the Company's flexibility in connection with possible future actions
such as stock dividends, stock splits, financings, employee benefit programs and
acquisitions. If the proposed amendment is approved, the authority will lie with
the Board of Directors to determine whether, when and on what terms the issuance
of shares of Class A Common Stock may be warranted in connection with any of the
foregoing purposes or other proper corporate purposes.
If the proposed amendment is approved, all or any of the authorized shares
of Class A Common Stock may be issued without further action by the stockholders
and without first offering such shares to stockholders for subscription. The
issuance of Class A Common Stock other than on a pro rata basis to all current
stockholders could have the effect of diluting the earnings per share, book
value per share and current stockholders' proportionate interests. However, in
such events stockholders wishing to maintain their interest may be able to do so
through normal market purchases.
<PAGE>
If the proposed amendment is adopted by the stockholders, it will become
effective upon filing and recording an amendment to the Articles of Organization
with the state secretary of the Commonwealth of Massachusetts.
The Board recommends a vote "FOR" approval of the Proposed Amendment.
APPROVAL OF AUDITORS
(Item 3 of Notice)
The Board has selected the firm of Richard A. Eisner & Company, LLP,
independent certified public accountants, as auditors of the Company for the
fiscal year ending June 30, 1997 and is submitting the selection to stockholders
for approval. The Board recommends a vote "FOR" this proposal. Unless the proxy
indicates otherwise, the shares represented by the enclosed proxy will be voted
to approve such selection.
Although there is no legal requirement that this matter be submitted to a
vote of stockholders, the Board believes that the selection of independent
auditors is of sufficient importance to seek stockholder ratification. In the
event Richard A. Eisner & Company, LLP is not ratified by the affirmative vote
of the holders of shares representing a majority of the votes cast at the Annual
Meeting, the Board may reconsider its selection. A representative of Richard A.
Eisner & Company, LLP is expected to attend the Annual Meeting. Such
representative will have an opportunity to make a statement and will be
available to respond to appropriate questions from stockholders.
The Board recommends a vote "FOR" ratification of the above selection.
NOTICE OF AMENDMENT TO BY-LAWS
On November 13, 1996, the Board of Directors approved an amendment
restating Section 5 of Article I of the By-Laws. The amendment to the by-laws
provides that shares as to which a nominee has no voting authority are counted
for purposes of establishing a quorum but are not deemed to be cast with respect
to any particular question or questions brought before the meeting for which the
nominee has no voting authority. The amendment to the by-laws further clarifies
that when a quorum is present, the affirmative vote of shares representing a
majority of the votes which may be cast with respect to such matter present or
represented and voting shall be necessary and sufficient to the determination of
any questions brought before the meeting, unless a larger vote is required by
law, by the by-laws or by the Articles Of organization of the Company.
Article I, Section 5 as amended reads as set forth in Exhibit A to this
proxy statement.
Under Massachusetts law, when a proposed by-law change is approved by the
Board, notice of the by-law change must be given to all stockholders entitled to
vote on amending the by-laws no later than the time of giving notice of the
meeting of stockholders next following such approval and, therefore, is included
here. Under Massachusetts law, any change to the By-Laws adopted by the
directors may be amended or repealed by the stockholders.
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based on a review of Forms 3 and 4 furnished to the Company, all
directors, officers and beneficial owners of more than ten percent of any class
of equity securities of the Company registered pursuant to Section 12 of the
Securities Exchange Act (the "Exchange Act") filed on a timely basis reports
required by Section 16(a) of the Exchange Act during the most recent fiscal
year, except that Mr. Phillips failed to file a Form 3 upon being elected to the
Board of Directors within the required time frame.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
For approximately the last ten years, Bruce A. Shear, a director and the
President, Chief Executive Officer and Treasurer of the Company, and persons
affiliated and associated with him have made a series of unsecured loans to the
Company and its subsidiaries to enable them to meet ongoing financial
commitments. The borrowings generally were entered into when the Company did not
have financing available from outside sources and, in the opinion of the
Company, were entered into at market rates given the financial condition of the
Company and the risks of repayment at the time the loans were made. As of June
30, 1996, the Company owed an aggregate of $103,996 to related parties. During
the year ended June 30, 1996, the Company paid an aggregate of $181,612 to
related parties.
During the period ended June 30, 1996, the Company paid Mr. Shear
approximately $181,612 in principal and accrued interest under various notes. In
connection with the IPO, Mr. Shear contributed to the Company approximately
$85,000 of accrued and unpaid interest payable under various notes and
approximately $15,000 of accrued and unpaid guarantee fees owed to him for
20,000 shares of the Company's Class B Common Stock. The Company paid Mr. Shear
$50,000 out of the proceeds of the IPO in reduction of the principal amount of
the notes for the payment of certain tax obligations arising from the issuance
of the stock. Upon the consummation of those transactions, Mr. Shear accepted a
new promissory note of the Company in exchange for the notes plus accrued
interest for $110,596. As of August 31, 1996, the Company owed Bruce A. Shear
$110,596 on that promissory note, which is dated March 31, 1994, matures on
December 31, 1998 and bears interest at the rate of 8% per year, payable
quarterly in arrears, and requires repayments of principal quarterly in equal
installments commencing July 1, 1996, until maturity. The current balance of
this note as of June 30, 1996 is $78,996.
On June 30, 1988, in connection with the acquisition of Franvale, the
Company issued promissory notes in the amount of $1,350,000 and $225,000 to
Continental Medical Systems, Inc., the seller of Franvale. These notes bore
interest at the rate of 10% per annum and were payable on December 1, 1996.
Additionally, on June 30, 1992, the Company issued a note in the amount of
$240,084 to Continental Medical Systems, payable on December 1, 1996, and
bearing interest at the rate of 10% per annum. As of September 8, 1994, the
aggregate principal amount outstanding under these loans was paid in full
through the HUD refinancing of the Franvale facility.
Bruce A. Shear guaranteed each of the loans in connection with the
acquisition of Franvale for a guarantee fee payable by the Company equal
annually to 1.5% of the outstanding principal amount guaranteed. In addition, a
3% fee is payable by the Company on the accrued and unpaid amount of the
guarantee fees. Bruce A. Shear received no guarantee fees pursuant to these
arrangements in the fiscal year ended June 30, 1996.
Certain other relatives of Bruce A. Shear have made loans from time to
time to the Company. As of June 30, 1994, the principal amount of $27,700 was
outstanding on a note payable to Gertrude Shear, Bruce A. Shear's mother, which
paid interest from April 15, 1993 until April 15, 1994 at the rate of 8% per
annum, and thereafter paid interest at the prime rate plus 2% per annum,
adjusted quarterly. An aggregate principal amount of $13,850 was paid on
September 10, 1994 and the balance was paid in full on March 10, 1996.
<PAGE>
In addition the Company owed Tot Care, Inc. and Humpty Dumpty School,
Inc., two corporations owned by Bruce A. Shear, an aggregate principal amount of
$55,000 as of June 30, 1994. These loans earned interest at the rate of 15% per
year. An aggregate principal amount of $27,500 was paid on September 10, 1994
and the balance was paid in full on March 10, 1996.
The Company has also borrowed from certain of its officers and
consultants other than Bruce Shear and his relatives. As of August 31, 1996,
the aggregate principal amount owed by the Company to such persons was
$25,000 as follows: $5,000 to Mark S. Cowell, the Company's Vice President of
Communications, and his wife, Karen K. Cowell, $10,000 to Himanshu S. Patel,
the Medical Director at Changes, and Anjana H. Patel, and $10,000 to Mukesh
P. Patel, the Medical Director at Mt. Regis, and Falguni M. Patel. All of
these borrowings are payable on demand.
The Company has leased furniture and equipment from time to time from
Trans National Leasing Corp., a corporation owned by Leon Shear, Bruce A.
Shear's uncle. The Company currently has sixteen equipment leases with Trans
National, which in the aggregate provide for annual lease payments of
approximately $70,200. At the term of each lease, the lessee has the right to
purchase the subject equipment for 10% of the total equipment purchase price.
The Company intends to honor its existing lease obligations with Trans National,
and in the future to obtain equipment and furniture either through purchase or
lease from such companies, including Trans National, as can provide the best
terms available to the Company as determined by its management. During the
period ended June 30, 1996 the Company paid an aggregate of $114,736 under these
leases.
The Company had proposed to develop a short-term intensive inpatient
treatment center in Lynn, Massachusetts. The site on which such treatment center
was to be located is the former Mt. Pleasant Hospital which is owned by the
Shear Family Trust and the NMI Trust (the "Shear Trusts"), two family trusts
established by the Shear family. The Company has recently made a decision not to
pursue this project. As a result, the Company has received from the Shear Trusts
a refund of an option deposit payment of $50,000 previously made by the Company,
plus accrued interest thereon, and will obtain reimbursement of approximately
$107,000 in development expenses over time. As of June 30, 1996, the Company
received $6,000 in payment on this account and is currently receiving payment of
$500 each month.
On December 17, 1993, the Company issued 11,250 and 19,750 shares of the
Company's Class A Common Stock to certain directors and officers, respectively,
of the Company at a price of $4.00 per share, pursuant to the Company's Stock
Plan. Each purchaser paid to the Company 25% of the purchase price for his or
her shares in cash, and the balance with a non-recourse note. The notes are
payable quarterly over the three years commencing June 30, 1994, and bear
interest at the rate of 6% per year. The shares purchased with non-recourse
notes have been pledged to the Company to secure the payment obligation. As the
principal due under each of the notes is reduced, the appropriate number of
shares are released from the pledge.
William F. Grieco, as one of the two trustees of the Shear Family Trust
and the NMI Trust, of which Gertrude Shear, Bruce A. Shear's mother, is the
lifetime beneficiary, controls 7.0% of the outstanding Class B Common Stock of
the Company, and 6.6% of the outstanding Class C Common Stock of the Company.
Mr. Grieco was a partner of Choate, Hall & Stewart until February 23, 1996.
Choate, Hall & Stewart provides general legal representation to the Company.
During the fiscal year ended June 30, 1996, the Company incurred legal fees and
expenses for services provided by Choate, Hall & Stewart in an aggregate amount
equal to $306,484.92.
The Company adopted a policy that all transactions between the Company and
its officers, directors and affiliates will be on terms no less favorable to the
Company than could be obtained from unrelated third parties and will be approved
by a majority of the disinterested members of the Company's Board of Directors.
<PAGE>
STOCKHOLDER PROPOSALS FOR 1996 MEETING
Proposals of stockholders intended to be presented and director
nominations intended to be made at the 1997 Annual Meeting of Stockholders must
be received by the Company at its principal office, 200 Lake Street, Suite 102,
Peabody, Massachusetts 01960, Attention: Paula C. Wurts, Assistant Clerk, not
later than September 3, 1997 for inclusion in the proxy statement for that
meeting. Other requirements for inclusion are set forth in Rule 14a-8 under the
Securities Exchange Act of 1934.
OTHER MATTERS
The Board does not know of any other matters which may come before the
Annual Meeting. However, if any other matters are properly presented to the
Annual Meeting, it is the intention of the persons named in the accompanying
proxy to vote, or otherwise to act, in accordance with their judgment on such
matters.
All costs of solicitation of proxies by management will be borne by the
Company. In addition to solicitations by mail, the Company's directors, officers
and regular employees, without additional remuneration, may solicit proxies by
telephone or personal interviews. Brokers, custodians and fiduciaries will be
requested to forward proxy soliciting materials to the beneficial owners of the
Company's stock held in the names of such brokers, custodians and fiduciaries,
and the Company will reimburse them for their out-of-pocket expenses in this
connection.
By order of the Board of Directors
Paula C. Wurts,
ASSISTANT CLERK
November 27, 1996
The Board hopes that stockholders will attend the meeting, WHETHER OR NOT
YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. A prompt response will greatly
facilitate arrangements for the meeting, and your cooperation will be
appreciated. Stockholders who attend the meeting may vote their stock personally
even though they have sent in their proxies.
ds1-302181
<PAGE>
EXHIBIT A
Section 5. Action at a Meeting. Except as otherwise provided in the
Articles of Organization, the presence of a quorum shall be separately
determined with respect to each matter to be acted on at any meeting of
stockholders, and shall consist of the holders of shares having the right to
cast a majority of the votes which may be cast with respect to such matter
(including shares as to which a nominee has no voting authority as to certain
matters brought before the meeting). Though less than a quorum be present, any
meeting may without further notice be adjourned to a subsequent date or until a
quorum be had, and at any such adjourned meeting any business may be transacted
which might have been transacted at the original meeting.
When a quorum is present at any meeting, the affirmative vote of shares
representing a majority of the votes which may be cast with respect to such
matter present or represented and voting shall be necessary and sufficient to
the determination of any questions brought before the meeting, unless a larger
vote is required by law, by the articles of organization or by these by-laws,
provided, however, that any election by stockholders shall be determined by a
plurality of the votes cast by the stockholders entitled to vote in such
election. Shares as to which a nominee has no voting authority as to a
particular question or questions brought before the meeting will not be deemed
to be cast with respect to such question or questions.
Except as otherwise provided by law or by the articles or organization or
by these by-laws, each holder of record of shares of stock entitled to vote on
any matter shall have one vote for each such share held of record by him and a
proportionate vote for any fractional shares so held by him. Stockholders may
vote either in person or by proxy. No proxy dated more than six months before
the meeting named therein shall be valid and no proxy shall be valid after the
final adjournment of such meeting. A proxy with respect to stock held in the
name of two or more persons shall be valid if executed by any one of them unless
at or prior to the exercise of the proxy the corporation receives a specific
written notice to the contrary from any one of them. A proxy purporting to be
executed by or on behalf of a stockholder shall be deemed valid unless
challenged at or prior to its exercise and the burden of proving its invalidity
shall rest on the challenger.
Any election by stockholders and the determination of any other questions
to come before a meeting of the stockholders shall be by ballot if so requested
by any stockholder entitled to vote thereon but need not be otherwise.
<PAGE>
Proxy Card
Class B Proxy Card
REVOCABLE PROXY - CLASS B COMMON STOCK
PHC, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
1996 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of PHC, Inc., a Massachusetts corporation, (the
"Company") hereby acknowledges receipt of the Notice of 1996 Annual Meeting of
Stockholders and Annual Report on Form 10-KSB for fiscal year ended June 30,
1996 and hereby appoints Bruce A. Shear and Paula C. Wurts, and both of them, as
proxies, with full power to each of substitution, and hereby authorizes either
of them to represent and to vote, as designated on the reverse side, all the
shares of Class B Common Stock of the Company held of record by the undersigned
on November 25, 1996 at the Annual Meeting of Stockholders to be held at 3:00
p.m. (Boston time), on Tuesday, December 31, 1996 at the offices of Choate, Hall
& Stewart, Exchange Place, 53 State Street, Boston, Massachusetts 02109, and at
any adjournments or postponements thereof. The undersigned stockholder hereby
revokes any proxy or proxies heretofore given.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED, OR
IF NO DIRECTION IS MADE, FOR SUCH PROPOSALS, AND IN ACCORDANCE WITH THE
DETERMINATION OF THE PROXY HOLDERS AS TO OTHER MATTERS. THE UNDERSIGNED
STOCKHOLDER HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING AND
PROXY STATEMENT.
(CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE)
(BACK)
<PAGE>
FORM OF PROXY FOR CLASS B COMMON STOCK SHAREHOLDERS
(BLUE)
Please mark your
votes as in this
example. FOR AGAINST ABSTAIN
block with X block block block
2.To approve the proposal to amend
WITHHOLD the Company's Restated Articles
FOR AUTHORITY Nominee: Bruce A. Shear of Organization to increase the
block block Howard Phillips number of authorized shares of
Class A Common Stock, $.01 par
value,from 10,000,000 to
1. To elect Bruce A. Shear and Howard 20,000,000.
Phillips as the Class B Directors of
the Company, to hold office until the FOR AGAINST ABSTAIN
annual meeting next following their block block block
election and until their successors 3. To ratify the selection by the
are duly elected and qualified. Board of Directors of Richard A
Eisner & Company, LLP as the
Company's independent auditors
for the 1997 fiscal year.
FOR AGAINST ABSTAIN
block block block
4. In their discretion, the Proxies
are authorized to vote upon such
matters as may properly come
before the meeting or any
adjournment or postponement
thereof.
PLEASE MARK, SIGN, DATE AND
RETURN THIS PROXY CARD USING
THE ENCLOSED ENVELOPE.
SIGNATURE DATE DATE
(SIGNATURE IF HELD JOINTLY)
NOTE: Please sign exactly as name appears on this proxy. All joint owners should
sign. When signing as attorney, executor, administrator, trustee, guardian or
custodian for a minor, please give your full title as such. If a corporation,
please sign full corporate name and indicate signer's office. If a partner sign
in the partnership name.
(FRONT)
<PAGE>
Proxy Card
Proxy Card Class A
REVOCABLE PROXY - CLASS A COMMON STOCK
PHC, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
1996 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of PHC, Inc., a Massachusetts corporation, (the
"Company") hereby acknowledges receipt of the Notice of 1996 Annual Meeting of
Stockholders and Annual Report on Form 10-KSB for fiscal year ended June 30,
1996 and hereby appoints Bruce A. Shear and Paula C. Wurts, and both of them, as
proxies, with full power to each of substitution, and hereby authorizes either
of them to represent and to vote, as designated on the reverse side, all the
shares of Class A Common Stock of the Company held of record by the undersigned
on November 25, 1996 at the Annual Meeting of Stockholders to be held at 3:00
p.m. (Boston time), on Tuesday, December 31, 1996 at the offices of Choate, Hall
& Stewart, Exchange Place, 53 State Street, Boston, Massachusetts 02109, and at
any adjournments or postponements thereof. The undersigned stockholder hereby
revokes any proxy or proxies heretofore given.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED, OR
IF NO DIRECTION IS MADE, FOR SUCH PROPOSALS, AND IN ACCORDANCE WITH THE
DETERMINATION OF THE PROXY HOLDERS AS TO OTHER MATTERS. THE UNDERSIGNED
STOCKHOLDER HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING AND
PROXY STATEMENT.
(CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE)
(BACK)
<PAGE>
FORM OF PROXY FOR CLASS B COMMON STOCK SHAREHOLDERS
(WHITE)
Please mark your
votes as in this
example. FOR AGAINST ABSTAIN
block with X block block block
2.To approve the proposal to amend
WITHHOLD the Company's Restated Articles
FOR AUTHORITY Nominee: Donald E. Robar of Organization to increase the
block block Gerald M. Perlow number of authorized shares of
Class A Common Stock, $.01 par
value, from 10,000,000 to
20,000,000.
1. To elect Donald E. Robar and
Gerald M. Perlow as the Class A
Directors of the Company, each FOR AGAINST ABSTAIN
to hold office until the annual block block block
meeting next following their 3.To ratify the selection by the
election and until their successors Board of Directors of Richard
are duly elected and qualified. A. Eisner & Company, LLP as the
Company's independent audutors
for the 1997 fiscal year.
For, all nominees except as noted below.
---------------------------------
FOR AGAINST ABSTAIN
block block block
4.In their discretion, the Proxies
are authorized to vote upon such
matters as may properly come
before the meeting or any
adjournment or postponement
thereof.
PLEASE MARK, SIGN, DATE AND
RETURN THIS PROXY CARD USING
THE ENCLOSED ENVELOPE.
SIGNATURE DATE DATE
(SIGNATURE IF HELD JOINTLY)
NOTE: Please sign exactly as name appears on this proxy. All joint owners should
sign. When signing as attorney, executor, administrator, trustee, guardian or
custodian for a minor, please give your full title as such. If a corporation,
please sign full corporate name and indicate signer's office. If a partner sign
in the partnership name.
(FRONT)
<PAGE>
Annual Report for Proxy Statement
Logo Letterhead
To Our Shareholders:
It is our pleasure to enclose for your information and review our
Company's third Annual Report, as a public company, for the fiscal year ended
June 30, 1996.
CONTINUED GROWTH
Over the last fiscal year we were able to pull together a number of
projects. I would like to take this opportunity to highlight some of our
significant events:
Completed the construction and renovation project at Franvale Nursing and
Rehabilitation Center in Braintree, Massachusetts, our long term care
facility. Franvale is now operating at optimum capacity and is delivering the
high quality, cost effective services that it was designed for.
Pioneer continued to integrate its delivery system by purchasing a number of
outpatient behavioral healthcare programs in Michigan and Kansas.
Pioneer's Harmony Healthcare division continues to grow by adding major
contracts with some of the largest gaming companies in the world. These
contracts include the MGM Grand Hotel, Boyd Gaming Corporation, Treasure
Island, and the Mirage. Harmony continues to grow outside of the Las Vegas
area as the gaming industry expands into new states.
Pioneer Healthcare provides inpatient and outpatient behavioral healthcare
services. Pioneer contracts with national insurance companies in addition to
major transportation and gaming companies who have selected them to provide
behavioral health services. The Company also provides long-term/sub-acute
services through its subsidiary, Franvale Nursing and Rehabilitation Center, in
Braintree MA.
Thank you for the support you have given our Company. We believe this
fiscal year will present us with a number of excellent opportunities for growth
and dvelopment that will enhance shareholders' value.
Bruce A. Shear
President
November 15, 1996
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[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, 1996 [ ] Transition
report under section 13 or 15(d) of the Securities Exchange Act of 1934
[NO FEE REQUIRED] for the transition period from to
Commission file number: 0-23524
PHC, INC.
(Name of small business issuer in its charter)
MASSACHUSETTS 04-2601571
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 LAKE STREET, SUITE 102, PEABODY, MA 01960
(Address of principal executive
(Zip Code) offices)
Issuer's telephone number: (508) 536-2777
Securities registered under Section 12(b) of the Act:
NONE.
Securities registered under Section 12(g) of the Act:
Units (each unit consisting of one share of CLASS A COMMON
STOCK AND ONE CLASS A WARRANT)
(Title of class)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
CLASS A WARRANTS TO PURCHASE ONE SHARE OF CLASS A COMMON STOCK
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes 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. X
The issuer's revenues for the fiscal year ended June 30, 1996 were $21,802,758.
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 13, 1996, was $17,840,970. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At September 13, 1996, 2,327,624 shares of the issuer's Class A Common Stock,
806,556 shares of the issuer's Class B Common Stock and 199,816 shares of the
issuer's Class C Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
PHC, Inc. (the "Company") is a national health care company specializing in
the treatment of substance abuse, which includes alcohol and drug dependency and
related disorders, and in the provision of psychiatric and long-term care. The
Company currently operates three substance abuse treatment facilities: Highland
Ridge Hospital, located in Salt Lake City, Utah, ("Highland Ridge"); Mount Regis
Center, located in Salem, Virginia, near Roanoke ("Mount Regis"); and Good Hope
Center, located in West Greenwich, Rhode Island ("Good Hope"). Until August 16,
1994, the Company operated Marin Grove, a substance abuse treatment facility in
California ("Marin Grove"). On September 20, 1994, the Company acquired the
business and certain assets of Harbor Oaks Hospital ("Harbor Oaks"), a 64-bed
psychiatric hospital located in New Baltimore, Michigan. The Company's subacute
and long-term care facility, Franvale Nursing and Rehabilitation Center
("Franvale"), which until September 7, 1994 was known as Franvale Nursing Home,
is located in Braintree, Massachusetts. On November 1, 1995, the Company
acquired the business and certain assets of Harmony Counseling Services, a
provider of outpatient psychiatric services in Las Vegas, Nevada for a purchase
price of $575,000 plus 75,000 shares of PHC, Inc. Class A Common Stock which now
operates as Harmony Healthcare. On March 15, 1996, the Company acquired the
business and certain assets of Total Concept EAP, a provider of outpatient
psychiatric services in Shawnee Mission, Kansas, in a total stock transaction
for 12,000 shares of Class A Common Stock which operates under the name of Total
Concept.
The Company's substance abuse facilities provide specialized treatment
services to patients who typically have poor recovery prognoses and who are
prone to relapse. These services are offered in small specialty care and
subacute facilities (i.e., facilities designed to provide care to individuals
who no longer require hospital care but who require some medical care), which
permits the Company to provide its clients with efficient and customized
treatment without the significant costs associated with the management and
operation of general acute care hospitals. The Company tailors these programs
and services to "safety-sensitive" industries and concentrates its marketing
efforts on the transportation, oil and gas exploration, heavy equipment,
manufacturing, law enforcement, gaming, and health services industries.
The psychiatric facility which was purchased in September 1994 provides
psychiatric care to children, adolescents and adults. The Company draws patients
from the local population and uses the facility as a mental health resource to
complement its substance abuse facilities. The outpatient psychiatric clinics
provide psychiatric treatment for adults, adolescents and children.
The Company's long-term care facility provides traditional geriatric care
services as well as specialized subacute services. The facility provides care to
the high acuity segment (patients requiring a significant amount of medical
care) of the geriatric population and to younger patients who require skilled
nursing care for longer terms than typically associated with a general acute
care hospital. The Company's long-term care services are offered in a larger,
more traditional setting than the Company's substance abuse facilities, enabling
the Company to take advantage of economies of scale to provide cost-effective
treatment alternatives. The Company markets its long-term care to hospitals,
insurers and managed care providers, in addition to marketing directly to
prospective residents and their families.
The Company's strategy of providing services to particular markets has
resulted in customized, outcome-oriented programs, which the Company believes
produce overall cost savings to the patient or client organization. The
substance abuse facilities provide treatment services designed to prevent
relapse. Such services, while potentially more costly on a per patient stay
basis, often result in long-term health care cost savings to insurers, patients
and patients' families. The Company's long-term care facility achieves its cost
containment objective by providing care to high acuity patients in a setting
that produces positive outcomes through the use of tailored services. The
specific skilled services that are provided are similar to those offered in
acute care hospitals without the added overhead cost.
The Company was organized as a Delaware corporation in 1976 under the
name American International Health Services, Inc. In 1980, the Company merged
into an inactive publicly held Massachusetts corporation and was the surviving
corporation in the merger. The Company changed its name to "PHC, Inc." as of
November 24, 1992. The Company is based in Massachusetts and is unaffiliated
with an inactive Minnesota corporation of the same name. From the time of its
organization in 1976 until 1992, the Company managed treatment programs for
addictive disorders for acute care hospitals located in as many as twelve
states. Additionally, in 1984 the Company began to operate its own free-standing
treatment facilities for addictive disorders. The Company does business under
the tradename "Pioneer Healthcare." With the exception of the services provided
directly by the Company under the name Pioneer Development Support Services, the
Company operates as a holding company, providing administrative, legal and
programmatic support to its subsidiaries.
The Company plans to expand its operations through the acquisition or
establishment of additional substance abuse, long-term care and psychiatric
treatment facilities.
Substance Abuse Facilities
Industry Background
The demand for substance abuse treatment services increased rapidly in the
last decade. The Company believes that the increased demand is related to
clinical advances in the treatment of chemical dependencies, greater societal
willingness to acknowledge the underlying problems as treatable illnesses,
improved health insurance coverage for addictive disorders and chemical
dependencies and governmental regulation which requires certain employers to
provide information to employees about, among other things, available drug
counseling and employee assistance programs.
To contain costs associated with behavioral health issues, in the 1980s
many private payors instituted managed care programs for reimbursement, which
include pre-admission certification, case management or utilization review and
limits on financial coverage or length of stay. These cost containment measures
have encouraged outpatient care for behavioral problems, resulting in a
shortening of the length of stay and revenue per day in inpatient chemical abuse
facilities. The Company believes that it has addressed these cost containment
measures by specializing in treating relapse-prone patients with poor prognoses
who have failed in other treatment settings. These patients require longer
lengths of stay and come from a wide geographic area. The Company continues to
develop alternatives to inpatient care including partial day and evening
programs in addition to onsite and offsite outpatient programs.
The Company believes that because of the apparent unmet need for certain
intense clinical and medical services, its strategy has been successful despite
national trends towards outpatient treatment, shorter inpatient stays and
rigorous scrutiny by managed care organizations.
The Company has been able to secure insurance reimbursement for
longer-term inpatient treatment as a result of its success with poor prognosis
patients. The Company's three substance abuse facilities work together to refer
patients to the center that best meets the patient's clinical and medical needs.
Each facility caters to a slightly different patient population. Highland Ridge
in Utah specializes in providing services to high-risk, relapse-prone chronic
alcoholics and drug addicts and Mount Regis in Virginia specializes in the
treatment of minority groups and dual diagnosis patients (those suffering from
both substance abuse and psychiatric disorders). Good Hope Center concentrates
on providing services to insurers, managed care networks and health maintenance
organizations for both adults and adolescents. The Company's clinicians often
work directly with managers of employee assistance programs to select the best
treatment facility possible for their clients.
Each of the Company's facilities operates a case management program for
each patient. This includes a clinical and financial evaluation of a patient's
circumstances to determine the most cost-effective modality of care from among
outpatient treatment, detoxification, inpatient, day care, specialized relapse
treatment and others. In addition to any care provided at one of the Company's
facilities, the case management program for each patient includes aftercare.
Aftercare may be provided through the outpatient services provided by a
facility. Alternatively, the Company may arrange for outpatient aftercare, as
well as family and mental health services, through its numerous affiliations
with clinicians located across the country once the patient is discharged.
As a general rule, the Company attempts not to accept patients who do not
have either insurance coverage or adequate financial resources to pay for
treatment. Each of the Company's substance abuse facilities does, however,
provide treatment free of charge to a small number of patients each year who are
unable to pay for treatment but who meet certain clinical criteria and who are
believed by the Company to have the requisite degree of motivation for treatment
to be successful. In addition, the Company provides follow-up treatment free of
charge to relapse patients who satisfy certain criteria. The number of patient
days attributable to all patients who receive treatment free of charge in any
given fiscal year is less than 5%.
The Company believes that it has benefited from an increased awareness of
the need to make substance abuse treatment services accessible to the nation's
workforce. For example, subchapter D of the Anti-Drug Abuse Act of
1988
(commonly known as The Drug Free Workplace Act) (the "Drug Free Workplace Act"),
requires employers who are Federal contractors or Federal grant recipients to
establish drug free awareness programs to inform employees about available drug
counseling, rehabilitation and employee assistance programs and the consequences
of drug abuse violations. In response to the Drug Free Workplace Act, many
companies, including many major national corporations and transportation
companies, have adopted policies that provide for treatment options prior to
termination of employment.
Although the Company does not provide federally approved mandated drug
testing, the Company treats employees who have been referred to the Company as a
result of compliance with the Drug Free Workplace Act, particularly from
companies that are part of safety sensitive industries, such as railroads,
airlines, trucking firms, oil and gas exploration companies, heavy equipment
companies and manufacturing companies.
Highland Ridge
Highland Ridge is a 34-bed alcohol and drug treatment hospital which the
Company has been operating since 1984. It is the oldest free-standing chemical
dependency hospital in Utah. Highland Ridge is accredited by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO") and received
an unconditional three-year accreditation effective July 1, 1993 which was
automatically extended pending the results of the current survey, which was
completed in August, 1996. Highland Ridge is also licensed by the Utah
Department of Health.
The patient population of Highland Ridge typically is between the ages of
18 and 70. Approximately 21% of the clients are female and 11% are minority
group members. Most patients are from Utah and surrounding states. Individuals
typically access Highland Ridge's services through professional referrals,
family members, employers, employee assistance programs or contracts between the
Company and health maintenance organizations located in Utah.
A pre-admission evaluation, which involves an evaluation of psychological,
cognitive and situational factors is completed for each prospective patient. In
addition, each prospective patient is given a physical examination upon
admission. Diagnostic tools, including those developed by the American
Psychological Association, the American Society of Addiction Medicine and the
Substance Abuse Subtle Screening Inventory are used to develop an individualized
treatment plan for each client. The treatment regimen involves an
interdisciplinary team which integrates the twelve-step principles of self-help
organizations, medical detoxification, individual and group counseling, family
therapy, psychological testing, psychiatric support, stress management, dietary
planning, vocational counseling and pastoral support. Highland Ridge also offers
extensive aftercare assistance. Individuals for whom treatment is inappropriate
are referred to other community and professional resources.
Highland Ridge was the first private for-profit hospital to address
specifically the special needs of chemically dependent women in Salt Lake
County. Approximately 40 women have been treated in an inpatient setting at no
charge since the program's inception in 1988. In addition, Highland Ridge has
contracted with Salt Lake County to provide medical detoxification services
targeted to women. The hospital also operates a specialized continuing care
support group to address the unique needs of women and minorities.
Highland Ridge periodically conducts or participates in research projects.
Highland Ridge is presently the site for a research project being conducted by
the University of Utah Medical School. The research explores the relationship
between individual motivation and treatment outcomes. This research is regulated
and reviewed by the Human Subjects Review Board of the University of Utah and is
subject to federal standards that delineate the nature and scope of research
involving human subjects. Highland Ridge benefits from this research by
expanding its professional relationships within the medical school community and
by applying the findings of the research to improve the quality of services the
Company delivers.
See "Description of Property - Highland Ridge."
Mount Regis
Mount Regis is a 25-bed, free-standing alcohol and drug treatment center
located in Salem, Virginia, near Roanoke. The business, which was acquired in
1987, is the oldest program of its kind in the Roanoke Valley. Mount Regis is
accredited by the JCAHO, and licensed by the Department of Mental Health, Mental
Retardation and Substance Abuse Services of the Commonwealth of Virginia.
Mount Regis' patient population typically ranges in age from 18 to 70. In
the June 30, 1996 fiscal year, approximately 36% of Mount Regis' clients were
minority group members and 19% were females. Approximately 101 women have been
treated in an inpatient setting at no charge since the program's inception. The
programs at Mount Regis are designed to be sensitive to needs of women and
minorities. The majority of Mount Regis clients are from Virginia and
surrounding states. In addition, because of its relatively close proximity and
accessibility to New York, Mount Regis has been able to attract an increasing
number of referrals from New York-based labor unions.
Mount Regis has established programs which allow the Company to better
treat dual diagnosis patients (those suffering from both substance abuse and
psychiatric disorders), cocaine addiction and relapse-prone patients. The
multi-disciplinary case management, aftercare and family programs are designed
to prevent relapse.
Until April of 1994, the Company leased the facility from Mount Regis
Center, Limited Partnership (the "Mount Regis Partnership"), a related party. In
April of 1994, PHC, Inc. purchased all of the limited partnership interests in
the Mount Regis Partnership which were not owned by the Company for a purchase
price of $31,250 per share, with the exception of shares owned by Bruce A.
Shear, the President of the Company, for which PHC, Inc. paid $25,000 per share.
The initial investment cost per share was $25,000. PHC, Inc. then assigned its
interest to PHC of Virginia, Inc., thus dissolving the limited partnership. The
Certificate of Cancellation of Limited Partnership was recorded June 30, 1994
and, on the same date, the Limited Partnership transferred ownership of the real
estate for Mount Regis to PHC of Virginia, Inc. The property was transferred
subject to an existing outstanding mortgage of approximately $531,000. In
connection with the dissolution of the Mount Regis Partnership, the Company paid
all of its outstanding debt to the Mount Regis Partnership in the amount of
$262,500. The Company also paid $53,041 to the former limited partners for their
net profit share through the date of transfer. See "Description of Property
Mount Regis."
In April 1993, Mount Regis purchased a free-standing outpatient clinic in
Roanoke called "Changes" from Alternative Counseling Services, Inc. The purchase
price of the clinic was $69,535, $23,900 of which was paid in cash and $45,635
of which was paid with two promissory notes of the Company, one in the principal
amount of $15,635 and one in the principal amount of $30,000. The $15,635
promissory note was paid off in July of 1994. Minimum monthly payments due under
the $30,000 promissory note are $650.00 plus 12% of the clinic receipts over
$14,000 a month from May 1993 through April 1996 until paid in full. Such
payments not to exceed $30,000 in the aggregate. See "Description of Property
Mount Regis."
The Changes clinic provides structured intensive outpatient treatment for
patients who have been discharged from Mount Regis and for patients who do not
need the formal structure of a residential treatment program. The program is
licensed by the Commonwealth of Virginia and approved for reimbursement by major
insurance carriers.
Godd Hope Center
On March 16, 1994, the Company completed the purchase of the operating
assets of Good Hope, a 49-bed substance abuse treatment facility located in West
Greenwich, Rhode Island, together with related outpatient programs. In addition
to the West Greenwich facility, Good Hope has a satellite location in North
Smithfield, Rhode Island. The West Greenwich facility is located on an
approximately 70-acre site three hours from New York City and one hour from
Boston. All 49 beds are located in West Greenwich. Good Hope has both adult and
adolescent programs which are located in separate buildings. Outpatient and day
treatment programs are also located at this site. The satellite site operates
both outpatient and day treatment substance abuse programs. See "Description of
Property - Good Hope."
Good Hope concentrates on providing services to insurers, managed care
networks and health maintenance organizations (HMOs). Good Hope provides the
same quality of individualized treatment provided by the Company's other
facilities by working closely with the managed care and HMO staff. The Company
recognizes that not all clients are in need of, nor are appropriate recipients
of, acute care alcohol and drug treatment services. Good Hope also utilizes its
outpatient programs to provide a continuum of care to local patients. The day
treatment license permits treatment of substance abuse, which encompasses
primary diagnoses of both alcohol abuse and drug abuse.
Good Hope has the Company's only substance abuse treatment program for
adolescents. This program has filled a need of the Company's other facilities
for a reliable referral for adolescents. Most of the patients treated at Good
Hope are from the New England area and approximately 30% are minorities.
Good Hope Center has experienced a decline in census and continues to
operate at a loss primarily as a result of the loss of referrals from the
Department of Child, Youth and Family Services (DCYF) contract funded by the
State of Rhode Island which created a substantial decline in adolescent census.
Management changes have been made and the Company's management team is focusing
its efforts to re-engineer this program from both an expense reduction and
revenue enhancement plan.
Discontinuance of Operation at Marin Grove
On August 16, 1994, the Company discharged the last patient from and
discontinued operations at Marin Grove, its substance abuse treatment facility
located in Marin County, California. The operations were discontinued based on
the Company's assessment that the continued poor financial performance of Marin
Grove did not justify the pending purchase of the Marin Grove facility or the
expenditures of additional sums to cover operating losses. This resulted in a
writedown of assets in the 1994 fiscal year of approximately $170,000 related to
the purchase and discontinued operations.
The Company had been granted a purchase option to acquire the real estate
for the Marin Grove facility from the lessor for $950,000 under the terms of a
settlement conference order issued as a result of litigation related to the
validity of the underlying lease agreement.
A settlement agreement with the lessor was finalized on September 8, 1994
which terminated the purchase option for Marin Grove and allowed the Company to
continue to occupy the administrative building and rental apartments until
November 30, 1994. Subsequently, the litigation described in the preceding
paragraph was dismissed with prejudice. The Company was obligated to pay rent in
the amount of $40,000 for the period ended November 30, 1994.
Proposed Short-Term Intensive Inpatient Facility
The Company had proposed to develop a short-term intensive inpatient
treatment center in Lynn, Massachusetts. The site on which such treatment center
was to be located is the former Mt. Pleasant Hospital which is owned by the
Shear Family Trust and the NMI Trust (the "Shear Trusts"), two family trusts
established by the Shear family. The Company has recently made a decision not to
pursue this project. As a result, the Company has received from the Shear Trusts
a refund of its option deposit payment of $50,000 previously made by the
Company, plus accrued interest thereon, and will obtain reimbursement of certain
development expenses over time. The Company has been paid $6,000 through June,
1996 and the Company will receive additional monthly payments of $500.00 until
paid in full.
HELPLINE Referral Service
In the spring of 1994 the Company began to operate a crisis hotline service
under contract with a major transportation client. The hotline, Pioneer
Development Support Services, or PDS2 ("PDS2"), is a national, 24-hour telephone
service which supplements the services provided by the client's Employee
Assistance Programs. The services provided include information, crisis
intervention, critical incidents coordination, employee counselor support,
client monitoring, case management and health promotion. The hotline is staffed
by counselors who refer callers to the appropriate professional resources for
assistance with personal problems. Four major transportation companies
subscribed to these services as of June 30, 1996. This operation is physically
located in Highland Ridge Hospital, but services are provided by staff dedicated
to PDS2. PDS2 is currently operated by the parent entity, PHC, Inc.
Operating Statistics
The following table reflects selected financial and statistical
information for the operating companies offering substance abuse treatment:
YEAR ENDED JUNE 30
1996 1995
---- ----
Net patient service revenues...... $10,307,262 $8,894,976
PDS2 $233,164 $128,157
Revenues..........................
Net revenues per patient day (1).. $380 $397
Average occupancy rate (2)........ 63% 66%
Total number of beds at endof period 108 108
(1) Net revenues per patient day is net patient service revenues divided by
total patient days.
(2) Average occupancy rates were obtained by dividing the total number of
patient days in each period by the number of licensed beds available in
such period. The total licensed beds available include only four months
for Good Hope in 1994 and 47 days for Marin Grove in 1995 due to its
closing. In calculating average occupancy rates, the total number of
patient days includes patient days attributed to scholarship patients as
well as patient days attributed to relapse patients for whom treatment is
provided by the Company without charge. In each of the fiscal years ended
June 30, 1994, 1995 and 1996, these patient days accounted for less than
5% of the total number of patients for the fiscal year.
PSYCHIATRIC FACILITY
Introduction
On September 20, 1994 the Company acquired its first psychiatric facility,
Harbor Oaks Hospital. The Company believes that its proven ability to provide
high quality, cost-effective care in the treatment of substance abuse will
assist it in growing in the related behavioral health field of psychiatric
treatment.
Harbor Oaks
Harbor Oaks is a 64-bed psychiatric hospital located in New Baltimore,
Michigan, approximately 20 miles northeast of Detroit along a highly populated
corridor surrounding Interstate Highway-94. Harbor Oaks is licensed by the
Department of Mental Health of the State of Michigan and is accredited by JCAHO.
Harbor Oaks provides inpatient psychiatric care to children, adolescents and
adults and operates a partial hospitalization program that includes outpatient
treatment services. In addition to drawing patients from Macomb, Oakland and St.
Clair Counties in Michigan as the prior owner did, the Company utilizes the
Harbor Oaks facility as a mental health resource to complement its nationally
focused substance abuse treatment programs. See "Description of Property Harbor
Oaks."
Through a management agreement with New Life Treatment Centers, Inc. the
Hospital also offers counseling programs with a Christian philosophy on an
inpatient and partial hospitalization basis. This program has attracted patients
from across the state, as well as from bordering Ohio.
In September, 1996, Harbor Oaks received approval from the Michigan
Department of Public Health for a Certificate of Need for a 20-slot
Child/Adolescent Partial Hospitalization Program to be located in Port Huron,
Michigan.
Operating Statistics
The following table reflects selected financial and
statistical
information for Harbor Oaks:
YEAR ENDED JUNE 30
INPATIENT INPATIENT PARTIAL PARTIAL
HOSPITAL HOSPITAL
1996 1995 1996 1995
---- ---- ---- ----
Net patient service revenues...... $5,296,874 $2,755,642 $921,537
$449,215
Net revenues per patient day (1).. $548 $533 $261 $176
Average occupancy rate (2)........ 64.4% 52.2% N/A N/A
Total number of beds at end of 64 64 N/A N/A
period............................
Sources of revenues:
Private(3).................... 75.5% 63.6% N/A N/A
Government(4) ................ 24.5% 36.4% N/A N/A
(1) Net revenues per patient day is net patient service revenues divided
by total patient days.
(2) Average occupancy rate was obtained by dividing the total number
of patient days in each period by the number of licensed beds available
in such period.
(3) Private pay percentage is the percentage of total patient days
derived from all payors other than Medicare and Medicaid.
(4) Government pay percentage is the percentage of total patient days
derived from the Medicare and Medicaid programs.
Ootpatient Psychiatric Facilities
Introduction
On November 1, 1995 the Company acquired its first outpatient psychiatric
clinic, Harmony Healthcare. On March 15, 1996 the Company acquired Total
Concepts, EAP, which operates Employee Assistance Programs and provides out
patient behavioral health care to adults, adolescents and children. The Company
believes its proven ability to provide high quality inpatient psychiatric
treatment will be a catalyst for the further development of its outpatient
treatment programs.
Harmony Healthcare
Harmony Healthcare, located in Las Vegas, Nevada, provides outpatient
psychiatric care to children, adolescents and adults in the local area. Harmony
also operates Employee Assistance Programs for several large casino companies
including Boyd Gaming Corporation, the MGM Grand, the Mirage and Treasure Island
resorts, which includes a rapid response program to provide immediate assistance
24 hours a day.
Total Concept EAP
Total Concept EAP, located in Shawnee Mission, Kansas, provides behavioral
health care to children, adolescents and adults and manages Employee Assistance
Programs for local businesses.
Operating Statistics
The following table reflects selected financial and statistical
information for the outpatient psychiatric centers for the year ended June
30, 1996:
Net revenues
Individual $ 648,302
Contract $ 503,365
-----------
$1,151,667
Total
Sources of revenues:
Private 89%
Government 11%
On August 31, 1996, the Company completed the acquisition of four
outpatient psychiatric clinics known as North Point located in Michigan for a
purchase price of $110,000 plus 15,000 shares of Class A Common Stock. On
September 7, 1996, the Company purchased three additional outpatient psychiatric
clinics from Value Behavioral Health for a purchase price of $150,000 adjustable
to $50,000 if certain contracts are not finalized within six months. The Company
will operate six of the acquired clinics as Pioneer Counseling Centers.
Long-Term Care Facility
Industry Background
The fastest growing market in the health care industry is the segment
which provides services for people 65 years of age and older. Demographers
predict that this population segment will increase dramatically in the next 20
years. The Company believes that there is a current shortage of long-term care
facilities which provide subacute and skilled nursing care and that such
shortage will be exacerbated by this population trend.
FRANVALE
The Company owns and operates a 128-bed, multi-level, long-term care
facility in Braintree, Massachusetts. For the fiscal year ended June 30, 1996,
Franvale operated at 87.1% of capacity.
In September, 1994, the Company received approval from The Commonwealth of
Massachusetts for a 25-bed addition to the Franvale facility. Under a one-time
regulatory exemption, the Company added an additional 12 beds to Franvale, for a
total of 37 new beds, and renovated the existing facility during the 1995 and
1996 fiscal years. To finance this addition and renovation, the Company applied
for and received Section 232 Mortgage Financing in an amount of $6,822,700 from
HUD. Approximately $2.9 million of that amount was used for the new construction
and renovation, which began September 13, 1994, and approximately $2,327,230 was
used to repay all indebtedness, plus accrued interest, relating to Franvale,
including $497,500 of indebtedness owing to the FDIC. The construction was
completed in September 1995. The Company began operation of the new addition on
September 29, 1995. The final amount of the mortgage was $6,822,700 as
determined by the HUD process of cost certification on July 9, 1996. The monthly
debt service is approximately $54,000.
Currently, the majority of the services provided by the Company at its
Franvale facility are skilled nursing services. The short-term rehabilitation
and subacute services provided include several forms of intravenous therapy,
total parenteral (intravenous) nutrition and pain management. Other subacute
services offered include hospice care, wound management and tracheotomy care.
The skilled therapeutic services offered by the Company include occupational,
physical and speech therapy, respiratory modalities and continence retraining
programs. Franvale was the first long-term care facility in Massachusetts to
hold DPH certification in all of the modalities of parenteral (intravenous)
infusion therapy, and is a leader among long-term care facilities in responding
to the needs of the managed care market and for providing transfusion services
in a setting that combines the prerequisite skill and cost effectiveness. With
completion of the addition and renovation project, the Company is expanding the
subacute services it offers to include expanded respiratory therapy services
(i.e., mechanically assisted ventilation), peritoneal and neurobehavioral
therapeutic services.
See "Description of Property - Franvale."
Operating Statistics
The following table reflects selected financial and statistical information
for Franvale:
YEAR ENDED
JUNE 30
1996 1995
Net patient service revenues........ $5,043,922 $4,180,471
Net revenues per patient day (1).... $137 $135
Average occupancy rate (2).......... 87.1% 92.7%
Total number of beds at end of period 128 91
Source of revenues:
Private (3).................... 8% 8%
Government (4)................. 92% 92%
(1) Net revenues per patient day equals net patient service revenues divided
by total patient days.
(2) Average occupancy rates were obtained by dividing the number of patient
days in each period by the number of licensed beds available in such period.
(3) Private pay percentage is the percentage of total patient days derived
from all payors other than Medicare and Medicaid.
(4) Government pay percentage is the percentage of total patient days
derived from the Medicare and Medicaid programs. Government total for 1996
reflects increase in higher acuity Medicare patients and Medicaid patients.
DAY-CARE
The Company operated three day care centers from 1988 until 1993. The
Company is in the process of phasing out these operations and, in this regard,
sold one of the centers in fiscal year 1993 and sold one of the centers in
fiscal year 1996. The Company is currently seeking a buyer for the remaining day
care center, which is located in Saugus, Massachusetts.
MARKETING
Each of the Company's substance abuse facilities conducts its own
marketing efforts on both a local and national level. Mount Regis has four
individuals on staff who are responsible for the marketing of that facility's
services, Highland Ridge has three such individuals on staff, and Harbor Oaks
Hospital has one such individual. The Company's national marketing efforts are
coordinated by the Company's National Marketing Director who reports to the
Company's Executive Vice President.
The Company markets the services of its psychiatric facility locally in
Michigan and to its existing chemical dependency and substance abuse clients
nationally.
With respect to substance abuse and psychiatric care, the Company intends
to continue its marketing strategy of focusing on referral sources in
safety-sensitive industries such as transportation, oil and gas exploration and
heavy machinery and equipment manufacturing the Company also sees significant
growth in the gaming industry. In addition to providing excellent service and
treatment outcomes, the Company will continue, where appropriate, to negotiate
pricing policies to attract patients for long-term, intensive treatment which
also meet length-of-stay and clinical requirements established by insurers and
managed care organizations.
The Company's marketing efforts for long-term care facilities will
emphasize the specialized, transitional subacute care services provided at
Franvale and which are expected to be provided at other facilities. Such
facilities provide care to patients who no longer require the higher acuity care
provided by acute care hospitals, but who still require nursing intervention and
use a significant amount of ancillary medical services, including intravenous
rehabilitation, respiratory and enteral therapies. The Company believes that
acute care hospitals seek to transfer certain patients who have entered the
recuperative period but who are not yet well enough to be cared for at home to
facilities which offer the type of intensive care available at Franvale. The
Company believes that such patients represent a large market but one which
currently is underserved. The Company hopes to continue its relationship with
existing acute care hospitals for transitional patients and to develop other
networks with health care providers to increase its census, particularly of
higher paying private pay and long-term care insured patients.
COMPETITION
The Company's substance abuse programs compete nationally with other
health care providers, including general and chronic care hospitals, both
non-profit and for-profit, other substance abuse facilities and short-term
detoxification centers. Some competitors have substantially greater financial
resources than the Company. The Company believes, however, that it can compete
successfully with such institutions because of its success in treating
poor-prognosis patients. The Company will compete through its focus on such
patients, its willingness to negotiate appropriate rates and its capacity to
build and service corporate relationships.
The Company's inpatient psychiatric facility and outpatient centers
compete regionally in the State of Michigan and nationally with other
psychiatric service providers. Harbor Oaks is located in the suburban Detroit
area and competes for patients with facilities in Macomb, Oakland and St. Clair
Counties. The outpatient centers compete with other similar centers. The Company
specializes in inpatient and partial hospitalization for acute mental health
treatment of children, adolescents and adults. Harbor Oaks is the only provider
of child and adolescent services for nearby St. Clair County and is only one of
two facilities in its own county of Macomb. Dual diagnosis programming provides
a niche service for clients with a primary mental health and a secondary
substance abuse diagnosis. The dual diagnosis program is the only program of its
type in metropolitan Detroit offering subacute detoxification and treatment of
the primary psychiatric and secondary substance abuse diagnosis. It is the only
psychiatric facility in the area offering subacute detoxification and
psychiatric evaluations in the same facility. The dual diagnosis service was
developed in response to demand from insurers, employees and treatment
facilities. Harbor Oaks Hospital is placed strategically in terms of physical
proximity to large population centers, competing hospitals, populations served
and programming. The Company plans to acquire outpatient facilities in strategic
locations to further expand its market and integrate its delivery system.
With respect to long-term care, the Company's competitors include
hospitals, long-term care facilities and hospices which provide both custodial
and subacute care. The Company competes in the long-term market within a
catchment area of an approximately 25-mile radius from its Franvale center. The
success of a long-term care facility depends on various factors, including the
quality of its amenities and facility, the professionalism of its staff and its
location. The Company believes that it can compete successfully in the long-term
care market, notwithstanding the fact that its competitors are numerous and in
many cases have greater financial resources than the Company, by continuing to
provide intensive, cost-effective and innovative treatment and by acquiring new
facilities or upgrading its existing facilities, as it has done through the
construction and renovation project at Franvale, so that the physical plant
appeals to private paying patients.
REVENUE SOURCES AND CONTRACTS
The Company has entered into relationships with numerous employers, labor
unions and third-party payors to provide services to their employees and members
for the treatment of substance abuse disorders. In addition, the Company admits
patients who seek treatment directly without the intervention of third parties
and whose insurance does not cover these conditions in circumstances where the
patient either has adequate financial resources to pay for treatment directly or
is eligible to receive free care at one of the Company's substance abuse
facilities. Free treatment provided each year amounts to less than 5% of the
Company's total patient days.
Each contract with an institution is negotiated separately, taking into
account the insurance coverage provided to employees and members, and may
provide for differing amounts of compensation to the Company for different
subsets of employees and members depending upon such coverage. The charges may
be capitated, or fixed with a maximum charge per patient day, and, in the case
of larger clients, frequently result in a negotiated discount from the Company's
published charges. The Company believes that such discounts are appropriate as
they are effective in producing a larger volume of patient admissions. When
non-contract patients are treated by the Company, they are billed on the basis
of the Company's standard per diem rates and for additional ancillary services
provided to them by the Company.
QUALITY ASSURANCE AND UTILIZATION REVIEW
The Company has established a comprehensive quality assurance program at
all of its facilities. Such programs are designed to ensure that each facility
maintains standards that meet or exceed requirements imposed upon the
Company,
with the objective of providing high-quality specialized treatment services to
its patients. The Company's professional staff, including physicians, social
workers, psychologists, nurses, dietitians, therapists and counselors, must meet
the minimal requirements of licensure for their specific discipline, as well as
the internal professional staff requirements adopted by each of the facilities.
The Company participates in the federally mandated National Practitioners Data
Bank, which monitors professional accreditation nationally.
In response to the increasing reliance of insurers and managed care
organizations upon utilization review methodologies, the Company has adopted a
comprehensive documentation policy to satisfy relevant reimbursement
criteria.
Additionally, the Company has developed an internal case management system which
provides assurance that services rendered to individual patients are medically
appropriate and reimbursable. Implementation of these internal policies has been
integral to the success of the Company's strategy of providing services to
relapse-prone, higher acuity patients.
GOVERNMENT REGULATION
The Company's business and the development and operation of the Company's
facilities are subject to extensive federal, state and local government
regulation. In recent years, an increasing number of legislative proposals have
been introduced at both the national and state levels that would effect major
reforms of the health care system if adopted. Among the proposals under
consideration are reforms to increase the availability of group health
insurance, to increase reliance upon managed care, to bolster competition and to
require that all businesses offer health insurance coverage to their employees.
The Company cannot predict whether any such legislative proposals will be
adopted and, if adopted, what effect, if any, such proposals would have on the
Company's business.
In addition, both the Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions, all
of which may materially increase or decrease the rate of program payments to
health care facilities. Since 1983, Congress has consistently attempted to limit
the growth of federal spending under the Medicare and Medicaid programs and will
like continue to do so. Additionally, congressional spending reductions for the
Medicaid program involving the issuance of block grants to states is likely to
hasten the reliance upon managed care as a potential savings mechanism of the
Medicaid program. As a result of this reform activity the Company can give no
assurance that payments under such programs will in the future remain at a level
comparable to the present level or be sufficient to cover the costs allocable to
such patients. In addition, many states, including The Commonwealth of
Massachusetts and the State of Michigan, are considering reductions in state
Medicaid budgets.
HEALTH PLANNING REQUIREMENTS
Some of the states in which the Company operates, and many of the states
where the Company may consider expansion opportunities, have health planning
statutes which require that prior to the addition or construction of new beds,
the addition of new services, the acquisition of certain medical equipment or
certain capital expenditures in excess of defined levels, a state health
planning agency must determine that a need exists for such new or additional
beds, new services, equipment or capital expenditures. These state determination
of need or certificate of need ("DoN") programs are designed to enable states to
participate in certain federal and state health related programs and to avoid
duplication of health services. DoNs typically are issued for a specified
maximum expenditure, must be implemented within a specified time frame and often
include elaborate compliance procedures for amendment or modification, if
needed. Several states, including The Commonwealth of Massachusetts, have
instituted moratoria on some types of DoNs or otherwise stated an intent not to
grant approvals for certain health services. Such moratoria may adversely affect
the Company's ability to expand in such states, but may also provide a barrier
to entry to potential competitors.
LICENSURE AND CERTIFICATION
All of the Company's facilities must be licensed by state regulatory
authorities. The Company's Franvale and Harbor Oaks facilities are certified for
participation as providers in the Medicare and Medicaid programs.
The Company's initial and continued licensure of its facilities, and
certification to participate in the Medicare and Medicaid programs, depends upon
many factors, including accommodations, equipment, services, patient care,
safety, personnel, physical environment, adequate policies, procedures and
controls and the regulatory process regarding the facility's initial licensure.
Federal, state and local agencies survey facilities on a regular basis to
determine whether such facilities are in compliance with governmental operating
and health standards and conditions for participating in government programs.
Such surveys include reviews of patient utilization and inspection of standards
of patient care. The Company will attempt to ensure that its facilities are
operated in compliance with all such standards and conditions. To the extent
these standards are not met, however, the license of a facility could be
restricted, suspended or revoked, or a facility could be decertified from the
Medicare or Medicaid programs.
MEDICARE REIMBURSEMENT
Currently, the Company's chemical dependency facilities do not receive
reimbursement under the Medicare program for services rendered. The Franvale and
Harbor Oaks facilities do, however, rely upon such reimbursement as presumably
will other long-term care and psychiatric facilities which may be acquired or
established by the Company. The Medicare program reimburses long-term care
facilities for routine operating costs, capital costs and ancillary costs.
Routine operating costs are subject to a routine cost limitation set for each
location. Such routine cost limitations are not applicable for the first three
years of the facility's operations. Owing to its high acuity patient population,
Franvale has received an exception to this routine cost limit for calendar years
1993, 1994, 1995 and 1996. Capital costs include interest expenses, property
taxes, lease payments and depreciation expense. Interest and depreciation are
calculated based upon the original owner's historical cost (plus the cost of
subsequent capital improvements) when changes in ownership occur after July
1984. Ancillary costs are reimbursed at actual cost to Medicare beneficiaries
based on prescribed cost allocation principles.
On December 13, 1989, the Catastrophic Care Act of 1988 (the "Catastrophic
Care Act") was repealed. Prior to the effective date of the Catastrophic Care
Act, federal law provided as a precondition to Medicare coverage of skilled
nursing facility services that the Medicare beneficiary must have been an
inpatient in an acute care hospital for at least three days preceding admission
to the nursing facility, with such admission occurring within thirty days after
discharge from the acute care hospital. Because the Catastrophic Care Act has
been repealed, that precondition to Medicare coverage of skilled nursing
facility services has been reinstated. However the Catastrophic Care Act's
expanded definition of skilled care, which increased beneficiaries' access to
skilled nursing services, has been retained.
The Medicare program generally reimburses psychiatric facilities pursuant
to its prospective payment system ("PPS"), in which each facility receives an
interim payment of its allowable costs during the year which is later adjusted
to reflect actual allowable direct and indirect costs of services based upon the
submission of a cost report at the end of each year. However, current Medicare
payment policies allow certain psychiatric service providers an exemption from
PPS. In order for a facility to be eligible for exemption from PPS, the facility
must comply with numerous organizational and operational requirements.
PPS-exempt providers are cost reimbursed, receiving the lower of reasonable
costs or reasonable charges. The Medicare program fiscal intermediary pays a per
diem rate based upon prior year costs, which may be retroactively adjusted upon
the submission of annual cost reports.
The Harbor Oaks facility is currently PPS-exempt. The amount of its
cost-based reimbursement may be limited by the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA") and regulations promulgated
thereunder.
Generally, TEFRA limits the amount of reimbursement a facility may receive to a
target amount per discharge, adjusted annually for inflation. This target amount
is based upon a facility's reasonable Medicare operating cost divided by
Medicare discharges, plus a per diem allowance for capital costs, during its
base year of operations. It is not possible to predict the ability of Harbor
Oaks to remain PPS-exempt or to anticipate the impact of TEFRA upon the
reimbursement received by Harbor Oaks in future periods.
In order to receive Medicare reimbursement, each participating facility
must meet the applicable conditions of participation set forth by the federal
government relating to the type of facility, its equipment, its personnel and
its standards of medical care, as well as compliance with all state and local
laws and regulations. In addition, Medicare regulations generally require that
entry into such facilities be through physician referral. The Company must offer
services to Medicare recipients on a non-discriminatory basis and may not
preferentially accept private pay or commercially insured patients.
MEDICAID REIMBURSEMENT
Currently, the Company's chemical dependency facilities do not receive
reimbursement under any state Medicaid program. The Franvale and Harbor Oaks
facilities do, however, rely upon Medicaid reimbursement, as presumably will
other long-term care facilities which may be acquired or established by the
Company. A portion of Medicaid costs are paid by states under the Medicaid
program and the federal matching payments are not made unless the state's
portion is made. Accordingly, the timely receipt of Medicaid payments by a
facility may be affected by the financial condition of the relevant state.
Harbor Oaks, the Company's psychiatric facility, is a participant in the
Medicaid program administered by the State of Michigan. The great majority of
patients reimbursed under this program are adolescents. Harbor Oaks receives
reimbursement from the State of Michigan Medicaid program on a per diem basis,
inclusive of ancillary costs. The rate is determined by the state and is
adjusted annually based on cost reports filed by the Company.
The Franvale facility participates in the Medicaid program administered by
The Commonwealth of Massachusetts. Payment to Medicaid providers in
Massachusetts may be delayed or reduced due to budgetary constraints or limited
availability of revenues due to general economic conditions affecting the
Commonwealth. Such delays and reductions have occurred in the past and no
assurance can be given that future reductions will not be made in the scope of
covered services or the rate of increase in reimbursement rates, or that future
reimbursement will be adequate to cover the provider's cost of providing
service. The effect of such limitations or reductions will be to require
management to carefully manage costs so that they will come within available
reimbursement revenues, if possible.
FRANVALE NURSING AND REHABILITATION CENTER
For 1995 and 1996, Massachusetts Medicaid continues to reimburse skilled
nursing facilities on an acuity based prospective system. The 1995 and 1996
rates are based on costs reported and acuity data for 1993 and are adjusted by
inflation factors. Under the rate formula established for 1996, Massachusetts
nursing facilities received an average increase in their Medicaid rates of
approximately 2%.
Actual reimbursement of long-term care costs under the Massachusetts Medicaid
program is based in part upon the acuity levels of individual patients. Any
changes by the Commonwealth to the methods used to determine patient acuity will
therefore affect Medicaid reimbursement to providers of long-term care. Although
the specific Medicaid rate formula for 1997 has not been determined, it is
expected that the base year period will remain the same and a modest inflation
adjustment will be incorporated into the rates. At this time the Company cannot
predict the impact of the 1997 or future year rate changes on its operations.
FRAUD AND ABUSE LAWS
Various federal and state laws regulate the business relationships and
payment arrangements between providers and suppliers of health care services,
including employment or service contracts, and investment relationships. These
laws include the fraud and abuse provisions of the Medicare and Medicaid
statutes as well as similar state statutes (collectively, the "Fraud and Abuse
Laws"), which prohibit the payment, receipt, solicitation or offering of any
direct or indirect remuneration intended to induce the referral of patients or
the ordering or providing of certain covered services, items or equipment.
Violations of these provisions may result in civil and criminal penalties and/or
exclusion from participation in the Medicare and Medicaid programs and from
state programs containing similar provisions relating to referrals of privately
insured patients. The federal government has issued regulations which set forth
certain "safe harbors," representing business relationships and payment
arrangements that can safely be undertaken without violation of the federal
Fraud and Abuse Laws. The Company believes that its business relationships and
payment arrangements either fall within the safe harbors or otherwise comply
with the Fraud and Abuse Laws.
EMPLOYEES
As of September 15, 1996, the Company had 434 employees, of which 15 (14
full time) were employed through the Company's headquarters, 64 (34 full time)
at Highland Ridge, 41 (29 full time) at Mount Regis, 47 (27 full time) at Good
Hope, 166 (90 full time) at Franvale, and 84 (44 full time) at Harbor Oaks, 12
(9 full time) at Harmony Healthcare, 5 (4 full time) at Total Concept. Of the
Company's 434 employees, 268 are leased from Allied Resource Management of
Florida, Inc. ("ARMFCO"), a wholly owned subsidiary of HRC ARMCO, Inc. (formerly
known as Alliance Employee Leasing Corporation), a national employee leasing
firm.
The Company has elected to lease a substantial portion of its employees to
provide more favorable employee health benefits at lower cost than would be
available to the Company as a single employer and to eliminate certain
administrative tasks which otherwise would be imposed on the management of the
Company. The Company does not lease employees for its long-term care facility.
The arrangements with ARMFCO are implemented through separate leases with the
Company relating to each facility, other than Franvale, and are terminable by
either party on 30 days' written notice. The agreements with ARMFCO provide that
for all leased employees, ARMFCO will administer payroll (including withholding
of state and federal payroll taxes), provide for compliance with workers'
compensation laws, including procurement of workers' compensation insurance and
administering claims, and procure and provide designated employee benefits. The
Company retains the right to reject the services of any leased employee and
ARMFCO has the right to increase its fees at any time upon thirty days' written
notice or immediately upon any increase in payroll taxes, workers' compensation
insurance premiums or the cost of employee benefits provided to the leased
employees.
The Company believes that it has been successful in attracting skilled and
experienced personnel; competition for such employees is intense, however, and
there can be no assurance that the Company will be able to attract and retain
necessary qualified employees in the future. None of the Company's employees are
covered by a collective bargaining agreement. The Company believes that its
relationships with its employees are good.
INSURANCE
Each of the Company's facilities maintains separate professional liability
insurance policies. Mount Regis, Harbor Oaks, Harmony Healthcare, and Total
Concept have coverage of $1,000,000 per claim and $3,000,000 in the
aggregate.
Highland Ridge has limits of $1,000,000 per claim and $5,000,000 in the
aggregate. Good Hope has coverage of $2,000,000 per claim and $6,000,000 in the
aggregate. In addition, these entities maintain general liability insurance
coverage in identical amounts. The Company's long-term care facility maintains
general and professional liability coverage of $2,000,000, with a limit of
$1,000,000 per claim and an aggregate of $5,000,000 excess coverage.
The Company maintains $1,000,000 of directors and officers liability
insurance coverage and $1,000,000 of general liability insurance coverage. The
Company believes, based on its experience, that its insurance coverage is
adequate for its business and that it will continue to be able to obtain
adequate coverage.
ITEM 2. DESCRIPTION OF PROPERTY.
EXECUTIVE OFFICES
The Company's executive offices are located in Peabody, Massachusetts. The
Company's lease in Peabody covers approximately 3,600 square feet for a 60-month
term effective September 10, 1994 at an annual base rent of $28,800 in the first
year, $32,400 in the second year, $34,020 in the third year, $35,721 in the
fourth year and $37,507 in the fifth year. The Company believes that this
facility will be adequate to satisfy its needs for the foreseeable future.
HIGHLAND RIDGE
The Highland Ridge premises consists of approximately 16,072 square feet
of space occupying two full stories of a three-story building. The Company is in
the twelfth year of a fifteen-year lease term, which lease provides for monthly
rental payments of approximately $21,000 for the remainder of the lease term.
The lease expires on September 30, 1998, and contains an option to renew. During
the term of the lease or any extension thereof, the Company has a right of first
refusal on any offer to purchase the leased premises. The Company believes that
these premises are adequate for its current and anticipated needs.
MOUNT REGIS
The Company owns the Mount Regis facility which consists of a three-story
wooden building located on an approximately two-acre site in a residential
neighborhood. The building consists of over 14,000 square feet. Mount
Regis/Changes occupies approximately 1,500 square feet of leased office space on
the first floor of an office building in Roanoke, Virginia. The Company believes
that these premises are adequate for its current and anticipated needs. The
Mount Regis Center property is subject to an outstanding mortgage in favor of
Douglas Roberts with an outstanding balance of $505,485 at fiscal year ended
June 30, 1996.
GOOD HOPE
The Company leases the property from NMI Realty, Inc., at an annual rent
of $206,000 for the second year, $231,000 in the third through fifth years,
$255,000 in the sixth year and $255,000 plus 5% of previous year's rent per year
in years seven through twenty of the lease. The Company has an irrevocable
option to purchase the property for $1,300,000 at the end of the second year,
for $1,200,000 at the end of the third year, for $1,150,000 at the end of the
fourth year and for $1,100,000 at any time after the end of the fifth year
through the end of the term of the lease.
The West Greenwich facility consists of three buildings, containing a
total of approximately 25,000 square feet, located on an approximately 70-acre
parcel of land. The satellite office is leased; the Company is a tenant-at-will
at the North Smithfield satellite location. The Company believes that these
premises are adequate for its current and anticipated needs.
HARBOR OAKS
Harbor Oaks is located in New Baltimore, Michigan, approximately 20 miles
northeast of Detroit. The Company owns the property on which Harbor Oaks
operates, consisting of a one-story brick and wood frame building comprising
approximately 32,000 square feet and which is used for the operation of a
psychiatric hospital, and the underlying real estate of approximately three
acres. There have been two additions to the building; in 1982, 19 beds were
added and, in 1988, a new administrative area and gymnasium were built. The
Company believes that these premises are adequate for its current and
anticipated needs.
HARMONY HEALTHCARE
The Harmony premises consists of approximately 2,628 square feet of space
located on the third floor of the building known as Charleston Tower located at
1701 West Charleston Boulevard, Las Vegas, Nevada. The property is under a four
year lease which provides for lease payments of $4,599.00 per month plus common
area charges of 3.48% of project expenses not to exceed $300.00 in the first
year with incremental increases of $50.00 per month allowed each year of the
lease. The lease also allows for an increase in leased space to 3,077 square
feet as soon as available for occupancy. This increase in leased space increases
the monthly rent charge to $5384.75 but the allocation of project expenses
remains the same. The Company believes that these premises are adequate for its
current and anticipated needs.
TOTAL CONCEPT
The Total Concept premises consists of approximately 1,850 square feet of
space known as Suite 101 located at King's Cove Office Park in Shawnee
Mission,
Kansas. The property is under a three year lease which provides for monthly
lease payments of $1,735.00 for the first year, $1,773.00 for the second year
and $1,850.00 for the third year of the lease. The Company believes that these
premises are adequate for its current and anticipated needs.
FRANVALE
The Company owns the real property and improvements for Franvale. The
operations are located in a two-story building comprising 44,019 square feet
which is located on an approximately two-acre parcel of land. The real property
was owned by PHC, Inc. until September 8, 1994, at which time it was transferred
to its subsidiary, Quality Care Centers of Massachusetts, Inc., ("QCC"). At the
time the property was transferred to QCC, QCC purchased an adjoining 5,825
square foot parcel of land and refinanced its existing debt and financed the
costs of renovations and the addition of 37 beds to the long-term care facility.
The Company believes that these premises are adequate for its current and
anticipated needs.
The refinancing described in the preceding paragraph was accomplished
through guarantees provided by the U.S. Department of Housing and Urban
Development under Section 232 of The National Housing Act. A non-recourse loan
in the amount of $6,822,700 was provided by Charles River Mortgage Company of
Boston, Massachusetts in return for a promissory note and mortgage of the
Company in the same amount. This amount was adjusted after HUD's final cost
certification process completed in July, 1996. The annual interest is 9.25% and
the note is payable over a forty-year period commencing January 1, 1996. During
the twelve-month construction period, only interest was payable, effective
October 1, 1994. Pre-payment is allowed with penalty from October 1, 2000
through October 1, 2005, with no penalty from October 1, 2005. All pre-existing
debt relating to Franvale was paid by the Company out of the proceeds of the
refinancing; $497,500.00 was paid to the Federal Deposit Insurance Company,
$1,823,839.87 was paid to CMS Capital Ventures, Inc. and $5,888.77 was paid to
Trans National Leasing.
The Company completed renovations to and the addition of 37 beds to its
long-term care facility in September ,1995.
ITEM 3. LEGAL PROCEEDINGS.
Consistent with its discontinuation of operations at the Marin Grove
facility, the Company has entered into a settlement agreement with Claire
Leonhard Morse, individually and as a trustee of the Anna Leonhard Trust, Arnold
Leonhard, individually and as a trustee of the Anna Leonhard Trust, and Lloyd
Leonhard (collectively, the "Lessor") in connection with litigation relating to
the Company's lease of the Marin Grove property. Under the settlement agreement,
the Company paid the Lessor $40,000, less approximately $17,400 for amounts
already paid, as rent for the period from August 1, 1994 to November 30, 1994
and continued to occupy only that portion of the property used for
administrative purposes and rented to current subtenants until November 30,
1994. In December 1994, the litigation was dismissed with prejudice.
The Company received a notice from Pioneer Health Care, Inc., a
Massachusetts non-profit corporation demanding that the Company discontinue use
of its PIONEER HEALTHCARE trademark upon the ground that that mark infringes the
rights of Pioneer Health Care, Inc. under applicable law. Pioneer Health Care,
Inc. threatened to proceed with the necessary legal action to prevent the
Company from using the PIONEER HEALTHCARE mark, and to seek a cancellation of
the registration that has been issued by the U.S. Patent Trademark Office (the
"PTO") to the Company for the PIONEER HEALTHCARE mark, unless the Company
complied with this demand. The Company refused to comply with this demand,
whereupon Pioneer Health Care, Inc. filed a petition in the PTO seeking the
cancellation of the Company's registration of its PIONEER HEALTHCARE trademark.
The Company thereupon commenced litigation in the United States District Court
for the District of Massachusetts seeking a declaratory judgment that its use of
the PIONEER HEALTHCARE trademark does not infringe any rights of Pioneer Health
Care, Inc. under applicable law, and that it has the right to maintain its
registration of that mark. Pioneer Health Care, Inc. has filed a counterclaim in
that litigation seeking injunctive and monetary relief against the Company upon
claims of trademark infringement, trademark dilution and unfair competition. The
Company is defending itself vigorously against those claims. Proceedings upon
the petition filed by Pioneer Health Care, Inc. in the PTO seeking the
cancellation of the Company's registration of its PIONEER HEALTHCARE trademark
have been stayed pending the resolution of the litigation between the parties.
The Company does not believe that an adverse decision would have a material
adverse effect on the Company.
In January 1996, the Company received notice that Mullikin Medical Center,
A Medical Group, Inc., located in Artesia, California, filed a petition with the
PTO seeking cancellation of the registration of the PIONEER HEALTHCARE mark. The
Company and petitioner are currently discussing a settlement whereby the parties
would agree that there is no likelihood of confusion of their respective
trademarks due to the difference in the trademarks, the difference in the
parties' services, the difference in the channels of trade of the parties'
services and the scope of protection to be accorded trademarks using the name
PIONEER. The Company is unable to express an opinion as to the likely merits of
this matter.
On October 31, 1994, the Company was served with a summons for a Civil
Action in the Superior Court Department of the Trial Court of the Commonwealth
of Massachusetts by NovaCare, Inc. ("NovaCare"), an entity which contracted with
the Company in 1992 to provide rehabilitation therapy and related administrative
services to the Company's long-term care facility (the "Action"). The complaint
alleged that the Company owed NovaCare contractual damages in the amount of
approximately $587,000, plus interest, attorney fees, costs of collection, and
double or triple damages pursuant to a Massachusetts statute prohibiting unfair
and deceptive trade practices. The Company filed a counterclaim alleging that
NovaCare breached the contract in question and that the Company may be owed
damages in excess of the amount sought by NovaCare.
On February 13, 1996, the Company settled the Action by agreeing to pay
NovaCare an amount less than its claim. The Company is not paying NovaCare
accrued interest, attorney's fees, costs of collection, or multiple damages. A
portion of the settlement amount has already been paid The balance of the
settlement amount is payable over twelve (12) months with interest on the unpaid
balance at 9.5%. In the event that the Company defaults on its obligation to pay
the settlement amount, it has agreed to entry of judgment against it in the
amount of $457,637.46 (the "Judgment"). The Judgment represents the full unpaid
balance of NovaCare's claim against the Company, including interest, attorney's
fees, and costs of collection. Any amounts paid by the Company to NovaCare after
February 9, 1996 shall be deducted from the Judgment. Until the settlement
amount is paid, NovaCare will continue to hold a mortgage on a day care property
owned by the Company in Saugus, Massachusetts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 1996.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company are as follows:
NAME AGE POSITION
Bruce A. Shear................ 41 Director, President, &Chief Executive
Officer
Robert H. Boswell............. 47 Executive Vice President
Mark Cowell (3)............... 50 Vice President of Communications
Gerald M. Perlow, M.D. (1)(2). 58 Director and Clerk
Donald E. Robar (1)(2)........ 59 Director and Treasurer
Paula C. Wurts................ 47 Controller, Assistant Clerk, and
Assistant Treasurer
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Mr. Cowell resigned from the Company effective July, 1996.
All of the directors hold office until the annual meeting of stockholders
next following their election, or until their successors are elected and
qualified. The Company is required, upon request of Americorp Securities,
Inc.,
the underwriter of the Company's initial public offering in March 1994 (the
"Underwriter"), to use its best efforts to elect a designee of the Underwriter
to the Board of Directors for a period of three years from March 3, 1994. The
underwriter has advised the Company that it has no current plans to designate a
director. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board. There are no family relationships among any of the
directors or officers of the Company.
Information with respect to the business experience and affiliations of
the directors and officers of the Company is set forth below.
BRUCE A. SHEAR has been President, Chief Executive Officer and a Director
of the Company since 1980 and Treasurer of the Company since September 1993.
From 1976 to 1980 he served as Vice President, Financial Affairs, of the
Company. Mr. Shear has served on the Board of Governors of the Federation of
American Health Systems for over ten years. Mr. Shear received an M.B.A. from
Suffolk University in 1980 and a B.S. in Accounting and Finance from Marquette
University in 1976.
ROBERT H. BOSWELL has served as the Executive Vice President of the Company
since 1992. From 1989 until Spring of 1994 Mr. Boswell served as the
Administrator of the Company's Highland Ridge Hospital facility where he is
based. Mr. Boswell is principally involved with the Company's substance abuse
facilities. From 1981 until 1989, he served as the Associate Administrator at
the Prevention Education Outpatient Treatment Program--the Cottage Program,
International. Mr. Boswell graduated from Fresno State University in 1975 and
from 1976 until 1978 attended Rice University's doctoral program in philosophy.
MARK COWELL has served as Vice President of Communications of the Company
since 1984 and as Administrator of Mount Regis Center since 1989. Mr. Cowell
received his B.A. in Journalism from Northeastern University in 1969 and is
currently completing courses for an M.B.A. at Virginia Polytechnic University.
GERALD M. PERLOW, M.D. has served as a Director of the Company since May
1993 and as Clerk since February, 1996. Dr. Perlow is a cardiologist in private
practice in Lynn, Massachusetts, and has been Associate Clinical Professor of
Cardiology at the Tufts University School of Medicine since 1972. Dr. Perlow is
a Diplomat of the National Board of Medical Examiners and the American Board of
Internal Medicine (with a subspecialty in cardiovascular disease) and a Fellow
of the American Heart Association, the American College of Cardiology, the
American College of Physicians and the Massachusetts Medical Center. From 1987
to 1990, Dr. Perlow served as the Director, Division of Cardiology, at
AtlantiCare Medical Center in Lynn, Massachusetts. Dr. Perlow received a B.A.
from Harvard College in 1959 and an M.D. from Tufts University School of
Medicine in 1963.
DONALD E. ROBAR has served as a Director of the Company since 1985 and has
served as the Treasurer since February, 1996. Dr. Robar has been a professor of
Psychology since 1961, most recently at Colby-Sawyer College in New London, New
Hampshire. Dr. Robar received a Ed.D. from the University of Massachusetts in
1978, an M.A. from Boston College in 1968 and a B.A. from the University of
Massachusetts in 1960.
PAULA C. WURTS has served as the Controller of the Company since 1989, as
Assistant Treasurer since 1993, and as Assistant Clerk since January, 1996. Ms.
Wurts served as the Company's Accounting Manager from 1985 until 1989. Ms. Wurts
received an Associate's degree in Accounting from the University of South
Carolina in 1980, a B.S. in Accounting from Northeastern University in 1989 and
passed the examination for Certified Public Accountants. She has completed the
requirements for a Master's Degree in Accounting from Western New England
College.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Units, Class A Common Stock and Class A Warrants have been
traded on the NASDAQ National Market under the symbols "PIHCU," "PIHC" and
"PIHCW," respectively, since the Company's initial public offering which was
declared effective on March 3, 1994. There is no public trading market for the
Company's Class B and Class C Common Stock. The following table sets forth, for
the periods indicated, the high and low sale price of the Company's Class A
Common Stock, as reported by NASDAQ.
1995 HIGH LOW
Third Quarter (beginning
March 3, 1995) . . . . . . . . . . 6 1/4 5 1/8
Fourth Quarter . . . . . . . . . . . 7 3/8 5 1/8
1996
First Quarter . . . . . . . . . . . . 7 3/4 6 1/2
Second Quarter . . . . . . . . . . . 7 3/8 5 1/2
Third Quarter . . . . . . . . . . . . 9 5/8 5 1/4
Fourth Quarter . . . . . . . . . . . 9 3/4 7
1997
First Quarter (through
September 13, 1996). . . . . . . 9 3/4 7
On September 13, 1996, the last reported sale price of the Class A Common
Stock was $7.50. On September 13, 1996 there were 46 holders of record of the
Company's Class A Common Stock, 322 holders of record of the Company's Class B
Common Stock and 335 holders of the Company's Class C Common Stock.
DIVIDEND POLICY.
The Company has never paid any cash dividends on its Common Stock. While
there are currently no restrictions on the Company's ability to pay dividends,
the Company anticipates that in the future, earnings, if any, will be retained
for use in the business or for other corporate purposes, and it is not
anticipated that cash dividends in respect of Common Stock will be paid in the
foreseeable future. Any decision as to the future payment of dividends will
depend on the results of operations and financial position of the Company and
such other factors as the Company's Board of Directors, in its discretion, deems
relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere
herein.
The Company is a provider of health care services through several chemical
dependency centers, a long-term care facility, an acute psychiatric hospital,
and effective fiscal year 1996 two outpatient psychiatric centers. The
profitability of the Company is largely dependent on the level of patient
occupancy at these treatment facilities. The Company's administrative expenses
do not vary significantly as a percentage of total revenue although 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. While it is
anticipated that a number of the proposed regulatory changes may have a positive
impact on the Company's business, there can be no assurance that other changes
may not adversely affect the Company.
Over the past several years, the Company has been systematically phasing
out its day care center operations due to declining profitability and its lack
of fit with the Company's health care operations. At June 30, 1996 the Company
had remaining net assets related to these operations amounting to approximately
$56,700 which is a real estate parcel located in Saugus, Massachusetts. The
Company does not anticipate any significant future losses due to the disposition
of this asset.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996 AND 1995
The Company experienced a loss for fiscal year ended June 30, 1996
primarily as a result of the increased expenses incurred in the opening of the
new beds at Franvale. Census levels at Franvale did not increase as soon as
anticipated to cover the fixed costs involved in the expanded facility.
Marketing efforts since the opening of the new beds are now producing expected
patient census and mix. Census is currently at 90% occupancy of the 128 total
beds which is up from 87.1% for the fiscal year ended June 30, 1996 on less
available beds.
Also contributing to the current year's loss was Good Hope Center's loss
of referrals from the Department of Child, Youth and Family Services
(DCYF)
contract funded by the state of Rhode Island. This created a sharp decline in
adolescent census. The Company is re-engineering the program and the center
operations. In conjunction with the re-engineering of the facility, two
unprofitable outpatient centers have been closed, some programs have been
combined, several positions have been eliminated and new management has been put
in place. The management team is focusing its attention on both expense
reduction and revenue enhancement.
Net patient care revenue from all facilities increased 32% to $21,802,758
for the year ended June 30, 1996 from $16,536,618 for the year ended June 30,
1995.. Net patient care revenue for the psychiatric hospital, Harbor Oaks
Hospital, was $6,218,410 for the fiscal year ended June 30, 1996 compared to
3,204,857 for June 30, 1995. Net patient care revenue at the Company's chemical
dependency treatment centers increased to $9,155,595 from $8,932,864 over the
same period. Net patient revenue at the Company's long-term care facility
increased to $5,043,922 for fiscal 1996 (20.7%) from $4,180,471 in fiscal 1995
which is attributable to the increase in census due to the addition of 37
available beds.
Total patient care expenses for all facilities increased 29.8% to
$12,004,383 for the year ended June 30, 1996 from $9,248,317 for the year ended
June 30, 1995. Patient care expenses for the psychiatric hospital, Harbor Oaks
Hospital, were $3,098,664 for the fiscal year ended June 30, 1996 compared to
$1,941,528 for fiscal year ended June 30, 1995. Patient care expenses at the
Company's chemical dependency treatment centers decreased to $4,350,423 from
$4,453,212 for the same period (approximately 2.3%). Patient care expenses at
the Company's long-term care facility increased to $4,029,572 for fiscal 1996
from $2,884,425 in fiscal 1995 (approximately 39.7%). The percentage increase in
patient care expenses in the long-term care facility is due to increased census
and acuity of patient mix and fixed cost increase, interest, salaries, related
to the new addition. The census increase related to the new beds took longer
than anticipated creating a loss for the fiscal year ended June, 1996. Census is
now at the expected level and rate increases have been implemented effective
September 1, 1996 to offset the higher costs.
LIQUIDITY AND CAPITAL RESOURCES
During the third fiscal quarter of 1996, the Company completed a private
placement of 493,700 Class A Common Stock with Warrants to purchase additional
shares of Class A Common Stock at $4.00 a share. This resulted in net proceeds
to the Company of approximately $1,524,800.
Prior to 1992, the Company's primary lender was a bank which failed in May
1992 and was taken over by the FDIC. As noted above, during fiscal 1994 the
Company negotiated the repayment of this debt resulting in a reduction in the
amount due of approximately $400,000. Of the total negotiated amount to be paid,
$1,100,000 was paid in fiscal 1994 and $497,500 was paid in fiscal 1996 out of
the proceeds received from HUD financing (see below).
In September 1994 the Company consummated its planned HUD financing for
the expansion and refurbishment of its long-term care facility. Under this
financing the Company received gross proceeds of $6,822,700 which were expended
as follows:
Existing Indebtedness $2,327,230
Construction Contract $2,879,183
Other Costs $ 596,470
Finance and Carrying
Charges $1,019,547
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 increased 45% to $9,606,000 at June 30, 1996 from approximately $6,621,000
at June 30, 1995. The increase in accounts receivable is net of the sale of
certain receivables to LINC Finance Corporation VIII (LINC). Without this sale,
the June 30, 1996 ending accounts receivable balance would have been
approximately $796,000 higher and would have reflected an increase of
approximately 40%. This significant increase in receivables is primarily due to
increase in revenues from new acquisitions and increased beds at Franvale. The
Company continues to closely monitor its accounts receivable balances and
implement procedures to manage this receivables growth and keep it consistent
with growth in revenues.
During the fiscal year ended 1995, PHC of Virginia, Inc., PHC of Rhode
Island, Inc. and LINC entered into Sale and Purchase Agreements, pursuant to
which LINC will provide funding of up to $950,000 to each of these subsidiaries.
There can be no assurance that the other subsidiaries will enter into similar
agreements or satisfy the conditions necessary to receive funding if pursued.
During the fiscal year ended June 30, 1996, PHC of Utah, Inc. and
HEALTHPARTNERS FUNDING, L.P. entered into a revolving credit agreement, pursuant
to which HealthPartners Funding, L.P. will provide funding of up to $1,000,000
to PHC of Utah, Inc. This revolving credit agreement is secured by the assets of
the subsidiary.
At June 30, 1996 the Company had approximately $293,000 in cash and cash
equivalents, working capital of approximately $4,871,000 and a working capital
ratio of approximately 1.9 to 1. Management believes that the Company has
adequate cash resources to fund operations for the foreseeable future. However,
the Company is currently seeking bank lending relationships to insure that the
Company will have the necessary capital to fund expansion of its existing
business in the future and to pursue acquisition opportunities as they arise.
The Company has made significant progress toward the accomplishment of its
acquisition and expansion plans by completing its nursing home refinancing and
the construction of a new 37-bed addition and facility renovations. The
completion of the Rhode Island acquisition expanded its substance abuse
facilities base while the closing of the Company's unprofitable California
facility focuses its efforts on contributing to the profitability of its core
substance abuse facilities.
The Company's first psychiatric hospital acquisition in September of 1994
marked the Company's entry into this compatible business line. The acquisition
of the Company's first outpatient psychiatric clinic was completed in November
of 1995. The March, 1996 acquisition of Total Concept also focuses on outpatient
psychiatric care. The Company will continue to look into further expansion in
these areas taking into account the overall enhancement of stockholders' value.
ITEM 7. FINANCIAL STATEMENTS.
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AT PAGE
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Index........................................................... F-1
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Reports of Independent Auditors................................. F-2
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Consolidated Balance Sheets..................................... F-3
===============================================================================
Consolidated Statements of Operations........................... F-4
===============================================================================
Consolidated Statements of Changes
in Stockholders' Equity......................................... F-5
===============================================================================
Consolidated Statements of Cash Flows........................... F-6
===============================================================================
Notes to Financial Statements................................... F-7
===============================================================================
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Information required by Item 401 and Item 405 of Regulation S-B is contained in
Part I of this report.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based on a review of Forms 3 and 4 furnished to the Company, all
directors, officers and beneficial owners of more than ten percent of any class
of equity securities of the Company registered pursuant to Section 12 of the
Securities Exchange Act (the "Exchange Act") filed on a timely basis reports
required by Section 16(a) of the Exchange Act during the most recent fiscal
year.
ITEM 10. EXECUTIVE COMPENSATION.
EMPLOYMENT AGREEMENTS
The Company has not entered into any employment agreements with
its
executive officers. The Company has acquired a $1,000,000 key man life
insurance
policy on the life of Bruce A. Shear.
EXECUTIVE COMPENSATION
Two executive officers of the Company received compensation in the 1996
fiscal year which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 1996:
SUMMARY COMPENSATION TABLE
ANNUAL All Other
COMPENSATION Salary
Bruce A. Shear, President and
Chief Executive Officer......... $294,063 $10,818(1)
Robert H. Boswell,
Executive Vice President...... $80,667 $24,750(2)
(1) This amount represents (i) $2,650 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii)) $5,146
in premiums paid by the Company with respect to life insurance for the benefit
of Mr. Shear, and (iii) $3,022 personal use of Company car held by Mr. Shear.
(2) This amount represents (i) $1,000 bonus, (ii) $3,750 automobile allowance,
and (iii) $20,000 net gain from the exercise of options and subsequent sale of
stock.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
services as members of the Board. Directors who are not employees of the Company
receive $2,500 stipend per year and $1,000 for each Board meeting they
attend.
In addition, directors of the Company are entitled to receive certain stock
option grants under the Company's Non-Employee Director Stock Option Plan (the
"Director Plan").
COMPENSATION COMMITTEE
The Compensation Committee consists of Mr. Donald Robar and Dr. Gerald
Perlow. The Compensation Committee met once during fiscal 1996. Mr. Shear did
not participate in discussions concerning, or vote to approve, his salary. In
fiscal year 1996, none of the executive officers or directors of the Company
served on a board of directors of any other entity.
STOCK PLAN
The Company's Stock Plan was adopted by the Board of Directors on August
26, 1993 and approved by the stockholders of the Company on November 30,
1993.
The Stock Plan provides for the issuance of a maximum of 300,000 shares of the
Class A Common Stock of the Company pursuant to the grant of incentive stock
options to employees and the grant of nonqualified stock options or restricted
stock to employees, directors, consultants and others whose efforts are
important to the success of the Company.
The Stock Plan is administered by the Board of Directors. Subject to the
provisions of the Stock Plan, the Board of Directors has the authority to select
the optionees or restricted stock recipients and determine the terms of the
options or restricted stock granted, 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 cannot 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. Generally, an option is not transferable by the
optionholder except by will or by the laws of descent and distribution. Also,
generally, no option may be exercised more than 60 days following termination of
employment. However, in the event that termination is due to death or
disability, the option is exercisable for a period of one year following such
termination.
In September of 1993, the Company issued options to purchase a total of
57,500 shares of Class A Common Stock at an exercise price of $5.00 per share
under the Stock Plan. Because the holders of two of those options are no longer
employees of the Company and some options have been exercised, the number of
shares of Class A Common Stock for which these options are exercisable has been
reduced to 36,250. These options were fully exercisable as of September 9, 1996.
In June of 1994, the Company issued options to purchase a total of 3,000
shares of Class A Common Stock at an exercise price of $6.37 per share under the
Stock Plan. In April of 1995, the Company issued options to purchase a total of
39,000 shares of Class A Common Stock at an exercise price of $5.13 per share
under the Stock Plan. As of June 30, 1996, 10,000 of these options had been
exercised. These options are all immediately exercisable and can be exercised
for a period of five years from the grant date, provided that the optionee
remains an employee of the Company as of the exercise date.
In March of 1996, the Company issued options to purchase a total of 35,000
shares of Class A Common Stock at an exercise price ranging from $5.25 to $6.50
under the Stock Plan. In May of 1996, the Company issued options to purchase
6,000 shares of Class A Common at an exercise price of $7.00. These options were
immediately exercisable as to 25% of the shares covered thereby. The remaining
option shares are exercisable at the rate of 25% per year over the next three
years after the grant date provided the optionee remains an employee of the
Company as of each exercise date.
EMPLOYEE STOCK PURCHASE PLAN
On October 18, 1995, the Board of Directors voted to provide employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to participate in an Employee Stock Purchase Plan (the "Plan") which
became effective February 1, 1996. No more than 100,000 shares may be sold under
this Plan. The price per share shall be the lesser of 85% of fair market value
on the Offering Date or 85% of the fair market value of a share on the date such
right is exercised. Currently there is an offering period under the plan which
began on February 1, 1996 and will end on January 31, 1997. There are twenty-six
employees participating in this plan period.
NON-EMPLOYEE DIRECTOR STOCK PLAN
The Company's Non-Employee Director Stock Plan (the "Director Plan") was
adopted by the directors on October 18, 1995 and approved by the Stockholders of
the Company on December 15, 1995. Non-qualified options to purchase a total of
30,000 shares of Class A Common Stock are available for issuance under the
Director Plan.
The Director Plan is administered by the Board of Directors or a committee
of the Board. Under the Director Plan, each director of the Company who was a
director at the time of adoption of the Director Plan and who was not a current
or former employee of the Company received an option to purchase that number of
shares of Class A Common Stock as equals 500 multiplied by the years of service
of such director as of the date of the grant. At each annual meeting of the
Board of Directors of the Company following the initial grant described above,
each nonemployee director is granted under the Director Plan an option to
purchase 2,000 shares of the Class A Common Stock of the Company. The option
exercise price is the fair market value of the shares of the Company's Class A
Common stock on the date of grant. The options are non-transferable and become
exercisable as follows: 25% immediately and 25% on each of the first, second and
third anniversaries of the grant date. If an optionee ceases to be a member of
the Board of Directors other than for death or permanent disability, the
unexercised portion of the options, to the extent unvested, immediately
terminate, and the unexercised portion of the options which have vested lapse
180 days after the date the optionee ceases to serve on the Board. In the event
of death or permanent disability, all unexercised options vest and the optionee
or his or her legal representative has the right to exercise the option for a
period of 180 days or until the expiration of the option, if sooner.
On January 23, 1996, a total of 5,500 shares were issued under the
Director Plan at an exercise price of $6.63 per share. As of September 13,
1996,
none of these options had been exercised.
ISSUANCE OF RESTRICTED STOCK
On December 17, 1993, the Company issued 11,250 and 19,750 shares of the
Company's Class A Common Stock to certain directors and officers of the
Company,
respectively, at a purchase price of $4.00 per share. The shares of restricted
stock were issued pursuant to the Company's Stock Plan. Each purchaser paid to
the Company 25% of the purchase price for his or her shares in cash, and the
balance with a non-recourse note. The notes are payable quarterly over three
years commencing June 30, 1994, and bear interest at the rate of 6% per year. To
secure the payment obligation under the non-recourse notes, shares paid for with
these notes have been pledged to the Company. As the principal due under each of
the notes is reduced, the appropriate number of shares are released from the
pledge.
On November 1, 1995, the Company issued 75,000 shares of the Company's
Class A Common Stock as part of the acquisition of Harmony Counseling. The
Company also issued 12,000 shares of Class A Common Stock in the acquisition of
Total Concept EAP on March 15, 1996.
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, Class B Common Stock and Class
C Common Stock (the only classes of capital stock of the Company currently
outstanding) as of September 22, 1996 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.
TITLE OF CLASS Name and Address of Amount and Nature Percent of
BENEFICIAL OWNER OF BENEFICIAL OWNER CLASS (6)
Class A Gerald M. Perlow 15,250 (3) *
Common Stock c/o PHC, Inc.
200 Lake ST, STE 102
Peabody MA 1960
Donald E. Robar 7,375 (3) *
c/o PHC, Inc.
200 Lake ST, STE 102
Peabody MA 01960
Bruce A. Shear 5,000
c/o PHC, Inc.
200 Lake ST, STE 102
Peabody MA 01960
All Directors and 74,125 (4) 3.2%
Officers as a
Group (6 persons)
Class B Bruce A. Shear 681,259 (1) 84.5%
Common c/o PHC, Inc.
Stock (7) 200 Lake ST, STE 102
Peabody MA 01960
Class B J. Owen Todd 59,280 (5) 7.3%
Common Stock c/o Todd and Weld
1 Boston Place
Boston MA 02108
William F. Grieco 59,280 (5) 7.3%
115 Marlborough ST
Boston MA 02116
All Directors and 681,259 (1) 84.5%
Officers as a
Group (6 persons)
Class C Bruce A. Shear 156,502 (2) 78.3%
Common Stock c/o PHC, Inc.
200 Lake ST, STE 102
Peabody MA 01960
J. Owen Todd 13,173 (5) 6.6%
c/o Todd and Weld
1 Boston Place
Boston, MA 02108
William F. Grieco 13,173 (5) 6.6%
115 Marlborough ST
Boston MA 02116
All Directors and 156,502 (2) 78.3%
Officers as a
Group (6 persons)
* Less than 1%.
(1) 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. Excludes an aggregate of 59,280 shares of Class B
Common Stock owned by the Shear Family Trust and the NMI Trust, of which Bruce
A. Shear is a remainder beneficiary.
(2) Includes 12,526 shares of Class C 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. Excludes an aggregate of 13,173 shares of Class C
Common Stock owned by the Shear Family Trust and the NMI Trust (the "Trusts"),
of which Bruce A. Shear is a remainder beneficiary.
(3) Includes 11,375 shares issuable pursuant to currently exercisable stock
options. Of those options, 10,000 have an exercise price of $5.00 per share, and
1,375 have an exercise price of $6.63.
(4) Includes an aggregate of 46,875 shares issuable pursuant to currently
exercisable stock options. Of those options, 20,000 have an exercise price of
$5.00 per share, 3,000 have an exercise price of $6.37 per share, 20,000 have an
exercise price of $5.13 per share, 2,500 have an exercise price of $5.25 per
share, and 1,375 have an exercise price of $6.63 per share.
(5) Messrs. Todd and Grieco are the two trustees of the Trusts which
collectively hold 72,453 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, Gertrude Shear currently
owns 2.86% of the Company's outstanding Class A Common Stock, less than 1% of
the Company's outstanding Class B Common Stock and 4.97% of the Company's
outstanding Class C Common Stock.
(6) 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 the
holders of the Class B Common Stock are entitled to elect all the remaining
members of the Company's board of directors). The Class C Common Stock is
non-voting. Based on the numbers of shares listed under the column headed
"Amount and Nature of Beneficial Ownership," the following persons or groups
hold the following percentages of voting rights for all shares of common stock
combined:
Bruce A. Shear 53.6%
J. Owen Todd 4.7%
William F. Grieco 0%
All Directors and
Officers as a Group 54.7%
(6 persons)
(7) 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
RELATED PARTY INDEBTEDNESS
For approximately the last ten years, Bruce A. Shear, a director and the
President, Chief Executive Officer and Treasurer of the Company, and persons
affiliated and associated with him have made a series of unsecured loans to the
Company and its subsidiaries to enable them to meet ongoing financial
commitments. The borrowings generally were entered into when the Company did not
have financing available from outside sources and, in the opinion of the
Company, were entered into at market rates given the financial condition of the
Company and the risks of repayment at the time the loans were made. As of June
30, 1996, the Company owed an aggregate of $103,996 to related parties. During
the year ended June 30, 1996, the Company paid an aggregate of $181,612 to
related parties.
During the period ended June 30, 1996, the Company paid Mr. Shear
approximately $181,612 in principal and accrued interest under various notes. In
connection with the IPO, Mr. Shear contributed to the Company approximately
$85,000 of accrued and unpaid interest payable under various notes and
approximately $15,000 of accrued and unpaid guarantee fees owed to him for
20,000 shares of the Company's Class B Common Stock. The Company paid Mr. Shear
$50,000 out of the proceeds of the IPO in reduction of the principal amount of
the notes for the payment of certain tax obligations arising from the issuance
of the stock. Upon the consummation of those transactions, Mr. Shear accepted a
new promissory note of the Company in exchange for the notes plus accrued
interest for $110,596. As of August 31, 1996, the Company owed Bruce A. Shear
$110,596 on that promissory note, which is dated March 31, 1994, matures on
December 31, 1998 and bears interest at the rate of 8% per year, payable
quarterly in arrears, and requires repayments of principal quarterly in equal
installments commencing July 1, 1996, until maturity. The current balance of
this note as of June 30, 1996 is $78,996.
On June 30, 1988, in connection with the acquisition of Franvale, the
Company issued promissory notes in the amount of $1,350,000 and $225,000 to
Continental Medical Systems, Inc., the seller of Franvale. These loans bore
interest at the rate of 10% per annum and were payable on December 1, 1996.
Additionally, on June 30, 1992, the Company issued a note in the amount of
$240,084 to Continental Medical Systems, payable on December 1, 1996, and
bearing interest at the rate of 10% per annum. As of September 8, 1994, the
aggregate principal amount outstanding under these loans was paid in full
through the HUD refinancing of the Franvale facility.
Bruce A. Shear guaranteed each of the loans in connection with the
acquisition of Franvale for a guarantee fee payable by the Company equal
annually to 1.5% of the outstanding principal amount guaranteed. In addition, a
3% fee is payable by the Company on the accrued and unpaid amount of the
guarantee fees. Bruce A. Shear received no guarantee fees pursuant to these
arrangements in the fiscal year ended June 30, 1996 in cash.
Certain other relatives of Bruce A. Shear have made loans from time to
time to the Company. As of June 30, 1994, the principal amount of $27,700 was
outstanding on a note payable to Gertrude Shear, Bruce A. Shear's mother, which
paid interest from April 15, 1993 until April 15, 1994 at the rate of 8% per
annum, and thereafter paid interest at the prime rate plus 2% per annum,
adjusted quarterly. An aggregate principal amount of $13,850 was paid September
10, 1994 and the balance was paid in full on March 10, 1996.
In addition the Company owed Tot Care, Inc. and Humpty Dumpty School,
Inc., two corporations owned by Bruce A. Shear, an aggregate principal amount of
$55,000 as of June 30, 1994. These loans earned interest at the rate of 15% per
year. An aggregate principal amount of $27,500 was paid on September 10, 1994
and the balance was paid in full on March 10, 1996.
The Company has also borrowed from certain of its officers and consultants
other than Bruce Shear and his relatives. As of August 31, 1996, the aggregate
principal amount owed by the Company to such persons was $25,000 as follows:
$5,000 to Mark S. Cowell, the Company's Vice President of Communications, and
his wife, Karen K. Cowell, $10,000 to Himanshu S. Patel, the Medical Director at
Changes, and Anjana H. Patel, and $10,000 to Mukesh P. Patel, the Medical
Director at Mt. Regis, and Falguni M. Patel. All of these borrowings are payable
on demand.
The Company has leased furniture and equipment from time to time from Trans
National Leasing Corp., a corporation owned by Leon Shear, Bruce A. Shear's
uncle. The Company currently has sixteen equipment leases with Trans National,
which in the aggregate provide for annual lease payments of approximately
$70,200. At the term of each lease, the lessee has the right to purchase the
subject equipment for 10% of the total equipment purchase price. The Company
intends to honor its existing lease obligations with Trans National, and in the
future to obtain equipment and furniture either through purchase or lease from
such companies, including Trans National, as can provide the best terms
available to the Company as determined by its management. During the period
ended June 30, 1996 the Company paid an aggregate of $114,736 under these
leases.
The Company had proposed to develop a short-term intensive inpatient
treatment center in Lynn, Massachusetts. The site on which such treatment center
was to be located is the former Mt. Pleasant Hospital which is owned by the
Shear Family Trust and the NMI Trust (the "Shear Trusts"), two family trusts
established by the Shear family. The Company has recently made a decision not to
pursue this project. As a result, the Company has received from the Shear Trusts
a refund of an option deposit payment of $50,000 previously made by the Company,
plus accrued interest thereon, and will obtain reimbursement of approximately
$107,000 in development expenses over time. As of June 30, 1996, the Company
received $6,000 in payment on this account and is currently receiving payment of
$500 each month.
On December 17, 1993, the Company issued 11,250 and 19,750 shares of the
Company's Class A Common Stock to certain directors and officers, respectively,
of the Company at a price of $4.00 per share, pursuant to the Company's Stock
Plan. Each purchaser paid to the Company 25% of the purchase price for his or
her shares in cash, and the balance with a non-recourse note. The notes are
payable quarterly over the three years commencing June 30, 1994, and bear
interest at the rate of 6% per year. The shares purchased with non-recourse
notes have been pledged to the Company to secure the payment obligation. As the
principal due under each of the notes is reduced, the appropriate number of
shares are released from the pledge.
William F. Grieco, as one of the two trustees of the Shear Family Trust
and the NMI Trust, of which Gertrude Shear, Bruce A. Shear's mother, is the
lifetime beneficiary, controls 7.0% of the outstanding Class B Common Stock of
the Company, and 6.6% of the outstanding Class C Common Stock of the Company.
Mr. Grieco was a partner of Choate, Hall & Stewart, which provides general legal
representation to the Company. During the fiscal year ended June 30, 1996, the
Company incurred legal fees and expenses for services provided by Choate, Hall &
Stewart in an aggregate amount equal to $306,484.92.
The Company adopted a policy that all transactions between the Company and
its officers, directors and affiliates will be on terms no less favorable to the
Company than could be obtained from unrelated third parties and will be approved
by a majority of the disinterested members of the Company's Board of Directors.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibit in the Exhibit Table of Item 601 of Regulation S-B. The
Company will furnish to any stockholder, upon written request, any exhibit
listed below upon payment by such stockholder to the Company at the Company's
reasonable expense in furnishing such exhibit.
EXHIBIT DESCRIPTION
No.
+3.1 Restated Articles of Organization of the Registrant, as amended.
3.2 By-Laws of the Registrant, as amended.
+4.1 Form of Warrant Agreement.
+4.2 Specimen certificate representing Class A Common Stock.
+4.3 Form of Certificates representing redeemable Class A Warrants
(form of certificate representing redeemable Class A Warrants
included in Exhibit 4.1).
+4.4 Form of Unit Purchase Option.
++++4.5 Warrant Agreement by and among PHC, Inc., American Stock
Transfer,and Americorp Securities, Inc.
++++4.6 Registration Rights for Exhibit 4.5.
u +10.1 1993 Stock Purchase and Option Plan of PHC, Inc.
u +10.2 Form of Stock Option Agreement of PHC, Inc.
u ++10.3 Form of Restricted Stock Agreement with list of employees
and directors who have entered into agreement and corresponding
numbers of shares.
+10.4 Form of Subscription Agreement for Bridge financing with list
of bridge investors who have entered into agreement and
corresponding amounts subscribed for.
+10.5 Form of 8% Subordinated Notes of PHC, Inc. with list of
bridge investors who have purchased notes and principal
amounts thereof.
+10.6 Form of Warrant Agreement for Bridge financing with list
of bridge investors holding warrant agreements and
corresponding numbers of bridge units for which warrant is
exercisable.
+10.7 Lease Agreement between Blackacre Realty Trust and PHC, Inc.,
dated April 30, 1985, with amendments dated May 22, 1986, on
or about March 9, 1988, and May 1, 1992.
10.9 Lease Agreement between David H. Brom and Changes, dated
April 1, 1995.
+10.11 Option to Purchase Agreement between PHC, Inc. and Quality
Care Centers of Massachusetts, Inc., dated July 6, 1993.
+10.12 Lease Agreement between Anna Meta Leonhard & Claire Leonhard
Morse and PHC, Inc., dated December 13, 1989; Approval of
Assignment of lease by PHC, Inc., to PHC of California, Inc.
dated December 13, 1989.
+10.13 Settlement Conference Order, dated February 1, 1993, in the
matter of AIHS OF CALIFORNIA, INC. V. CLAIRE LEONHARD MORSE;
Letter from Jerry M. Ackeret to Godfrey J. Tencer, dated
September 24, 1993, confirming extension of the Settlement;
Letter from Godfrey J. Tencer to Jerry M. Ackeret, dated October
4, 1993, accepting extension in letter of September 24, 1993;
Letter from Jerry M. Ackeret to PHC, Inc., dated February 15,
1994, agreeing to extension of closing of the purchase of the
property to March 8, 1994.
+10.14 Lease Agreement between Palmer-Wells Enterprises and AIHS, Inc.
and Edwin G. Brown, dated September 23, 1983,with Addendum dated
March 23, 1989, and Renewal of Addendum dated April 7, 1992;
Tenant Acceptance Letter to The Mutual Benefit Life Insurance
Company and Palmer-Wells Enterprises, executed by PHC, Inc. and
Edwin G. Brown, dated June 6, 1989.
+10.15 Sample Equipment Lease with Trans National Leasing Corp.
+10.16 Note of PHC, Inc. in favor of Tot Care, Inc., dated January
1, 1991, in the amount of $55,000.
+10.17 Note of PHC, Inc. in favor of Humpty Dumpty School, Inc.,
dated March 1, 1991, in the amount of $25,000.
+10.18 Note of PHC, Inc. in favor of Bruce A. Shear, dated April 1,
1993, in the amount of $152,500; Subordination letter from
Aquarius Realty to Malden Trust Company as to $50,000 of debt,
dated 1983, regarding debt of PHC, Inc.; Subordination letter
from Bruce A. Shear and Steven J. Shear, individually, to Malden
Trust Company as to $80,000 of debt, dated 1983, regarding debt
of PHC, Inc.
+10.19 Note of PHC, Inc. in favor of Steven J. Shear, dated April 1,
1993, in the amount of $25,000.
+10.20 Note of PHC, Inc. in favor of Gertrude Shear, dated April
15, 1993, in the amount of $27,700.
+10.21 Note of PHC, Inc. in favor of Mark S.Cowell and Karen K.Cowell,
dated May 5, 1993, in the amount of $10,000.
+10.22 Note of PHC, Inc. in favor of Trans National Leasing Corp., dated
May 17, 1993, in the amount of $50,000.
+10.26 Advance Funding Agreement by and among Quality Care Centers of
Massachusetts, Inc., Kelspride Nursing Homes, Inc. and
Continental Medical Systems, Inc., dated June 30, 1988, and
amendment thereto dated June 30, 1992; Note of Quality Care
Centers of Massachusetts, Inc. in favor of Continental Medical
Systems, Inc., dated June 30, 1992, in the amount of $240,084;
Mortgage, Security Agreement and Assignment by PHC, Inc. to
Continental Medical Systems, Inc., dated June 30, 1988, and
amendment thereto dated June 30, 1992; Security Agreement by
Quality Care Centers of Massachusetts, Inc. to Continental
Medical Systems, Inc., dated June 30, 1988, and amendment thereto
dated June 30, 1992; Guaranty of PHC, Inc. in favor of
Continental Medical Systems, Inc. dated June 30, 1988, and
amendment thereto dated June 30, 1992; Guaranty of Bruce A.
Shear, individually, dated June 30, 1988, and amendment thereto
dated June 30, 1992 and Guaranty Fee Agreement of PHC, Inc. in
favor of Bruce A. Shear in consideration of June 30, 1988,
Guaranty on behalf of PHC, Inc.; Waiver and Agreement by and
among PHC, Inc., Quality Care Centers of Massachusetts, Inc.,
Continental Medical Systems, Inc. and CMS Capital Ventures, Inc.,
dated October 13, 1993.
+10.28 Purchase and Sale Agreement by and between Alternative Counseling
Services, Inc. and PHC of Virginia, Inc., dated March 22, 1993;
Note of PHC of Virginia, Inc. in favor of Alternative Counseling
Services, Inc., dated April 1, 1993, in the amount of $30,000;
Note of PHC of Virginia, Inc. in favor of Alternative Counseling
Services, Inc., dated April 1, 1993, in the amount of $15,485
with Changes Clinic Collections on Purchased Receivables, April
1, 1993 - September 7, 1993.
10.29 Note of PHC of Virginia, Inc. in favor of Himanshu S. Patel
and Anjana H. Patel, dated April 1, 1995, in the amount of
$10,000.
+10.30 Note of PHC of Virginia, Inc. in favor of Mukesh P. Patel
and Falguni M. Patel, dated April 1, 1993, in the amount of
$10,000.
+10.31 Mount Regis Center, Limited Partnership Agreement and Certificate
of Limited Partnership, dated July 24, 1987, by and among PHC of
Virginia, Inc. and limited partners; Form of Letter Agreement of
limited partners dated October 18, 1993, with list of Selling
Limited Partners and Units to be sold.
+10.32 Contract for Purchase and Sale of Real Estate by and
between Douglas M. Roberts, PHC of Virginia, Inc. and PHC, Inc.
dated March 31, 1987, with amendment dated July 28, 1987.
+10.33 Deed of Trust Note of Mount Regis Center Limited Partnership in
favor of Goulas M. Roberts, dated July 28, 1987, in the amount of
$560,000, guaranteed by PHC, Inc., with Deed of Trust executed by
Mount Regis Center, Limited Partnership of even date.
+10.34 Security Agreement Note of PHC of Virginia, Inc. in favor of
Mount Regis Center, Inc., dated July 28, 1987, in the amount of
$90,000, guaranteed by PHC, Inc., with Security Agreement, dated
July 1987.
+10.35 Form of Agreement amending Deed of Trust Note (by Mount Regis
Center Limited Partnership to Douglas M. Roberts, dated July 28,
1987) and Security Agreement Note (by PHC of Virginia, Inc. to
Mount Regis Center, Inc., dated July 28, 1987, and assigned by
Mount Regis to Douglas M. Roberts, effective August 1, 1987) by
and between Douglas M. Roberts, PHC of Virginia, Inc., Mount
Regis Limited Partnership and PHC, Inc., dated September, 1991.
+10.37 Note of Quality Care Centers of Massachusetts, Inc. in favor
of Bruce A. Shear, dated April 1, 1993, in the amount of $10,000.
10.38 Exhibit intentionally omitted.
+10.42 Note of PHC of California, Inc. in favor of Bruce A. Shear,
dated April 1, 1993, in the amount of $100,000.
+10.43 Note of PHC of California, Inc. in favor of Marin Addiction
Counseling & Treatment, Inc., dated January 30, 1990, in the
amount of $273,163 with Agreement, dated April 26, 1990,
evidencing assignment of note by Marin Addiction Counseling
Treatment, Inc. to Circle of Help, Inc.; Asset Purchase Agreement
by and between Marin Addiction Counseling & Treatment, Inc. and
PHC of California, Inc., dated January 19, 1990; Waiver Letter
from Circle of Help, Inc. to PHC, Inc., dated February 15, 1994.
+10.45 Promissory Note and Corporate Guarantee of STL, Inc. in favor of
Joseph and Theodora Koziol, dated November 30, 1992, in the
amount of $40,000, Corporate Guarantee by PHC, Inc., with Release
of All Demands of even date attached.
+10.50 Letter agreement between PHC, Inc. and Leonard M. Krulewich, as
assignee of the ENOBLE Corporation, dated April 26, 1993,
relative to the transfer of ownership of the DoN; Request for
Transfer of DoN, dated May 28, 1993; Request for Transfer of Site
of DoN, dated May 28, 1993; Request for Extension of
Authorization Period from June 27, 1993, dated June 24, 1993;
Letter from counsel of AtlantiCare Medical Center to
Massachusetts Department of Public Health, dated July 13, 1993.
10.51 Medical Services Agreement between Mukesh P. Patel and
Himanshu Patel and Mount Regis Center, dated August 25, 1995.
+10.52 Copy of Note of Bruce A. Shear in favor of Steven J. Shear, dated
December 1988, in the amount of $195,695; Pledge Agreement by and
between Bruce A. Shear and Steven J. Shear, dated December 15,
1988; Stock Purchase Agreement by and between Steven J. Shear and
Bruce A. Shear, dated December 1, 1988.
+10.53 Management Agreement by and between STL, Inc.and Lillian Furbish,
dated September 8, 1993.
10.54 Exhibit intentionally omitted.
+10.55 Letter Agreement by and between PHC, Inc. and the Utah Group,
dated November 5, 1993.
#10.56 Note of PHC, Inc. in favor of Bruce A. Shear, dated March 31,
1994, in the amount of $110,596.
#10.57 Consent of PHC, Inc. and PHC of Virginia, Inc., dated June 10,
1994, as to the transfer of partnership property to PHC of
Virginia, Inc.; Deed by and between Mount Regis Center, Limited
Partnership and PHC of Virginia, Inc., dated June 10, 1994;
Consent to Transfer by Douglas M. Roberts, dated June 23, 1994;
Form of Mount Regis Center, Limited Partnership Assignment and
Assumption of Limited Partnership Interest, by and between PHC of
Virginia, Inc. and each assignor dated as of June 30, 1994; Mount
Regis Center, Limited Partnership Certificate of Cancellation of
Limited Partnership, filed June 30, 1994.
#10.58 Letter from PHC of California, Inc. to Circle of Help, Inc.,
dated September 20, 1994, confirming agreement as to payment
by PHC of California, Inc. to Circle of Help, Inc. in the
amount of $100,000 as full satisfaction of promissory note of
PHC of California, Inc. in favor of Marin Addiction Counseling
and Treatment, Inc. in the amount of $273,163 which was assigned
to Circle of Help, Inc. on April 26, 1990.
#10.59 Settlement Agreement and Mutual General Release, by and between
PHC of California, Inc. and Claire Leonhard Morse, individually
and as Trustee of the Anna Leonhard Trust, Arnold Leonhard,
individually and as Trustee of the Anna Leonhard Trust, and Lloyd
Leonhard.
#10.60 Estoppel, Consent and Subordination Agreement, by and between
Zions First National Bank and Highland Ridge Hospital,
dated June 30, 1994.
#10.61 Regulatory Agreement for Multifamily Housing Projects, by and
between Quality Care Centers of Massachusetts, Inc. and Secretary
of Housing and Urban Development, dated September 8, 1994;
Mortgage of Quality Care Centers of Massachusetts, Inc. in favor
of Charles River Mortgage, dated September 8, 1994; Mortgage Note
of Quality Care Centers of Massachusetts, Inc. in favor of
Charles River Mortgage Company, Inc., in the amount of
$6,926,700, dated September 8, 1994; Security Agreement by and
between Quality Care Centers of Massachusetts, Inc. and Charles
River Mortgage Company, Inc., dated September 8, 1994; Standard
Form Agreement Between Owner and Architect for Housing Services,
by and between Quality Care Centers of Massachusetts, Inc. and
David H. Dunlap Associates, Inc., dated November 5, 1992;
Construction Contract by and between Quality Care Centers of
Massachusetts, Inc. and Corcoran Jennison Construction Co., Inc.,
dated September 8, 1994, and related documents.
#10.62 First Amendment to Management Agreement, by and between STL,
Inc.and Lillian Furbish, dated September 21, 1994.
*10.63 Asset Purchase Agreement by and between Good Hope Center, Inc.
and the Company, dated as of January 21, 1994.
#10.64 Lease and Option Agreement, by and between NMI Realty, Inc. and
PHC of Rhode Island, Inc., dated March 16, 1994.
#10.65 Tenant Estoppel Certificate of PHC of Rhode Island, Inc. to
Fleet National Bank, dated September 13, 1994.
#10.66 Subordination, Non-Disturbance and Attornment Agreement, by
and among Fleet National Bank, PHC of Rhode Island, Inc.
and NMI Realty, Inc., dated September 13, 1994.
#10.67 Secured Promissory Note of PHC of Rhode Island, Inc. in favor
of Good Hope Center, Inc., dated March 16, 1994, in the amount of
$116,000.
#10.68 Asset Sale Agreement by and between Harbor Oaks Hospital
Limited Partnership and the Company, dated June 24, 1994.
#10.69 Lease Agreement by and between Conestoga Corp. and PHC, Inc.,
dated July 11, 1994.
#10.70 Letter from counsel of PHC, Inc. to Massachusetts Department of
Public Health, dated August 31, 1994, requesting, on behalf of
the Company and ENOBLE, that the Massachusetts Department of
Public Health place them on the agenda of the Public Health
Council, with attachments.
++10.71 Sale and Purchase Agreement by and between PHC of Rhode
Island, Inc. and LINC Finance Corporation VIII, dated January 20,
1995.
+++10.72 Sale and Purchase Agreement by and Between PHC of Virginia, Inc.
and LINC Finance Corporation VIII, dated March 6, 1995.
10.73 Renewal of Lease Addendum between Palmer Wells Enterprises and
PHC of Utah, Inc., executed February 20, 1995.
+++++10.74 Employee Stock Purchase Plan
+++++10.75 Non-Employee Stock Option Plan
10.76 Loan and Security Agreement by and between PHC of Nevada, Inc.
and Linc Anthem Corp.
10.77 Secured Promissory Note for $7,500,000 by and between PHC
of Nevada, Inc. and Linc Anthem Corp.
10.78 Loan and Security Agreement for $1,000,000 by and between PHC
of Utah, Inc. and HealthPartners Funding LP.
10.79 HealthPartners Revolving Credit Note
10.80 Guaranty of HealthPartners Revolving Credit Note
10.81 Stock Pledge by and between PHC, Inc. and Linc Anthem Corporation
10.82 Asset Purchase Agreement by and between Harmony Counseling, Inc.
and PHC, Inc.
10.83 Asset Purchase Agreement by and between Total Concept Employee
Assistance Program, Inc.
+16.1 Letter on Change in Independent Public Accountants.
21.1 List of Subsidiaries.
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995
+ Filed with the same exhibit number as an exhibit to the Company's
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission (Registration No. 33-71418) or an amendment thereto and
incorporated herein by reference.
++ Filed as an exhibit to the Company's quarterly report on Form 10-QSB,
filed with the Securities and Exchange Commission (Commission File number
0-23524) on February 14, 1995 and incorporated herein by reference.
+++ Filed as an exhibit to the Company's quarterly report on Form 10Q-SB,
filed with the Securities and Exchange Commission (Commission file number
0-23524) on May 15, 1995 and incorporated herein by reference.
++++ Filed as an exhibit to the Company's quarterly report on Form 10Q-SB,
filed with the Securities and Exchange Commission (Commission file number
0-23524) on February 16, 1996 and incorporated herein by reference.
+++++ Filed as an exhibit to the Company's Form 10-C dated February 22, 1996.
* Filed as an exhibit to the amendment to the Company's Current Report on
Form 8-K, filed with the Securities Exchange Commission on August 15,
1994 and incorporated herein by reference.
u Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHC, INC.
Date: October 4, 1996 By: /S/ BRUCE A. SHEAR
-------------------
Bruce A. Shear, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/S/ BRUCE A. SHEAR President, Chief October 4, 1996
- - ------------------
Bruce A. Shear Executive Officer and
Director (principal
executive officer)
/S/ PAULA C. WURTS October 4, 1996
- - ------------------
Paula C. Wurts Controller and Assistant Treasurer
(principal financial
and accounting officer)
/S/ GERALD M. PERLOW Director October 4, 1996
- - ---------------------
Gerald M. Perlow
/S/ DONALD E. ROBAR Director October 4, 1996
- - -------------------
Donald E. Robar
PHC, INC. AND SUBSIDIARIES
- I N D E X -
PAGE
NUMBER
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheets of PHC, Inc.
and subsidiaries as at June 30, 1996 and June 30, 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated financial position of
PHC, Inc. and subsidiaries at June 30, 1996 and June 30, 1995, and the results
of their operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
Cambridge, Massachusetts
September 6, 1996
F-2
<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
- - -------------
A S S E T S
1996 1995
-----------
- - ------ -----
<S>
<C> <C>
Cash and cash equivalents......................... $293,515 $ 586,738
Accounts receivable, net of allowance for bad
debts of $1,492,983 at June 30, 1996 and
$815,459 at June 30, 1995 (Notes A and M). ...... 8,866,065 5,964,279
Prepaid expenses . . . . . . . . . . . . ......... 259,893 174,539
Other receivables and advances . . . . . . . . . . 66,513 81,889
Deferred income taxes (Note F) . . . . . . . . . . 515,300 251,863
Total current assets. . . . . . . . . . . . . 10,001,286 7,059,308
Accounts receivable, noncurrent (Note A) . . . . . . 740,000 656,734
Loans receivable. . . . . . . . . . . . . . . . . . 113,805 96,343
Property and equipment, net (Notes A and B) . . . . . 7,884,063 7,086,637
Deferred income taxes (Note F). . . . . . . . . . . . 154,700
Deferred financing costs, net of amortization . . . . 702,948
Goodwill, net of accumulated amortization (Note A). . 709,573
Other assets (Note A) . . . . . . . . . . . . . . . . 454,160 352,795
Net assets of operations held for sale (Note J) . . . 56,682 163,568
T O T A L . . . . . . . . . . . . . . . . .$20,817,217 $15,415,385
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . .$3,127,052 $ 2,282,765
Notes payable - related parties (Note E) . . . . . . 56,600 46,598
Notes payable - bank . . . . . . . . . . . . . . . . 100,000
Current maturities of long-term debt (Note C). . . . 403,894 61,438
Current portion of obligations under capital leases
(Note D) . . .................................... 88,052 59,212
Accrued payroll, payroll taxes and benefits. . . . . 715,515 535,525
Accrued expenses and other liabilities . . . . . . . 738,784 567,846
Deferred revenue . . . . . . . . . . . . . . . . . . 55,453
Total current liabilities . . . . . . . . . . 5,129,897 3,708,837
Long-term debt and accounts payable (Note C). . . . . . 7,754,262 5,682,036
Obligations under capital lease (Note D). . . . . . . . 1,468,475 1,474,976
Notes payable - related parties (Note E). . . . . . . . 47,394 88,996
Total noncurrent liabilities. . . . . . . . . 9,270,131 7,246,008
Total liabilities . . . . . . . . . . . . . . 14,400,028 10,954,845
Commitments and contingent liabilities (Notes G, H, K, M, N and O)
Stockholders' equity (Notes H and K):
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued. . . . . . . ................
Class A common stock, $.01 par value; 10,000,000
shares authorized, 2,293,568 and 1,504,662 shares
issued in 1996 and 1995 . . . ...................... 22,936 15,047
Class B common stock, $.01 par value; 2,000,000
shares authorized, 812,237 and 898,795 shares
issued in 1996 and 1995, convertible into one share
of Class A common stock ............................ 8,122 8,988
Class C common stock, $.01 par value; 200,000 shares
authorized and 199,816 and 199,966 shares issued in 1996
and 1995 ............................................ 1,998 2,000
Additional paid-in capital . . . . . . . . . . . . . 8,078,383 5,554,874
Notes receivable related to purchase of 31,000 shares
of Class A common stock ............................. (63,928) (75,362)
Accumulated deficit. . . . . . . . . . . . . . . . . (1,630,322)(1,045,007)
Total stockholders' equity. . . . . . . . . . . . . . . 6,417,189 4,460,540
T O T A L . . . . . . . . . . ... . . $20,817,217 $15,415,385
=====================================================================
</TABLE>
The accompanying notes are an integral part hereof.
F-3
<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
1996 1995
---- ----
Revenues:
Patient care, net (Note A) . . . . . . . . $21,569,594 $16,408,461
Other. . . . . . . . . . . . . . . . . . . 233,164 128,157
-------- -----------
Total revenue . . . . . . . . . . . 21,802,758 16,536,618
------------ ----------
Operating expenses:
Patient care expenses. . . . . . . . . . . 12,004,383 9,248,317
Cost of management contracts . . . . . . . 146,407 149,317
Administrative expenses. . . . . . . . . . 9,694,802 6,223,815
------------ ----------
Total operating expenses. . . . . . 21,845,592 15,621,449
------------ -----------
Income (loss) from operations . . . . . . . . (42,834) 915,169
------------ -----------
Other income (expense):
Interest income. . . . . . . . . . . . . . 14,486 28,870
Other income . . . . . . . . . . . . . . . 211,292 80,317
Start-up costs (Note A). . . . . . . . . . (128,313)
Interest expense . . . . . . . . . . . . . (863,484) (577,544)
Gain on disposal of center (Note G[2]) . . 72,756
Gain (loss) from operations held for sale
(Note J) . . . . . . . . . . . . . . . . 11,947 (9,789)
----------- ------------
Total other income (expense). . . . (754,072) (405,390)
----------- ------------
Income (loss) before income taxes . . . . . . (796,906) 509,779
Income taxes (benefit) (Note F) . . . . . . . (211,591) 241,108
---------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . $ (585,315) $ 268,671
=========== ===========
Net income (loss) per share (Note A). . . . . $(.22) $.11
====== ====
Weighted average number of shares outstanding 2,709,504 2,403,457
========== =========
The accompanying notes are an integral part hereof.
F-4
<PAGE>
<TABLE>
<CAPTION>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Class B Class C Additional Notes
Common Stock Common Stock Common Stock Paid-in Receivable Accumulated
Shares Amount Shares Amount Shares Amount Capital for Stock Deficit Total
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1994 . . 1,483,500 $14,835 920,000 $9,200 200,000 $2,000 $5,554,902 $(93,000) $(1,313,678) $4,174,259
Payment of notes
receivable ............... 17,638 17,638
Conversion of shares ...... 21,162 212 (21,205) (212) (34) (28) (28)
Net income, year ended .... -- -- --------- -------- --- -----------
June 30, 1995. - 268,671 268,671
Balance - June 30, 1995 . . . 504,662 15,047 898,795 8,988 199,966 2,000 5,554,874 (75,362) (1,045,007) 4,460,540
Payment of notes receivable.. 11,434 11,434
Conversion of shares. . . . 86,554 866 (86,558) (866) (150) (2) 2 - 0 -
Exercise of options . . . . 22,500 225 113,575 113,800
Issuance of stock for
obligations in lieu of cash . 6,600 66 36,184 36,250
Exercise of bridge loan
warrants................... 33,509 335 153,617 153,952
Sale of stock in connection
with private placement. . . 493,750 4,937 1,970,063 1,975,000
Costs related to private
placement................. (442,395) (442,395)
Exercise of IPO warrants. 21,493 215 137,785 138,000
Issuance of shares with
acquisition............ 87,000 870 392,678 393,548
Exercise of private placement
warrants . . . . . . . 37,500 375 149,625 150,000
Amount paid for options, not
yet issued . . . . . . . 9,375 9,375
Compensatory stock options. . 3,000 3,000
Net loss, year ended June 30,
1996....................... (585,315) (585,315)
--------- -------- -------- ------ ------- -------- --------- -------- --------- -------
BALANCE - JUNE 30, 1996 . . 2,293,568 $22,936 812,237 $8,122 199,816 $1,998 $8,078,383 $(63,928) $(1,630,322) $6,417,189
========== ======== ======== ======= ======== ====== =========== ========= ============ ========
</TABLE>
The accompanying notes are an integral part hereof.
F-5
<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
1996 1995
-------------------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . $(585,315) $ 268,671
Adjustments to reconcile
net income (loss) to net cash
used in operating activities:
Deferred tax provision (benefit). . (418,137) 173,137
Depreciation and amortization . . . 554,025 238,547
(Increase) in accounts receivable . (2,985,052) (1,786,691)
Compensatory stock options and
stock issued for obligations . . . 39,250
(Increase) in prepaid expenses and
other curren assets. . . . . . . (69,978) (150,933)
(Increase) decrease in other assets.... (107,711) 162,570
Decrease in net assets of operations
held for sale........................ 106,886 32,303
Increase in accounts payable. . . . ..... 1,414,089 314,196
Increase in accrued expenses and other
liabilities............................ 295,475 258,175
------- -------
Net cash used in operating activities. . . (1,756,468) (490,025)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment
and intangibles .................... (1,557,419) (3,557,378)
Loan receivable . . . . . . . . . . . . (17,462) (91,343)
------------ ------------
Net cash used in investing activities. . . (1,574,881) (3,648,721)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of options
and warrants . . . ................. 576,561 17,610
Net proceeds from private placement . . . 1,532,605
Proceeds from borrowings. . . . . . . . . 2,043,748 5,149,643
Payments on debt. . . . . . . . . . . . . (402,828) (2,651,546)
Deferred Financing Costs . . . . . . . . (711,960)
------------ ------------
Net cash provided by financing
activities............................ 3,038,126 2,515,707
------------ -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS. . . . . . . . ............ (293,223) (1,623,039)
Beginning balance of cash and cash
equivalents . . . . . ................ 586,738 2,209,777
------------ -----------
ENDING BALANCE OF CASH AND CASH
EQUIVALENTS. . . . . . . ............. $293,515 $ 586,738
============ ===========
Supplemental cash flow information:
Cash paid during the year for interest. . $779,898 $ 575,000
Cash paid during the year for income
taxes. . . . . . ...................... 187,120 40,200
Supplemental disclosures of noncash investing
and financing activities:
Stock issued for acquisition of property
and equipment and intangibles. .. .. .. 393,548 84,242
Long-term debt assumed upon acquisition . 84,242
=============== ===============
Note payable due for litigation
settlement. . . . . .................. 225,000
=============== ===============
Capital leases. . . . . . . . . . . . . 94,699
<PAGE>
The accompanying notes are an integral part hereof.
F-6
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] BASIS OF PRESENTATION AND CONSOLIDATION:
PHC, Inc. ("PHC") operates substance abuse treatment centers in
several locations in the United States, a nursing home in Massachusetts, a
psychiatric hospital in Michigan and psychiatric outpatient facilities in Nevada
and Kansas. The consolidated financial statements include PHC and its
subsidiaries, all of which are 100% owned (collectively the "Company"):
PHC of Utah, Inc. ("PHU"), PHC of Virginia, Inc. ("PHV") and PHC of Rhode
Island, Inc. ("PHR") provide treatment of addictive disorders and chemical
dependency. PHC of Michigan, Inc. ("PHM") provides inpatient psychiatric care.
PHC of Nevada, Inc. ("PHN") and PHC of Kansas, Inc. ("PHK") provide psychiatric
treatment on an outpatient basis. Quality Care Centers of Massachusetts, Inc.
("Quality Care") operates a long-term care facility known as the Franvale
Nursing and Rehabilitation Center. STL, Inc. ("STL") operated day care centers
(see Note J - Operations Held For Sale). All significant intercompany
transactions and balances have been eliminated in consolidation.
For the year ended June 30, 1996, the Company incurred costs related
to an addition at Quality Care prior to obtaining a license to admit
patients.
These costs, amounting to $128,313, are included in other expense in the
accompanying statement of operations under the caption "Start-up Costs".
[2] REVENUES AND ACCOUNTS RECEIVABLE:
Patient care revenues are recorded at established billing rates or
at the amount realizable under agreements with third-party payors, including
Medicaid and Medicare. Revenues under third-party payor agreements are subject
to examination and adjustment, and amounts realizable may change due to periodic
changes in the regulatory environment. Provisions for estimated third party
payor settlements are provided in the period the related services are rendered.
Differences between the amounts accrued and subsequent settlements are recorded
in operations in the year of settlement.
A substantial portion of the Company's revenues at the Franvale
Nursing and Rehabilitation Center is derived from patients under the Medicaid
and Medicare programs. There have been and the Company expects that there will
continue to be, a number of proposals to limit Medicare and Medicaid
reimbursement, as well as reimbursement from certain private payor sources for
both Franvale and substance abuse treatment center services. The Company cannot
predict at this time whether any of these proposals will be adopted or, if
adopted and implemented, what effect such proposals would have on the Company.
(continued)
F-7
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(continued)
[2] REVENUES AND ACCOUNTS RECEIVABLE: (continued)
Medicaid reimbursements are currently based on established rates
depending on the level of care provided and are adjusted proactively at the
beginning of each calendar year. Medicare reimbursements are currently based on
provisional rates that are adjusted retroactively based on annual, calendar cost
reports filed by the Company with Medicare. The Company's 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 substantial receivables from Medicaid and Medicare,
relating to its long-term care facility aggregating approximately $2,350,000
(including $415,000 related to Medicare adjustments) at June 30, 1996 which
constitutes a concentration of credit risk should these agencies defer or be
unable to make reimbursement payments as due.
[3] PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the assets using accelerated and
straight-line methods. The estimated useful lives are as follows:
Estimated
ASSETS USEFUL LIFE
Buildings. . . . . . . . . . 20 through 39 years
Furniture and equipment. . . 3 through 10 years
Motor vehicles . . . . . . . 5 years
Leasehold improvements . . . term of lease
[4] OTHER ASSETS:
Other assets represent deposits, deferred expenses and costs
incurred in the organization of the Companies. Organization costs are amortized
over a five-year period using the straight-line method.
(continued)
F-8
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(continued)
[5] 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 straight-line basis over their
estimated useful lives.
[6] EARNINGS PER SHARE:
Net income or loss per share is based on the weighted average number
of shares of common stock outstanding during each period excluding Class C
common shares held in escrow. Common stock equivalents have been excluded since
they are antidilutive.
[7] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
[8] CASH AND CASH EQUIVALENTS:
Cash and cash equivalents are short-term highly liquid investments
with original maturities of less than three months.
(NOTE B) - PROPERTY AND EQUIPMENT:
Property and equipment is comprised as follows:
JUNE 30,
1996 1995
Land. . . . . . . . . . . . . $ 251,759 $ 239,259
Buildings . . . . . . . . . . 7,338,838 3,834,799
Furniture and equipment . . . 1,404,716 1,027,413
Motor vehicles. . . . . . . . 50,889 42,459
Leasehold improvements. . . . 301,067 216,633
Construction (Note D) . . . . - 0 - 2,753,679
----------- ----------
9,347,269 8,114,242
Less accumulated depreciation 1,463,206 1,027,605
T o t a l . . . . . $7,884,063 $7,086,637
=========== ==========
(continued)
F-9
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - LONG-TERM DEBT:
At June 30, 1996, the Company substantially completed an addition and
renovation to the Quality Care facility in which 37 new beds were added. The
Company financed this addition and renovation through the United States
Department of Housing and Urban Development ("HUD"). At the final endorsement,
which took place subsequent to year-end in July 1996, an additional $479,308 of
costs were advanced bringing the final balance of the note payable to
$6,781,294. At June 30, 1996 deferred financing costs related to the
construction note payable totalled $711,960 and are being amortized over the
life of the note. Interest costs capitalized in conjunction with the
construction approximated $65,250 and $89,000 at June 30, 1996 and June 30,
1995.
Long-term debt is summarized as follows:
JUNE 30,
1996 1995
Notes payable to various entities with interest
ranging from 8% to 9% requiring monthly payments
aggregating approximately $4,000 and maturing
through May 2001. . . . . . . . . . . . $ 58,154 $ 73,772
Note payable due in monthly installments of $2,000
including imputed interest at 8% through April
1, 1999, when the principal is due . .. . 60,163 78,145
9% mortgage note due in monthly installments of
$4,850 through July 1, 2012, when the
remaining principal balance is payable. . .. . . . 505,485 518,224
Mortgage note payable . . . . . . . . . . . 23,690
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 . . . . . . . . 735,213 ---
Construction obligations:
Construction note payable collateralized by
real estate and insured by HUD due in monthly
installments of $53,635, including interest at
9.25%, through December 2035. . . . . . 6,301,986 5,049,643
Other construction obligations to be added to note
payable . . . . . . . . ................ 344,802
Note payable to a former vendor, payable
in monthly installments of $19,728 including
interest at 9.5% through February 1997
(see Note N). . . . . . ................. 152,353
----------
T o t a l. . . . . . . . . . . . 8,158,156 5,743,474
Less current maturities. . . . . . . . . . 403,894 61,438
----------- ----------
T o t a l. . . . . . . . . . . . $7,754,262 $5,682,036
=========== ==========
(continued)
F-10
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - LONG-TERM DEBT: (continued)
Maturities of long-term debt are as follows as at June 30, 1996:
Year Ending
JUNE 30, AMOUNT
1997 . . . . . . . . . . . . . $ 403,894
1998 . . . . . . . . . . . . . 273,424
1999 . . . . . . . . . . . . . 302,539
2000 . . . . . . . . . . . . . 157,923
2001 . . . . . . . . . . . . . 56,977
Thereafter . . . . . . . . . . 6,618,597
----------
T o t a l. . . . . . $7,813,354
In May 1996, PHU entered into a loan and security agreement to borrow up
to $1,000,000 under a revolving line of credit. This agreement will be in effect
for a period of two years with an option to renew for one-year periods
thereafter. Principal is due upon the expiration of the term of the revolver.
Interest is payable monthly at the prime rate plus 2.25%. The revolver is
collateralized by substantially all the assets of PHU. At June 30, 1996 there
were no borrowings under this agreement.
(NOTE D) - CAPITAL LEASE OBLIGATIONS:
At June 30, 1996, the Company is obligated under various capital leases
for equipment and real estate (see Note L) providing for monthly payments
aggregating approximately $19,000 for fiscal 1997 and terms expiring from
December 1996 through February 2014.
The carrying value of assets under capital leases is as follows:
JUNE 30,
1996 1995
Building. . . . . . . . . . . . $1,477,800 $1,477,800
Equipment and improvements. . . 214,754 137,207
Less accumulated depreciation . (222,100) (137,057)
$1,470,454 $1,477,950
(continued)
F-11
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - CAPITAL LEASE OBLIGATIONS: (continued)
Future minimum lease payments under the terms of the capital lease
agreements are as follows at June 30, 1996:
Year Ending Real
JUNE 30, EQUIPMENT PROPERTY TOTAL
1997. . . . . . . . $ 68,895 $ 231,000 $ 299,895
1998. . . . . . . . 56,728 231,000 287,728
1999. . . . . . . . 33,262 239,000 272,262
2000. . . . . . . . 15,075 259,248 274,323
2001. . . . . . . . 3,098 272,208 275,306
Thereafter. . . . . - 0 - 4,886,036 4,886,036
--------- ------------ -----------
Total future
minimum lease
payments . . . . 177,058 6,118,492 6,295,550
Less amount
representing
interest . . . . (29,711) (4,709,312) (4,739,023)
--------- ------------ ------------
Present value of
future minimum
lease payments . 147,347 1,409,180 1,556,527
Less current
portion. . . . . 53,936 34,116 88,052
--------- ------------ -----------
Long-term
obligations
under capital
lease. . . . . . $ 93,411 $ 1,375,064 $ 1,468,475
========= ============ ===========
(continued)
F-12
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - NOTES PAYABLE - RELATED PARTIES:
Related party debt is summarized as follows:
JUNE 30,
1996 1995
Note payable, president and
principal stockholder,
interest at 8%, due in
installments through
1998 . . . . . . . . . . . . $ 78,996 $110,596
Notes payable, other related
parties interest at 12% and
payable on demand. . . . . . . . 24,998 24,998
--------- --------
T o t a l . . . . . . . . 103,994 135,594
Less current maturities . . . . . . 56,600 46,598
--------- --------
T o t a l . . . . . . . . $ 47,394 $ 88,996
========= ========
Accrued interest related to these notes totals $3,652 and $21,950 at June
30, 1996 and June 30, 1995, respectively.
Maturities of related party debt are as follows at June 30, 1996:
Year Ending
JUNE 30, AMOUNT
1997. . . . . . . . . . . . . . . . $ 56,600
1998. . . . . . . . . . . . . . . . 31,600
1999. . . . . . . . . . . . . . . . 15,794
--------
T o t a l . . . . . . . . $103,994
Related party interest on notes receivable related to the purchase of
Class A common stock approximated $4,295 and $3,000 for the year ended June
30,
1996 and June 30, 1995, respectively.
(NOTE F) - INCOME TAXES:
For the year ended June 30, 1995 the Company utilized net operating loss
carryforwards of approximately $754,000 to reduce taxable income. No significant
state income taxes were paid prior to June 30, 1995.
(continued)
F-13
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - INCOME TAXES: (continued)
The Company had the following deferred tax assets included in
the
accompanying balance sheets:
JUNE 30,
1996 1995
Temporary differences attributable to:
Allowance for doubtful accounts . . . . $510,000 $251,863
Depreciation. . . . . . . . . . . . . . 154,700
Other . . . . . . . . . . . . . . . . . 5,300
--------------------
Total deferred tax asset . . . . 670,000 251,863
Less current portion. . . . . . . . . . 515,300 251,863
--------- --------
Long-term portion. . . . . . . . $154,700 $ - 0 -
========= =======
The Company had no deferred tax liabilities at June 30, 1996 and June 30,
1995.
Income tax expense for the years ended is as follows:
JUNE 30,
1996 1995
Deferred income taxes (benefit) . . . $(418,137) $173,000
Current income taxes. . . . . . . . . 206,546 68,108
---------- --------
T o t a l . . . . . . . . . $(211,591) $241,108
========== ========
(continued)
F-14
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - INCOME TAXES: (continued)
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,
1996 1995
Income taxes (benefit) at statutory rate. . . $(271,000) $173,000
State income taxes. . . . . . . . . . . . . . 80,850 48,108
Increase due to nondeductible items,
primarily penalties and travel and
entertainment expenses . . . . . . . . . . 12,100 20,000
Other . . . . . . . . . . . . . . . . . . . . (33,541)
----------
T o t a l . . . . . . . . . . . . . $(211,591) $241,108
========== ========
(NOTE G) - COMMITMENTS AND CONTINGENT LIABILITIES:
[1] OPERATING LEASES:
The Company leases office and treatment facilities and furniture and
equipment under operating leases expiring on various dates through May 2000.
Rent expense for the years ended June 30, 1996 and June 30, 1995 was
approximately $450,000 and $386,000, respectively. Minimum future rental
payments under noncancelable operating leases having remaining terms in excess
of one year as of June 30, 1996 are as follows:
Year Ending
JUNE 30, AMOUNT
1997 . . . . . . . . . . . . . . . $ 422,791
1998 . . . . . . . . . . . . . . . 419,490
1999 . . . . . . . . . . . . . . . 205,380
2000 . . . . . . . . . . . . . . . 59,235
----------
Total minimum future
rental payments . . . $1,106,896
(continued)
F-15
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - COMMITMENTS AND CONTINGENT LIABILITIES: (continued)
[2] CENTER CLOSING:
The Company decided to discontinue operations at its treatment
center in California because of poor financial performance and discharged its
last patient in August 1994. The results of operations for the year ended June
30, 1995 reflect revenues of approximately $90,000 and a net gain of
approximately $22,000 from this center.
(NOTE H) - STOCK PLANS:
The Company has three stock plans: a stock option plan, an employee stock
purchase plan and a nonemployee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
has the authority to select the optionees and determine the terms of the options
including: (i) the number of shares, (ii) option exercise terms, (iii) the
exercise or purchase price (which in the case of an incentive stock option will
not be less than the market price of the Class A common stock as of the date of
grant), (iv) type and duration of transfer or other restrictions and (v) the
time and form of payment for restricted stock and upon exercise of options.
In October 1995, the Company adopted an employee stock purchase plan which
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. At June 30, 1996, 100,000 shares were available for purchase. During
the year ended 1996, there were no shares purchased under this plan.
Also in October 1995, the Company adopted a nonemployee directors' stock
option plan that provides for the grant of nonstatutory stock options
automatically at the time of each annual meeting of the Board. During the
meeting in which this plan was approved, options for 5,500 shares were granted
under this plan. The Company has reserved 30,000 shares for issuance under this
plan. Each outside director shall be granted an option to purchase 2,000 shares
of Class A common stock at fair market value, vesting 25% immediately and 25% on
each of the first three anniversaries of the grant.
(continued)
F-16
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - STOCK PLAN: (continued)
The Company had the following activity in its stock option plans for 1996
and 1995:
Number of Option Price
SHARES PER SHARE
Option plans:
Balance - June 30, 1994. . . 60,500 $5.00 - $6.37
Granted. . . . . . . . . . . 39,000 $5.13
Cancelled. . . . . . . . . . (7,500) $5.00
Exercised. . . . . . . . . .
Balance - June 30, 1995. . . 92,000 $5.00 - $6.37
Granted. . . . . . . . . . . 46,500 $5.25 - $7.00
Cancelled. . . . . . . . . . (1,250) $5.00
Exercised. . . . . . . . . . (22,500) $5.00 - $5.13
--------
Balance - June 30, 1996. . . 114,750 $5.00 - $7.00
========
Options for 68,625 shares are exercisable as of June 30, 1995 at an
average price of $5.20.
During fiscal 1994 the Company also issued restricted stock to certain of
the directors and officers of the Company for the purchase of 31,000 shares at a
purchase price of $4.00 per share. The directors and officers were required to
pay 25% of the purchase price of their shares immediately, with the balance
being payable quarterly over three years together with interest at 6% per year
until paid in full.
(continued)
F-17
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - SEGMENT INFORMATION:
The Company's continuing operations are classified into two primary
business segments: substance abuse/psychiatric treatment and long-term care.
YEAR ENDED JUNE 30,
1996 1995
Revenue:
Substance abuse/psychiatric
treatment. . . . . . . . . . $16,525,672 $12,227,990
Long-term care . . . . . . . . 5,043,922 4,180,471
Other. . . . . . . . . . . . . 233,164 128,157
------------ -----------
T o t a l . . . . . . . $21,802,758 $16,536,618
============ ===========
Income (loss) from operations:
Substance abuse/psychiatric
treatment. . . . . . . . . . $ 818,188 $ 649,395
Long-term care . . . . . . . . (826,463) 243,335
Other. . . . . . . . . . . . . 146,407 149,317
General corporate. . . . . . . (180,966) (126,878)
Other income (expense), net. . (754,072) (405,390)
------------ ------------
Income (loss) before income
taxes . . . . . . . . . . . . . $ (796,906) $ 509,779
============ ===========
Depreciation and amortization:
Substance abuse/psychiatric
treatment. . . . . . . . . . $ 349,437 $ 131,109
Long-term care . . . . . . . . 176,450 78,332
General corporate. . . . . . . 28,138 29,106
------------ -----------
$ 554,025 $ 238,547
============ ===========
Capital expenditures:
Substance abuse/psychiatric
treatment. . . . . . . . . . $ 233,466 $ 496,793
Long-term care . . . . . . . . 982,978 2,953,679
General corporate. . . . . . . 16,583 36,542
------------ -----------
$ 1,233,027 $ 3,487,014
============ ===========
Identifiable assets:
Substance abuse/psychiatric
treatment. . . . . . . . . . $10,877,197 $ 8,308,656
Long-term care . . . . . . . . 8,619,133 6,091,763
General corporate. . . . . . . 1,264,205 851,398
Net assets of operations held
for sale . . . . . . . . . . 56,682 163,568
------------ -----------
T o t a l . . . . . . . $20,817,217 $15,415,385
============ ===========
(continued)
F-18
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - OPERATIONS HELD FOR SALE:
Over the past several years, the Company has been systematically phasing
out its day care center operations (STL). At June 30, 1996 and June 30, 1995,
the Company had net assets relating to its day care centers amounting to
approximately $57,000 and $164,000, respectively, which primarily represents the
depreciated cost of real estate. At June 30, 1996 the Company had one real
estate parcel remaining which the Company has offered for sale.
The Company does not anticipate any significant future losses due to the
day care center operations or the ultimate sale of the real estate parcels.
(NOTE K) - CERTAIN CAPITAL TRANSACTIONS:
In addition to the outstanding options under the Company's stock plan
(Note I), the Company has the following options and warrants outstanding at June
30, 1996:
Number of Exercise Expiration
DESCRIPTION UNITS/SHARES PRICE DATE
Bridge warrants 4,814 units $4.57 per unit September
1998
Unit purchase option 146,077 units $5.99 per unit March 1999
IPO warrants 1,657,821 shares $7.50 per share March 1999
Private placement warrants 703,125 shares $4.00 per share January 1999
Bridge warrants 33,696 shares $7.50 per share March 1999
Incentive bridge warrants 8,424 shares $6.00 per share December 1998
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.
(continued)
F-19
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE K) - CERTAIN CAPITAL TRANSACTIONS: (continued)
In February 1996, the Company issued in a private placement units
comprised of 6,250 shares of Class A common stock and warrants to purchase
9,375
shares of Class A common stock. A total of 79 units, representing 493,750 shares
of Class A common stock and 740,625 warrants were issued in the offering at a
gross purchase price of $1,975,000. Fees and expenses payable in connection with
the offering total $442,395 of fees and expenses. Subject to the terms and
conditions of the applicable warrant agreement, each warrant is exercisable for
one share of Class A common stock at an exercise price of $4.00, subject to
adjustment upon certain events. The warrants expire in January 1999. Upon the
issuance of the units described above, certain additional shares of Class A
common stock or securities exercisable therefor became issuable under the
antidilution provisions of certain outstanding securities of the Company.
Also, in connection with the Company's initial public offering, present
stockholders have agreed to restrictions on approximately 200,000 shares
(designated Class C common stock) whereby some or all of those shares will be
transferred to the Company for no consideration if certain future earnings
targets are not achieved through June 30, 1997. The earnings target for fiscal
1996 was net income of $3.0 million or more to have restrictions released and
increases to $4.0 million for the year ending June 30, 1997. When, and if, the
share restrictions are released, the Company will incur an expense based on the
fair market value of the shares at the time the restrictions lapse.
(NOTE L) - ACQUISITIONS:
On September 20, 1994 the Company purchased a 64-bed healthcare facility
located in Michigan ("PHM") which provides psychiatric and other specialty
services to patients. The Company acquired the tangible, intangible, and real
property owned by the seller of the business for consideration consisting of
$759,307 in cash. The purchase price was allocated to the assets acquired as
follows:
Land. . . . . . . . . . . . . . . . . . $ 20,959
Building. . . . . . . . . . . . . . . . 644,152
Equipment and other assets. . . . . . . 94,196
T o t a l . . . . . . . . . . $759,307
(continued)
F-20
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - ACQUISITIONS: (continued)
On November 1, 1995, the Company purchased an outpatient facility located
in Nevada ("PHN") which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of $631,000 in cash and 75,000 shares of
Class A common stock of PHC, Inc. which were valued at $323,000. The purchase
price was allocated as follows:
Accounts receivable . . . . . . . . . . $231,509
Equipment and other assets. . . . . . . 54,397
Covenant not to compete . . . . . . . . 10,500
Goodwill. . . . . . . . . . . . . . . . 671,359
Accrued benefits payable. . . . . . . . (13,765)
$954,000
On March 29, 1996 PHN entered into a lease agreement for the real estate.
The lease payments, which increase annually, are due in equal monthly
installments over a period of four years.
On March 16, 1996, the Company purchased an outpatient facility located in
Kansas ("PHK") which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of 12,000 shares of Class A common stock
of PHC, Inc., valued at $70,548. The purchase price was allocated as follows:
Equipment and other assets. . . . . . . $ 20,000
Covenant not to compete . . . . . . . . 10,000
Goodwill. . . . . . . . . . . . . . . . 40,548
--------
$ 70,548
In connection with the acquisition, PHK entered into a lease agreement for
the real estate. The lease payments, which increase annually, are due in equal
monthly installments over a period of three years.
(continued)
F-21
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - ACQUISITIONS: (continued)
Based on unaudited data, the pro forma results of operations as though the
foregoing acquisitions were made at the beginning of the periods indicated below
are as follows. Management does not believe such results are indicative of
future operations.
YEAR ENDED JUNE 30,
(in thousands
except per share
data)
1996 1995
Revenues. . . . . . . . . . $22,135 $17,588
Operating expenses. . . . . 22,126 16,559
Income from operations. . . 9 1,029
Other expenses, including
income taxes . . . . . . 552 (690)
-------- --------
Net income (loss). .. . . $ (543) $ 339
======== =======
Pro forma income (loss)
per share.. .. .. .. .. $(.20) $.14
(NOTE M) - SALE OF RECEIVABLES:
The Company has entered into a sale and purchase agreement whereby
third-party receivables are sold at a discount with recourse. The interest rate
is calculated at 5.5% plus the six-month LIBOR rate which is 11.3% and 11.5% at
June 30, 1996 and June 30, 1995, respectively. The amount of receivables subject
to recourse at June 30, 1996 totalled approximately $805,000 and the agreement
states that total sales of such outstanding receivables are not to exceed
$4,000,000. Proceeds from the sale of these receivables totalled approximately
$3,500,000 and $2,100,000 at June 30, 1996 and June 30, 1995, respectively. The
purchase fees related to the proceeds above of approximately $73,720 and $30,000
at June 30, 1996 and June 30, 1995, respectively, are included in interest
expense in the accompanying consolidated statement of operations. The agreement
expires December 31, 1997.
(continued)
F-22
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE N) - LITIGATION:
On October 31, 1994, the Company and a supplier, NovaCare, Inc., became
parties to a Civil Action in the Superior Court Department of the Trial Court of
the Commonwealth of Massachusetts, NovaCare, Inc. ("NovaCare") is an entity
which contracted with the Company in 1992 to provide rehabilitation therapy and
related administrative services to the Company's long-term care facility. During
the year ended June 30, 1996, the parties agreed to settle all claims and
counterclaims in the Civil Action whereby no additional loss accrual was
necessary. See Note C for payment terms. NovaCare has obtained (but has not
recorded) a Real Estate Attachment for a portion of the settlement amount which
may be employed if PHC does not satisfy its obligation under the settlement
agreement.
(NOTE O) - SUBSEQUENT EVENT:
On August 31, 1996 the Company purchased the assets of an outpatient
psychiatric clinic in Michigan, which was financed through a loan of
$500,000
received in July 1996. Annual revenues for this clinic in the past
year
approximated $750,000.
F-23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHC, INC.
Date: October 4, 1996 By: /S/ BRUCE A. SHEAR
-------------------
Bruce A. Shear, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/S/ BRUCE A. SHEAR President, Chief October 4, 1996
- - ------------------
Bruce A. Shear Executive Officer and
Director (principal
executive officer)
/S/ PAULA C. WURTS October 4, 1996
- - ------------------
Paula C. Wurts Controller and Assistant Treasurer
(principal financial
and accounting officer)
/S/ GERALD M. PERLOW Director October 4, 1996
- - ---------------------
Gerald M. Perlow
/S/ DONALD E. ROBAR Director October 4, 1996
- - -------------------
Donald E. Robar
<PAGE>
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, 1996
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 [NO FEE REQUIRED] for the transition period from ________ to
Commission file number: 0-23524
PHC, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MASSACHUSETTS 04-2601571
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 LAKE STREET, SUITE 102, PEABODY, MA 01960
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number: (508) 536-2777
Securities registered under Section 12(b) of the Act:
NONE.
Securities registered under Section 12(g) of the Act:
Units (each unit consisting of one share of CLASS A COMMON
STOCK AND ONE CLASS A WARRANT)
(Title of class)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
CLASS A WARRANTS TO PURCHASE ONE SHARE OF CLASS A COMMON STOCK
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes 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. X
The issuer's revenues for the fiscal year ended June 30, 1996 were $21,802,758.
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 13, 1996, was $17,840,970. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At September 13, 1996, 2,327,624 shares of the issuer's Class A Common Stock,
806,556 shares of the issuer's Class B Common Stock and 199,816 shares of the
issuer's Class C Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The definition of the # footnote is:
# Filed as an exhibit to the Company's report on Form 10-KSB, filed with
the Securities and Exchange
Commission on September 28, 1994 and incorporated herein by
reference.
<PAGE>
