Logo Letterhead
To Our Shareholders:
Our fiscal year ended June 30, 1997 was a year that brought to us
exciting growth of our core behavioral healthcare business. The year,
however, was not without some disappointments. I would like to take this
opportunity to briefly summarize our Company's accomplishments.
1. The highlights for Pioneer Healthcare for the fiscal year were the
following:
Our core behavioral healthcare business had revenue growth of 31%.
We completed the successful acquisition of a large behavioral
management company in New York.
We signed many new contracts including our Company's largest
contract for 64,000 lives in the State of Nevada.
We had two strong additions to our Board of Directors.
2. We are disappointed in the operation of our long term care facility,
which is not part of our core behavioral healthcare business, and have
announced our intention to sell the facility.
In summary, with the continued growth of our behavioral healthcare
business and divestiture of our long term care facility that was a
significant drain on earnings, our Company will be able to focus on the
exciting opportunities presented to us that will continue to enhance our
position as a leading behavioral healthcare company.
The outlook for the future is very positive. We want to thank you for
your support of our Company and look forward to future enhancing shareholder
value.
/s/ Bruce A. Shear
President
November 24, 1997
<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, 1997
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 [NO FEE REQUIRED] for the transition period from ____ to _____.
Commission file number: 0-23524
PHC, INC.
(Name of small business issuer in its charter)
MASSACHUSETTS 04-2601571
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 LAKE STREET, SUITE 102, PEABODY, MA 01960
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (978) 536-2777
Securities registered under Section 12(b) of the Act:
NONE.
Securities registered under Section 12(g) of the Act:
Units (each unit consisting of one share of CLASS A COMMON
STOCK AND ONE CLASS A WARRANT)
(Title of class)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
CLASS A WARRANTS TO PURCHASE ONE SHARE OF CLASS A COMMON STOCK
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No X
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
The issuer's revenues for the fiscal year ended June 30, 1997 were $27,234,372.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of September 15, 1997, was $13,351,977.
(See definition of affiliate in Rule 12b-2 of Exchange Act).
At September 15, 1997, 4,470,866 shares of the issuer's Class A Common
Stock, 730,331 shares of the issuer's Class B Common Stock and 199,816 shares of
the issuer's Class C Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
<PAGE>
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
PHC, Inc.(the "Company") is a national health care company specializing in
the treatment of behavioral health care including alcohol and drug dependency
and related disorders, psychiatric care and long term care. The Company operates
3 substance abuse facilities, 6 psychiatric facilities and 1 long-term care
facility. Through the Company's facilities, it provides specialized treatment
services to substance abuse patients who typically have poor recovery prognoses
and who are prone to relapse; psychiatric care to children, adolescents and
adults, on an inpatient and outpatient basis; and traditional geriatric care and
specialized subacute services. In addition, the Company provides psychiatric
services under contract to approximately 35 long-term care facilities. The
Company's national customers include organizations within the transportation,
gaming and railroad industries such as CSX, American Airlines, MGM, General
Electric and International Brotherhood of Electrical Works.
The Company's substance abuse 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 Company operates substance abuse facilities in Salt Lake City,
Utah, West Greenwich, Rhode Island and Salem, Virginia.
Harbor Oaks Hospital, the Company's psychiatric hospital, provides
psychiatric care to adults, adolescents and children and draws patients from the
local population. This facility is also used as a mental health resource to
complement its substance abuse facilities. Harmony Healthcare and Total Concept,
EAP ("Total Concept") provide outpatient psychiatric treatment for adults,
adolescents and children with a concentration of individuals in the gaming
industry. BSC-NY, Inc. ("BSC") provides management and administrative services
to Perlow Physicians, PC which provides psychiatric services under contract to
over 35 psychotherapy and psychological practices in the greater New York City
metropolitan area. Additionally, BSC is affiliated with a number of outpatient
providers and has a contract to provide employee assistance services to the
employees of Suffolk County, New York. North Point - Pioneer, Inc. ("NPP")
provides outpatient psychiatric treatment for adults, adolescents and children
in the Metropolitan Detroit area. Pioneer Counseling of Virginia, Inc. ("PCV")
is a physicians' practice specializing in the treatment of behavioral disorders
in adults, adolescents and children in the Roanoke Valley, Virginia area.
The Company's "safety-sensitive" industry focused strategy results in
customized outcome oriented programs that the Company believes produce overall
cost savings to the patients and/or the client organization. The Company has
been able to leverage its industry knowledge to gain additional clients within
each of its targeted industries. The Company believes that 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 psychiatric treatment programs provide care at the lowest level of
intensity appropriate for the patient in an integrated delivery system including
inpatient and outpatient treatment. The integrated nature of these programs,
generally involves the same caregivers for different treatment modalities,
provides for efficient care delivery and the avoidance of repeat procedures and
diagnostic and therapeutic errors. The Company plans to expand its operations
through the acquisition or establishment of additional substance abuse and
psychiatric treatment facilities.
Franvale, the Company's long-term care facility, provides traditional
geriatric care services as well as specialized subacute services 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.
Since long term care is not a part of the Company's core business, Pioneer
continuously looks for the best strategic alternative for Franvale but no
specific plans have been formulated at this time.
The Company was organized as a Delaware corporation in 1976 under the name
American International Health Services, Inc. and changed its name to "PHC,
Inc.," on November 24, 1992. The Company operates as a holding company, doing
business under the trade name Pioneer Healthcare, with the exception of the
services provided directly by the Company under the name Pioneer Development
Support Services. The Company's executive offices are located at 200 Lake
Street, Suite 102, Peabody, Massachusetts, 01960 and its telephone number is
(978) 536-2777.
PSYCHIATRIC SERVICES INDUSTRY
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 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
included 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 on site and off site 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.
Company Operations
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 including high-risk,
relapse-prone chronic alcoholics, drug addicts, minority groups and dual
diagnosis patients (those suffering from both substance abuse and psychiatric
disorders). The Company 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.
<PAGE>
Each of the Company's facilities operates a case management program for
each patient including 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 care or services 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.
In general, the Company does not 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", 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. 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 located in
Salt Lake City, Utah, and is the oldest free-standing chemical dependency
hospital in Utah. Highland Ridge is accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"), licensed by the Utah
Department of Health and is recognized nationally for its excellence in treating
substance abuse disorders.
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.
Highland Ridge was the first private for-profit hospital to address
specifically the special needs of chemically dependent women in Salt Lake
County. 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.
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 periodically conducts or participates in research projects.
For example, Highland Ridge was the site of a recent research project being
conducted by the University of Utah Medical School. The research explored the
relationship between individual motivation and treatment outcomes. This research
was regulated and reviewed by the Human Subjects Review Board of the University
of Utah and was subject to federal standards that delineate the nature and scope
of research involving human subjects. Highland Ridge benefited 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.
SPECIALIZED TREATMENT 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. Five major transportation companies
subscribed to these services as of June 30, 1997. 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.
See "Description of Properties" - Highland Ridge.
MOUNT REGIS
Mount Regis is a 25-bed, free-standing alcohol and drug treatment center
located in Salem, Virginia, near Roanoke. The center, which was acquired in
1987, is the oldest 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. In
addition, Mount Regis operates Changes, a free standing outpatient clinic. 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.
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.
. See "Description of Properties"- Mount Regis.
See "Description of Properties"- Changes.
<PAGE>
GOOD HOPE CENTER
Good Hope is a 49-bed substance abuse treatment facility located in West
Greenwich, Rhode Island. In addition to the West Greenwich facility, Good Hope
has a satellite location providing outpatient programs in North Smithfield,
Rhode Island. Good Hope provides both adult and adolescent programs on an
inpatient, outpatient and day treatment basis. The satellite site operates both
outpatient and day treatment substance abuse programs.
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 staff of managed care and HMO
organizations. 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's substance abuse treatment program for adolescents also fills 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.
Good Hope continues to operate at a loss because of a decline in length of
stay and lower reimbursements from third party payors. However, the Company's
management team is focused on reducing expenses, increasing revenue and
enhancing programming and has recently established new contracts which should
help to stabilize the patient census.
See "Description of Properties" - Good Hope Center
DESCRIPTION OF PROPERTIES
Facility Location Square Feet Annual Rent Lease Term
____________ ___________ _________
Highland Ridge Salt Lake City, Utah 16,072 $252,000 9/30/98
Mount Regis Center Salem, Virginia 14,000 N/A N/A (1)
Changes Salem, Virginia 1,750 $ 18,000 N/A
Good Hope Center West Greenwich, RI 25,000 $231,000 N/A (2)
Good Hope Center North Smithfield, RI 2,180 $ 20,400 10/31/98
(1) The building is owned by the Company.
(2) The Company has an irrevocable option to purchase the property for
$1,150,000 on March 1, 1998 or $1,100,000 on March 1, 1999 or any
subsequent March 1 through the end of the lease.
GENERAL PSYCHIATRIC FACILITIES
Company Operations
The Company believes that its proven ability to provide high quality,
cost-effective care in the treatment of substance abuse will enable it to grow
in the related behavioral health field of psychiatric treatment. The Company's
primary competitive advantage is its ability to provide an integrated delivery
system of inpatient and outpatient care. As a result of integration, the Company
is better able to manage and track patients more effectively.
The Company's inpatient psychiatry services are offered at Harbor Oaks. The
Company currently operates five outpatient psychiatric facilities.
The Company's philosophy at these facilities is to provide the most
appropriate and efficacious care with the least restrictive modality of care.
Case management is handled by an attending physician and a case manager with
continuing oversight of the patient as the patient receives care in different
locations or programs. The integrated delivery system allows for better patient
tracking and follow-up, and fewer repeat procedures and therapeutic or
diagnostic errors. Each new patient receives a thorough diagnostic write-up and
a full history is taken. In addition, new patients also receive a full physical
examination after which an individualized treatment program is designed which
may include inpatient and/or outpatient treatment at one or more of the
company's facilities.
Patients are referred from managed health care organizations, state
agencies, individual physicians and by patients themselves. The patient
population at these facilities ranges from children as young as 5 years of age
to senior citizens. The psychiatric facilities treat a larger percentage of
female patients than the substance abuse facilities.
HARBOR OAKS
Harbor Oaks Hospital is a 64 bed psychiatric hospital located in New
Baltimore, Michigan, approximately 20 miles northeast of Detroit, which was
acquired by the Company in September 1994. Harbor Oaks Hospital is licensed by
the Michigan Department of Commerce and is accredited by JCAHO. Harbor Oaks
provides inpatient psychiatric care, partial hospitalization and outpatient
treatment to children, adolescents and adults. Harbor Oaks Hospital has serviced
clients from Macomb, Oakland and St. Clair Counties and has now expanded its
coverage area to include Wayne, Sanilac and Livingston Counties.
Harbor Oaks Hospital works in conjunction with New Life Treatment Centers,
Inc. ("New Life") to offer counseling programs with a traditional Christian
philosophy on an inpatient and partial hospitalization basis. This program has
attracted patients from across the state and throughout the midwest and
northeast United States. The contract with New Life had an initial term of two
years commencing on July 25, 1995 is currently being renegotiated with all
operations continuing as amended until a new contract is finalized. Harbor Oaks
pays New Life a monthly fee equal to 50% of net receipts from the program, not
including receipts from Medicare, Medicaid, CHAMPUS and other federally funded
programs. In the original agreement Harbor Oaks was required to pay New Life a
minimum of $52,500 per month and a fixed fee of $7,500 per month for each
patient whose treatment is covered by a federally funded program. In an
amendment to this contract in November 1996 the minimum payment requirement was
decreased from $52,500 to $35,000 per month.
The Company utilizes the Harbor Oaks facility as a mental health resource
to complement its nationally focused substance abuse treatment programs. Harbor
Oaks Hospital has a specialty program that treats substance abuse patients who
have a coexisting psychiatric disorder. This program provides an integrated
holistic approach to the treatment of individuals who have both substance abuse
and psychiatric problems. The program is offered to both adults and adolescents.
On February 10, 1997, Harbor Oaks Hospital opened an 8-bed adjudicated
residential unit serving adolescents with a substance abuse problem and a
co-existing mental disorder who have been adjudicated to have committed criminal
acts and who have been referred or required to undergo psychiatric treatment by
a court or family service agency. The patients in the program range from 13 to
18 years of age. The program provides patients with educational and recreational
activities and adult life functioning skills as well as treatment. Typically, a
patient is admitted to the unit for 30 days to six months, with a case review at
six months to determine if additional treatment is required.
HARMONY HEALTHCARE
Harmony Healthcare, an outpatient clinic located in Las Vegas, Nevada,
provides psychiatric care to children, adolescents and adults in the local area.
Harmony Healthcare also operates employee assistance programs for railroads,
healthcare companies and several large casino companies including Boyd Gaming
Corporation, the MGM Grand, the Mirage and Treasure Island Resorts with a rapid
response program to provide immediate assistance 24 hours a day.
TOTAL CONCEPT EAP
Total Concept, an outpatient clinic located in Shawnee Mission, Kansas,
provides psychiatric and substance abuse treatment to children, adolescents and
adults and manages employee assistance programs for local businesses, gaming,
railroads and managed health care companies.
NORTH POINT-PIONEER, INC.
NPP operates five psychiatric clinics in Michigan under the name Pioneer
Counseling Centers. These clinics provide outpatient psychiatric and substance
abuse treatment to children, adolescents and adults. The clinics, which are
located near the Harbor Oaks facility, provide more efficient integration of
inpatient and outpatient services, a larger coverage area and the ability to
share personnel which results in cost savings.
PIONEER COUNSELING OF VIRGINIA, INC.
PCV, an outpatient clinic located in Salem, Virginia, provides psychiatric
services to adults, adolescents and children referred by a physicians' practice.
PCV is 80% owned by the Company. The medical directors, who are employees of the
Company, own the remaining 20%.
BSC-NY, INC.
BSC provides management and administrative services to psychotherapy and
psychological practices in the greater New York City metropolitan area. BSC is
affiliated with several hundred outpatient providers and, in addition, has
contracts to provide employee assistance services to the employees of Suffolk
County, New York and to employees of certain other companies.
DESCRIPTION OF PROPERTIES
Facility Location Square Feet Annual Rent Lease Term
________ ____________ ___________ ___________ __________
Harbor Oaks New Baltimore,MI 32,000 N/A N/A(1)
Harmony Healthcare Las Vegas, NV 4,865 $102,165 5/31/00
Total Concept Shawnee Mission, KS 150 $4,800 9/30/98
North Point-Pioneer Farmington Hills, MI 4,992 $ 65,936 01/31/04
North Point-Pioneer Sterling Heights, MI 2,937 $ 59,969 08/31/01
North Point-Pioneer Birmingham, MI 3,135 $ 56,430 06/30/01
North Point-Pioneer Livonia, MI 2,960 $ 50,566 4/30/99
North Point-Pioneer Clinton Township, MI 3,355 $ 33,427 12/31/97
Pioneer Counseling VA Salem, VA 5,700 N/A N/A (1)
(1) The building is owned by the company.
OPERATING STATISTICS
The following table reflects selected financial and statistical information
for all psychiatric services.
Year Ended June 30,
1997 1996 1995
Inpatient
Net patient service revenues $13,557,703 $13,000,822 $9,871,623
Net revenues per patient day(1) $ 414 $ 385 $ 358
Average occupancy rate(2) 58.8% 63.4% 65.3%
Total number of licensed beds at 172 172 172
end of period
Source of Revenues:
Private(3) 91.6% 90.0% 89.8%
Government(4) 8.4% 10.0% 10.2%
Partial Hospitalization and
Outpatient
Net Revenues:
Individual $ 5,629,760 $ 3,021,486 $2,228,210
Contract $ 1,459,580 $ 503,365
Sources of revenues:
Private 98.4% 93.9% 94.6%
Government 1.6% 6.1% 5.4%
Other Psychiatric services
PDS2(5) $ 629,761 $ 233,164 $ 128,157
Practice Management(6) $ 650,852
(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 total number of
patient days in each period by the number of beds available in such period.
(3) Private pay percentage is the percentage of total patient revenue
derived from all payors other than Medicare and Medicaid.
(4) Government pay percentage is the percentage of total patient revenue
derived from the Medicare and Medicaid programs.
(5) PDS2, Pioneer Development and Support Services, provides clinical support,
referrals management and professional services for a number of the
Company's national contracts.
(6) Practice Management revenue is produced through BSC-NY.
<PAGE>
LONG-TERM CARE FACILITY
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, 1997,
Franvale operated at 84.1% of capacity
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.
The Company owns the two story building in which Franvale is located which
consists of approximately 44,000 square feet. The Company believes that these
premises are adequate for its current and anticipated needs.
On February 19, 1997, the Company's Franvale Nursing and Rehabilitation
Center ("Franvale") was cited for serious patient care and safety deficiencies
by the Massachusetts Department of Public Health as the result of a routine
survey. A civil penalty of $3,050 per day was imposed which was reduced to
$2,250 per day on March 12, 1997. After an appeal the fine was reduced to
$90,545 in total. At the time of the original citation, the Company was notified
by the Department of Public Health and by the federal agency, HCFA, that
Franvale would be terminated from the Medicare and Medicaid programs unless
Franvale was in substantial compliance with regulatory requirements by March 14,
1997. Franvale submitted a plan of correction to the Department of Public Health
and on March 12, 1997, as the result of a resurvey by the Department of Public
Health, a new statement of deficiencies was issued, which contained a
significant number of violations but recharacterized the level of seriousness of
the deficiencies to a lower degree of violation and which extended the
threatened date of termination to April 30, 1997.
As a result of the new statement of deficiencies, the Department of Public
Health had precluded the Company from admitting new patients to its Franvale
facility until at least April 30, 1997. However, on April 11, 1997, the Company
received authority to admit new patients on a case by case basis. Previous
patients were readmitted to the Franvale facility from a hospital only after a
case by case review by the Department of Public Health. The Company was
obligated to notify the attending physician of each resident of Franvale who was
found to have received substandard care of the deficiency notice and was
obligated also to notify the Massachusetts board which licenses the
administrator of Franvale.
On April 19, 1997 the Department of Public Health, Division of Health Care
Quality completed a follow-up survey of the Franvale Nursing Home. As a result
of this survey it was determined that all deficiencies cited from the April 17,
1997 visit had been corrected and the restrictions on Franvale's ability to
admit patients were lifted.
The Company replaced the management team at Franvale and expended
significant sums for staffing and programmatic improvements in order to bring
the facility into substantial compliance at the earliest possible date. The
Company engaged Oasis Management Company on November 1, 1996 through June 30,
1997 to provide management services to Franvale. The Company conducted an
intensive staff review which resulted in a total reorganization. The present
staff was provided with in-service training. The Company is continuing an
extensive program of review to ensure that Franvale remains in compliance.
As a result of the decrease in census resulting from the inability of
Franvale to admit new patients and the limitations on its ability to re-admit
patients, the monetary penalties which accrued, and the expenses that were
incurred by the Company in an attempt to cure the cited deficiencies, the
Company experienced a material adverse effect on its financial results in the
latter part of the fiscal year ended June 30, 1997, particularly in the fourth
quarter of 1997 and anticipates the possibility of continued adverse financial
impacts in future quarters. A new management team is in place and marketing
efforts have begun to show positive results. Pioneer continuously looks for the
best strategic alternative for Franvale although no specific plans have been
formulated at this time.
OPERATING STATISTICS
The following table reflects selected financial and statistical information
for Franvale:
Year ended June 30,
________________________
1997 1996 1995
____________ ____________ ___________
Net patient service revenues $ 5,306,717 $ 5,043,922 $ 4,180,471
Net revenues per patient $ 135 $ 137 $ 135
day(1)......................
Average occupancy rate(2) 84.1% 87.1% 92.7%
Total number of licensed beds 128 128 91
at end of period............
Source of revenues:
Private(3)............. 12.5% 8% 8%
Government(4).......... 87.5% 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 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.
BUSINESS STRATEGY
The Company's objective is to become a leading national provider of
treatment services, specializing in substance abuse and psychiatric care.
The Company focuses its marketing efforts on "safety-sensitive" industries.
This focus results in customized outcome oriented programs that the Company
believes produce overall cost savings to the patients and/or client
organizations. The Company intends to leverage experience gained from providing
services to customers in certain industries which it believes will enhance its
selling efforts within these certain industries.
The Company also intends to pursue at-risk contracts and outpatient,
managed care fee-for-service contracts.
The Company intends to pursue strategic acquisitions that will provide the
Company with a greater geographic reach, while incorporating the Company's
integrated delivery system. The Company may also engage in strategic
acquisitions which will enable it to expand the service offerings it currently
provides.
<PAGE>
MARKETING AND CUSTOMERS
The Company markets its substance abuse, inpatient and outpatient
psychiatric health services, both locally and nationally, primarily to safety
sensitive industries, including transportation, oil and gas exploration, heavy
machinery and equipment manufacturing and healthcare services. Additionally, the
Company markets its services in the gaming industry.
The Company employs 10 individuals dedicated to marketing among the
Company's facilities. Each facility performs marketing activities in its local
region. The National Marketing Director of the Company, coordinates the majority
of the Company's national marketing efforts. In addition, employees at certain
facilities perform national marketing activities independent of the National
Marketing Director. The Company, with the support of its owned integrated
outpatient systems and management services, plans to pursue more at-risk
contracts and outpatient, managed health care fee-for-service contracts. In
addition to providing excellent services and treatment outcomes, the Company
will continue to negotiate pricing policies to attract patients for long-term
intensive treatment which meet length of stay and clinical requirements
established by insurers, managed health care organizations and the Company's
internal professional standards.
The Company's inpatient services are complemented by an integrated system
of comprehensive outpatient mental health clinics and physician practices owned
or managed by the Company. These clinics and medical practices are strategically
located in Nevada, Virginia, Kansas City, Michigan, Utah and New York and enable
the Company to offer a broad range of wholly integrated, comprehensive, mental
health services for corporations and managed care organizations on an at-risk or
exclusive fee-for-service basis. Additionally, the Company operates Pioneer
Development and Support Services (PDS2) located in the Highland Ridge facility
in Salt Lake City, Utah. PDS2 provides clinical support, referrals, management
and professional services for a number of the Company's national contracts. It
gives the Company the capacity to provide a complete range of fully integrated
mental health services.
The Company has been successful in securing a number of national accounts
with a variety of corporations including: Boyd Gaming, Canadian Rail, Conrail,
CSX, the IUE, MCC, MGM, The Mirage, Station Casinos, Union Pacific Railroad,
Union Pacific Railroad Hospital Association, VBH, and others.
The Company's marketing efforts for its long-term care facility will
continue to emphasize the specialized, transitional subacute care services
provided by Franvale. 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 psychiatric facilities and programs compete primarily within
the respective geographic area serviced by them. The Company competes with
private doctors, hospital-based clinics, hospital-based outpatient services and
other comparable facilities. The main reasons that the Company competes well are
its integrated delivery system and dual diagnosis programming. Integrated
delivery provides for more efficient follow-up procedures and reductions in
length of stay. Dual diagnosis programming provides a niche service for clients
with a primary mental health and a secondary substance abuse diagnosis. The dual
diagnosis service was developed in response to demand from insurers, employees
and treatment facilities.
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 only facilities of the Company that receive Medicare
reimbursement are Franvale and Harbor Oaks. At Franvale 21.2% of revenues are
derived from Medicare programs and at Harbor Oaks 11.1% of revenues are derived
from Medicare programs. 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.
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 only facilities of the Company that receive reimbursement
under any state Medicaid program are Franvale and Harbor Oaks. 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 is a participant in the Medicaid program administered by the
State of Michigan. Reimbursement is received 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. For 1996 and 1995, Massachusetts Medicaid
continued to reimburse skilled nursing facilities on an acuity based prospective
system. The 1996 and 1995 rates are based on costs reported and acuity data for
1993 and are adjusted by inflation factors. Under the rate formula established
for 1997, Massachusetts nursing facilities received an average increase in their
Medicaid rates of approximately 2.4%.
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. At
this time the Company cannot predict the impact of future year rate changes on
its operations.
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.
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, 1997, the Company had 523 employees, of which 10 were
dedicated to Marketing , 152 (31 part time) to finance and administration and
361 (166 part time) to patient care. Of the Company's 523 employees, 389 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 agreement provides that ARMFCO
will administer payroll, 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, Total Concept,
NPP, BSC and PCV 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 $6,000,000 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 similar 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. PCV's two
doctors are currently covered by their own malpractice policies.
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 fourteenth 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 1,750 square feet of office space leased
from Pioneer Counseling of Virginia, Inc. in Salem, 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 $492,996 at fiscal year ended
June 30, 1997.
GOOD HOPE
The Company leases the West Greenwich facility which consists of three
buildings, containing a total of approximately 25,000 square feet 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
satellite office is leased from Park Square Medical for $1,700 per month. This
lease expires October 31, 1998. 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. The Harbor Oaks Hospital property is subject to an
outstanding mortgage in favor of Healthcare Financial Partners with an
outstanding balance of $1,100,000 at fiscal year ended June 30, 1997.
<PAGE>
HARMONY HEALTHCARE
The Harmony premises consists of approximately 4,865 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 $8,514.00 per month plus common
area charges of 3.48% of project expenses. The Company believes that these
premises are adequate for its current needs.
TOTAL CONCEPT
Total Concept subleases approximately 150 square feet of space for $400 per
month from The Menniger Clinic in Shawnee, Kansas. The property is under a one
year lease. The Company believes that these premises are adequate for its
current and anticipated needs.
NORTH POINT-PIONEER
There are five separate locations in Michigan from which North
Point-Pioneer operates. The Farmington Hills office consists of 4,922 square
feet of space which is under lease through January 31, 2004 and requires current
lease payments of $5,408 per month. The Sterling Heights office consists of
2,937 square feet of space which is under lease through August 31, 2001 and
requires current lease payments of $5,018 per month. The Birmingham office
consists of 3,135 square feet of space which is under lease through June 30,
2001 and requires current lease payments of $4,702 per month. The Livonia office
consists of 2,960 square feet of space which is under lease through April 30,
1999 and requires current lease payments of $4,193 per month. The Clinton
Township office consists of 3,355 square feet of space which is under lease
through December 31, 1997 and requires current lease payments of $5,571 per
month.
PIONEER COUNSELING OF VIRGINIA
The Company owns the Pioneer Counseling of Virginia building which consists
of 7,500 square feet of office space located in Salem, Virginia. Pioneer
currently leases 1,750 square feet to Mount Regis-Changes and 1,500 square feet
to Blankenship Opticians, an unrelated party. The Pioneer Counseling of Virginia
property is subject to an outstanding mortgage in favor of Dillon & Dillon
Associates with an outstanding balance of $538,605 at fiscal year ended June 30,
1997.
FRANVALE
The Company owns the real property and improvements for Franvale. The
operations are located in a two-story building comprising 44,000 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 Franvale property is subject to an outstanding mortgage
in favor of Charles River Mortgage Company and guaranteed by the US Department
of Housing and Urban Development with an outstanding balance of $6,757,422 at
fiscal year ended June 30, 1997.
ITEM 3. LEGAL PROCEEDINGS.
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 grounds 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.
Although the Company regards Pioneer Health Care, Inc.'s counterclaims as being
without merit, an adverse decision could result in money damages against the
Company and required discontinuance by the Company of the PIONEER HEALTHCARE
mark could result in costs to the Company which could 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.
This cancellation proceeding has been suspended pending the outcome of the
litigation described above.
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, 1997.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company as of June 30, 1997 are as
follows:
NAME AGE POSITION
Bruce A. Shear 42 President, Chief Executive Officer
and Director
Robert H. Boswell 48 Executive Vice President
Paula C. Wurts 48 Controller, Assistant Clerk and Assistant
Treasurer
Gerald M. Perlow, M.D. (1)(2) 59 Director and Clerk
Donald E. Robar (1)(2) 60 Director and Treasurer
Howard W. Phillips 67 Director
William F. Grieco 44 Director
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
All of the directors hold office until the annual meeting of stockholders
next following their election, or until their successors are elected and
qualified. 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 MBA from
Suffolk University in 1980 and a BS 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.
Mr. Boswell is a Board Member of the National Foundation for Responsible Gaming
and the Chair for the National Center for Responsible Gaming.
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 BS in Accounting from Northeastern University in 1989 and
passed the examination for Certified Public Accountants. She received an MBA in
Accounting from Western New England College in 1996.
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. From October 1996 to March
1997, Dr. Perlow served as President and Director of Perlow Physicians, P.C.
which has a management contract with BSC. Dr. Perlow received compensation of
$8,333 for the period. Dr. Perlow received a BA from Harvard College in 1959 and
an MD 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. He served as Clerk of the Company
from 1992 to 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 MA from Boston
College in 1968 and a BA from the University of Massachusetts in 1960.
HOWARD W. PHILLIPS has served as a Director of the Company since August
1996 and has been employed by the Company as a public relations specialist since
August 1995. From 1982 until October 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.
WILLIAM F. GRIECO has served as a Director of the Company since February
18, 1997. Since November of 1995, he has served as Senior Vice President and
General Counsel for Fresenius Medical Care North America. From 1989 until
November of 1995, Mr. Grieco was a partner at Choate, Hall & Stewart, the
Company's principal outside legal counsel. Mr. Grieco is a member of the Board
of Directors of Fresenius National Medical Care Holdings, Inc. Mr. Grieco
received a BS from Boston College in 1975, an MS in Health Policy and Management
in 1978 and a JD from Boston College Law School in 1981.
<PAGE>
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.
1996 HIGH LOW
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..... 9 5/8 6 1/2
Second Quarter ... 7 1/8 4 5/8
Third Quarter .... 5 5/8 1 3/4
Fourth Quarter.... 4 3/8 2 1/8
1998
First Quarter..... 3 9/16 2 1/4
through September
15, 1997
On September 15, 1997, the last reported sale price of the Class A Common
Stock was $3.00. On September 15, 1997 there were 109 holders of record of the
Company's Class A Common Stock, 321 holders of record of the Company's Class B
Common Stock and 322 holders of the Company's Class C Common Stock. Since the
Company failed to meet earnings targets as stipulated in its March 1994
prospectus, the Company's Class C Common Stock was canceled and retired on
September 28, 1997.
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 is a discussion and analysis of the financial condition and
results of operations of the Company for the years ended June 30, 1997 and 1996.
It should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein. During the fiscal year several
operations were acquired which make comparability of period results difficult.
The Company is a provider of health care services through several chemical
dependency centers, an acute psychiatric hospital, several outpatient
psychiatric centers and a long-term care facility (collectively called
"treatment facilities"). 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, 1997 the Company
has completely eliminated these operations with the sale of the last parcel real
estate.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997 AND 1996
The Company experienced a loss for fiscal year ended June 30, 1997
primarily as a result of an increase in the Provision for Doubtful Accounts and
the increased expenses incurred and decline in census related to the Franvale
State Survey in February which placed the facility in Jeopardy Status which
precluded admissions for a period of time. Census levels at Franvale did not
increase as soon as anticipated after the state resurveyed and lifted the ban on
admissions. Occupancy at Franvale for the fiscal year ended June 30, 1997 was at
84.1% as compared to 87.1% for the fiscal year ended June 30, 1996. A new
management team is in place at Franvale and marketing efforts have begun to show
positive results including some increase in census. Pioneer continuously looks
for strategic alternatives for Franvale which is not a part of the Company's
core business but has not formed any definitive plans at this time.
The environment the Company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the Company has recorded an increase in its accounts
receivable reserve and has adopted a more stringent reserve policy going forward
as well as instituting a more aggressive collection policy. The Provision for
Doubtful Accounts increased from $1,894,087 in fiscal 1996 as compared to
$3,397,693 in fiscal 1997. A substantial portion of the increase in the reserve
was recorded in the fourth fiscal quarter. The company is currently reviewing
these adjustments to determine if some of the adjustments should have been made
in prior fiscal quarters.
Total patient care revenue from all facilities increased 25% to $27,234,372
for the year ended June 30, 1997 from $21,802,758 for the year ended June 30,
1996. Net patient care revenue from psychiatric services increased 30.8% to
$21,927,655 for the fiscal year ended June 30, 1997 compared to $16,758,836 for
the year ended June 30, 1996. Net patient revenue at the Company's long-term
care facility increased to $5,306,717 for fiscal 1997 (5.2%) from $5,043,922 in
fiscal 1996 which is attributable to an increase in patient census. Although the
gross number of patients increased the percentage of occupancy decreased due to
the increase in available beds.
Total patient care expenses for all facilities increased 20.3% to
$14,436,784 for the year ended June 30, 1997 from $12,004,383 for the year ended
June 30, 1996. Patient care expenses for psychiatric services were $10,346,111
for the fiscal year ended June 30, 1997 compared to $7,974,811 for fiscal year
ended June 30, 1996 a 29.7% increase. Patient care expenses at the Company's
long-term care facility increased to $4,090,673 for fiscal 1997 from $4,029,572
in fiscal 1996 (approximately 1.5%).
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter of 1997, the Company issued Convertible
Debentures due December 31, 1998 in the aggregate face amount of $3,125,000 to
Infinity Investors Ltd. and Seacrest Capital Limited resulting in $2,500,000 of
proceeds to the Company. In the third quarter of 1997, in connection with the
issuance of the Convertible Debentures, the Company issued warrants for 150,000
shares to Infinity Investors Ltd. and Seacrest Capital Limited at an exercise
price of $2.00 per share. As of September 15, 1997 all of the Convertible
Debentures have been converted to Class A Common Stock. A total of 1,331,696
shares of Class A Common Stock were issued for this conversion and in payment of
related interest.
During the fourth fiscal quarter of 1997, the Company issued 1,000 shares
of Convertible Preferred Stock for a total of $1,000,000 to ProFutures Special
Equities Fund, L.P. resulting in proceeds to the Company of approximately
$873,705. The June 30, 1997 financial statements reflect the conversion of half
of the Convertible Preferred Stock into 229,964 shares of Class A Common Stock.
As of September 15, 1997 the remaining Convertible Preferred Stock was converted
to 246,305 shares of Class A Common Stock.
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 17.2% to $11,255,000 at June 30, 1997 from approximately
$9,606,000 at June 30, 1996. The increase in accounts receivable is net of the
sale of certain receivables to LINC Finance Corporation VIII (LINC). This
increase in receivables is primarily due to increase in revenues from new
acquisitions. The Company continues to closely monitor its accounts receivable
balances and implement procedures and policies, including more aggressive
collection techniques, to manage this receivables growth and keep it consistent
with growth in revenues.
In December of 1996, PHC of Utah, Inc. and Healthcare Financial
Partners-Funding II, L.P. ("HCFP") entered into a revolving credit agreement,
pursuant to which HCFP will provide funding of up to $1,000,000 to PHC of Utah,
Inc. In February of 1997, PHC of Michigan, Inc. and HCFP entered into a
revolving credit agreement, pursuant to which HCFP will provide funding up to
$1,500,000 to PHC of Michigan, Inc. Both of these revolving credit agreements
are secured by the assets of the subsidiary.
The Company currently has a mortgage of $1,100,000 secured by the Harbor
Oaks facility.
At June 30, 1997 the Company had approximately $905,700 in cash and cash
equivalents, working capital of approximately $4,763,000 and a working capital
ratio of approximately 1.6 to 1. Management believes that the Company has
adequate resources to fund operations for the foreseeable future. However, the
Company is constantly seeking less expensive alternative financing to insure
that it will have the necessary capital to fund expansion of its existing
business and to pursue acquisition opportunities as they arise.
The Company has made significant progress toward the accomplishment of its
acquisition and expansion strategy during the fiscal year by completing the
acquisition of its out patient psychiatric operations in Michigan (North
Point-Pioneer, Inc.) and its first psychiatric practice ownership in Salem,
Virginia. These acquisitions are key components in the culmination of the
Company's vision to provide a fully integrated delivery system in psychiatric
care.
Through merger the Company acquired a psychiatric management operation in
New York (BSC-NY, Inc.) which manages psychotherapy and psychological practices
in New York. Also in connection with the merger another entity was formed,
Perlow Physicians, P.C. ("Perlow"), to acquire the assets of the medical
practices now serviced by BSC. The Company advanced Perlow the funds to acquire
those assets and at June 30, 1997 Perlow owed the Company $3,063,177 which
includes, in addition to acquisition costs, management fees of approximately
$511,000 and interest on the advances of approximately $176,000. It is expected
that the obligations will be paid over the next several years and, accordingly,
most of these amounts have been classified as long term.
Subsequent to year end the Company issued 172,414 Shares of Unregistered
Class A Common Stock to ProFutures Special Equities Fund, L.P. resulting in
proceeds to the company of approximately $445,000.
Also subsequent to year end the Company completed the acquisition of
Counseling Associates, an outpatient clinic in Blacksburg, Virginia, for 26, 024
shares of Class A Common Stock and $50,000 in cash. This clinics operations will
be included in Pioneer Counseling of Virginia, Inc. which is an 80% owned
subsi
diary.
ITEM 7. FINANCIAL STATEMENTS
AT PAGE
Index........................................ F-1
Reports of Independent Auditors.............. F-2
Consolidated Balance Sheets.................. F-3
Consolidated Statements of Operations........ F-4
Consolidated Statements of Changes in Stockholders' F-5
Equity.......................................
Consolidated Statements of Cash Flows........ F-6
Notes to Financial Statements................ F-7
<PAGE>
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
In fiscal year 1997, both Mr. Grieco and Mr. Phillips failed to timely file
Form 3 upon joining the Company's Board of Directors. In addition, Dr. Robar,
Mr. Boswell, Ms. Wurts and Mr. Phillips each filed a Form 4 relating solely to
the grant of options outside of the prescribed time limits. These grants,
however, could have been reported on Form 5, in which case they would not have
been due until August 14, 1997. Additionally, for fiscal year 1997, Dr. Robar
failed to timely file a From 4 relating to the sale of the Company's Class A
Common Stock and Mr. Boswell and Ms. Wurts each failed to timely file a Form 4
relating to the purchase of the Company's Class A Common Stock.
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 1997
fiscal year which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 1997, 1996 and 1995:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
(a) (b) (c) (d) (e) (g) (i)
Name and Other Securities All Other
Principal Year Salary Bonus Annual Underlying Compensation
Position Compensation Options/SARs
($) ($) ($) (#) ($)
______________________________________________________________________________
Bruce A. Shear..... 1997 $294,167 -- $12,633(1) -- --
President and 1996 $294,063 -- $10,818(2) -- --
Chief Executive 1995 $237,500 -- $ 8,412(3) -- --
Officer
Robert H. Boswell.. 1997 $ 92,750 -- $ 6,000(4) 5,000 $ 6,821
Executive Vice 1996 $ 80,667 $1,000 $23,750(5) 5,000 $11,250
President 1995 $ 69,750 -- $ 6,000(4) 15,000 $28,050
(1) This amount represents (i) $2,687 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii)
$6,769 in premiums paid by the Company with respect to life insurance for
the benefit of Mr. Shear, and (iii) $3,177 personal use of Company car held
by Mr. Shear.
(2) 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 a
Company car held by Mr. Shear.
(3) 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 in premiums 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) an automobile allowance
(5) This amount represents (i) $3,750 automobile allowance, and (ii) $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"). In fiscal year 1997, Howard Phillips, a member of the board of
directors of the Company served on a board of directors of another entity. Mr.
Phillips 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. No other executive officers or directors
of the Company served on a board of directors of any other entity.
<PAGE>
COMPENSATION COMMITTEE
The Compensation Committee consists of Mr. Donald Robar and Dr. Gerald
Perlow. The compensation Committee met once during fiscal 1997. Mr. Shear did
not participate in discussions concerning, or vote to approve, his salary.
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.
As of June 30, 1997, the Company had issued options to purchase a total of
207,000 shares of Class A Common Stock under the 1993 Stock Plan at a price per
share ranging from $3.50 to $7.00 per share. On February 18, 1997, the Board of
Directors repriced all outstanding options, other than options granted to
members of the Board of Directors, at $3.50 per share. On August 1, 1997 the
Company issued an additional 75,000 options at an exercise price of $2.63.
Generally, options are exercisable upon grant for 25% of the shares covered with
an additional 25% becoming exercisable on each of the first three anniversaries
of the date of grant.
During the fiscal year ended June 30, 1997 13,375 shares of Class A Common
Stock were issued through the exercise of options by employees and 100 shares
were issued to a former employee.
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, 1997 and will end on January 31, 1998. There are thirty
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 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 options were issued under the
Director Plan at an exercise price of $6.63 per share. On February 18, 1997, a
total of 6,000 options were issued under the Director Plan at an exercise price
of $3.50. As of September 15, 1997, 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 bear interest at 6% per year, are
payable quarterly in arrears, and became due March 31, 1997. To secure the
payment obligation under the non-recourse notes, shares paid for with these
notes have been pledged to the Company. See "Certain Transactions." The notes
reached maturity on March 31, 1997. Two employees were in default. Mark Cowell
forfeited 6,925 shares and Joan Chamberlain forfeited 1,731 shares which are
currently held as treasury
stock.
On September 30, 1996 the company issued 15,000 shares of the Company's
Class A Common Stock as part of the acquisition of North Point. The Company also
issued 150,000 shares of the Company's Class A Common Stock as part of the
acquisition of BSC. The Company also issued 64,500 shares of the Company's Class
A Common Stock as part of the acquisition of Pioneer Counseling of Virginia.
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 15, 1997 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:
<PAGE>
Name and Address Amount and Nature Percent
Title of Class of Beneficial Owner of Beneficial of
Owner Class
(12)
Class A Common Stock Gerald M. Perlow 16,000(1) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 9,250(2) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Bruce A. Shear 17,500(3) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Robert H. Boswell 31,824(4) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 37,968(5) *
P. O. Box 2047
East Hampton, NY
11937
William F. Grieco 59,780(6)(7) 1.3%
115 Marlborough Street
Boston, MA 02116
J. Owen Todd 59,280(7) 1.3%
c/o Todd and Weld
1 Boston Place
Boston, MA 02108
All Directors and 188,247(8) 4.1%
Officers as a Group
(7 persons)
Class B Common Stock (9) Bruce A. Shear 671,259(10) 91.9%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and 671,259 91.9%
Officers as a Group
(7 persons)
Class C Common Stock(13) Bruce A. Shear 156,502(11) 78.3%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
J. Owen Todd 13,173(7) 6.5%
c/o Todd and Weld
1 Boston Place
Boston, MA 02108
William F. Grieco 13,173(7) 6.5%
115 Marlborough Street
Boston, MA 02116
All Directors and 169,675 84.93%
Officers as a Group
(7 persons)
* Less than 1%.
(1) Includes 6,000 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $3.50 to $6.63 per share.
(2) Includes 7,750 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $3.50 to $6.63 per share.
(3) Includes 12,500 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price of $2.63 per
share. Excludes an aggregate of 59,280 shares of Class A Common Stock owned
by the Shear Family Trust and the NMI Trust, of which Bruce A. Shear is a
remainder beneficiary.
(4) Includes an aggregate of 30,250 shares of Class A Common Stock issuable
pursuant to currently exercisable stock options at an exercise price range
of $2.63 to $3.50 per share.
(5) Includes 37,468 shares issuable upon the exercise of a currently
exercisable Unit Purchase Option for 18,734 Units, at a price per unit of
$5.60, of which each unit consists of one share of Class A Common Stock and
one warrant to purchase an additional share of Class A Common Stock at a
price per share of $7.50 and 500 shares issuable pursuant to currently
exercisable stock options having an exercise price of $3.50 per share.
(6) Includes 500 shares of Class A Common Stock issuable pursuant to currently
exercisable stock options, having an exercise price of $3.50 per share
(7) 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 B Common Stock and 4.97% of the Company's
outstanding Class C Common Stock.
(8) Includes an aggregate of 71,500 shares issuable pursuant to currently
exercisable stock options. Of those options, 2,750 have an exercise price
of $6.63 per share, 51,250 have an exercise price of $3.50 per share and
17,500 have an exercise price of $2.63. Also includes 37,468 shares
issuable upon the exercise of the Unit Purchase Option as described in
(5).
(9) 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.
(10) 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.
(11) 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.
(12) Represents percentage of equity of class, based on numbers of shares listed
under the column headed "Amount and Nature of Beneficial Ownership". Each
share of Class A Common Stock is entitled to one vote per share and each
share of Class B Common Stock is entitled to five votes per share on all
matters on which stockholders may vote (except that the holders of the
Class A Common Stock are entitled to elect two members of the Company's
Board of Directors and holders of the Class B Common Stock are entitled to
elect all the remaining members of the Company's Board of Directors). The
Class C Common Stock is non-voting.
(13) Since the Company failed to meet earnings targets as stipulated in its
March 1994 Prospectus, the Company's Class C Common Stock was canceled and
retired as of September 28, 1997. Based on the number of shares listed
under the column headed "Amount and Nature of Beneficial Ownership," the
following persons or groups held the following percentages of voting rights
for all shares of common stock combined as of September 15, 1997:
Bruce A. Shear .........................41.39%
J. Owen Todd..............................0.7%
William F. Grieco.........................0.7%
All Directors and Officers as a Group
(7 persons)........................ 42.2%
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, 1997, the Company owed an aggregate of $75,296 to related parties. During
the year ended June 30, 1997, the Company paid an aggregate of $114,771 in
principal and accured interest under various Notes to related parties.
As of June 30, 1997, the Company owed Bruce A. Shear $55,296 on a
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.
<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.
Exhibits Index
Exhibit No. Description
++1.1 Form of Underwriting Agreement.
+3.1 Restated Articles of Organization of the Registrant, as amended.
3.1.1 Articles of Amendment filed with the Commonwealth of
Massachusetts on January 28, 1997.
****3.2 By-laws of the Registrant, as amended.
3.3 Certificate of Vote of Directors establishing a Series of a
Class of stock dated June 3, 1997.
+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 Form of warrant issued to Barrow Street Research, Inc. and Peter
G. Mintz.
#4.6 Form of warrant issued to Robert A. Naify, Marshall Naify, Sarah
M. Hassanein and Whitney Gettinger.
#4.7 Form of Subscription Agreement prior to the Purchase of Units
Consisting of Shares of Class A Common Stock and Warrants to
Purchase Class A Common Stock.
###4.7.1 Regulation D Securities Subscription Agreement among PHC, Inc.,
Infinity Investors Ltd. and Seacrest Capital Limited dated
October 1996.
4.8 Form of Warrant Agreement by and among the Company, American
Stock Transfer & Trust Company and AmeriCorp Securities, Inc.
executed in connection with the Private Placement.
###4.8.1 7% Convertible Debenture issued to Infinity Investors Ltd. in
the principal amount of $1,975.000.
4.9 Form of Certificates representing the New Warrants (form of
certificate representing New Warrants included in Exhibit 4.8).
###4.9.1 7% Convertible Debenture to Seacrest Capital Limited in the
principal amount of $1,250.000.
###4.10 Book Entry Transfer Agent Agreement among PHC, Inc.,
Infinity Investors Ltd., Seacrest Capital Limited and American
Stock Transfer & Trust Company dated October 7, 1996.
###4.11 Registration Rights Agreement among PHC, Inc., Infinity Investors
and Seacrest Capital Limited dated October 7, 1996.
4.12 Form of Subscription Agreement for the Purchase of Units
Consisting of Shares of Class A Common Stock and Warrants to
Purchase Class A Common Stock.
4.13 Form of Warrant Agreement by and among the Company, American
Stock Transfer & Trust Company and AmeriCorp Securities, Inc,
executed in connection with the Private Placement.
4.14 Form of Certificates representing the New Warrants (form of
certificate representing New Warrants included in Exhibit 4.8).
4.15 Form of Warrant Agreement issued to Alpine Capital Partners, Inc.
to purchase 25,000 Class A Common shares dated October 7, 1996.
4.16 Stock Exchange Agreement by and between PHC, Inc. and Psychiatric
& Counseling Associates of Roanoke, Inc.
@ 4.17 Form of Warrant Agreement issued to Barrow Street Research, Inc.
to purchase 3,000 Class A Common shares dated February 18,
1997.
@ 4.18 Form of Consultant Warrant Agreement by and between PHC, Inc.,
and C.C.R.I. Corporation dated March 3, 1997 to purchase 160,000
shares Class A Common Stock.
@ 4.19 Amendment Agreement by and between PHC, Inc., Infinity Investors
Ltd., and Seacrest Capital Limited as parties to Regulation D
Securities Subscription Agreement dated October 7, 1996.
<PAGE>
Exhibit Index (Con't)
Exhibit No. Description
@ 4.20 Loan and Security Agreement by and between PHC of Michigan, Inc.
and HCFP Funding, Inc. dated March 11, 1997 in the amount of
$300.000.
@ 4.21 Subscription Agreement by and between PHC, Inc. and ProFutures
Special Equities Fund, L.P. for 1,000 shares of Series A
Convertible Preferred Stock.
@ 4.22 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. for 50,000 shares of Class A Common Stock.
4.23 Warrant Agreement by and between Brean Murray & Company and PHC.,
Inc. date 07/31/97 (See 10.125).
4.24 Subscription Agreement by and between PHC, Inc. and ProFutures
Special Equities Fund, L.P. to purchase PHC, Inc. Units dated
01/19/97 ------
4.25 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P.for up to 86,207 shares of Class A Common Stock
dated 09/19/97.
xxx5.1 Opinion of Choate, Hall & Stewart.
x****10.1 1993 Stock Purchase and Option Plan of PHC, Inc., as amended and
subject to approval of the Company's shareholders.
x+10.2 Form of Stock Option Agreement of PHC, Inc.
x+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. Bromm and Changes, a division of
Mount Regis, dated April 1, 1995.
+10.10 Lease Agreement between PHC, Inc. and Quality Care Centers of
Massachusetts, Inc., dated June 30, 1988, as amended on October
25, 1989.
+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.
<PAGE>
Exhibit Index (Con't)
Exhibit No. Description
+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 , 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
Anna 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 Douglas 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.
<PAGE>
Exhibit Index (Con't)
Exhibit No. Description
+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 Director Agreement between Mukesh P. Patel and Mount
Regis Center, dated September 1, 1991.
+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.
+10.55 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.
<PAGE>
Exhibit Index (Con't)
Exhibit No. Description
**10.59 Settlement Agreement and Mutual General Release, by and between
PHC of California, Inc. and 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 1995 Employee Stock Purchase Plan, subject to approval of the
Company's shareholders.
****10.75 1995 Non-Employee Director Stock Option Plan, subject to approval
of the Company's shareholders.
****10.76 Note of PHC of Nevada, Inc., in favor of LINC Anthem Corporation,
dated November 7, 1995; Security Agreement of PHC, Inc., PHC of
Rhode Island, Inc., and PHC of Virginia, Inc., in favor of LINC
Anthem Corporation, dated November 7, 1995; Loan and Security
Agreement of PHC of Nevada, Inc., in favor of LINC Anthem
Corporation, dated November 7, 1995; Guaranty of PHC, Inc., in
favor of LINC Anthem Corporation, dated November 7, 1995; Stock
Pledge and Security Agreement of PHC, Inc., in favor of LINC
Anthem Corporation, dated November 7, 1995.
<PAGE>
Exhibit Index (Con't)
Exhibit No. Description
****10.77 Secured Promissory Note in the amount of $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.
++10.84 Security Agreement by and between PHC, Inc., PHC of Rhode
Island, Inc., PHC of Virginia, Inc., PHC of Nevada, Inc. and
LINC Anthem Corporation dated July 25, 1996.
+++++10.85 Custodial Agreement by and between LINC Anthem Corporation and
PHC, Inc. and Choate, Hall and Stewart dated July 25, 1996.
++++10.86 Loan and Security Agreement by and between Northpoint-Pioneer
Inc. and LINC Anthem Corporation dated July 25, 1996.
++++10.87 Corporate Guaranty by PHC, Inc., PHC of Rhode Island, Inc.,
PHC of Virginia, Inc., PHC of Nevada, Inc. and LINC Anthem
Corporation dated July 25, 1996 for North Point-Pioneer, Inc.
++++10.88 Stock Pledge and Security Agreement by and between PHC, Inc.
and LINC Anthem Corporation.
++++10.89 Secured Promissory Note of North Point-Pioneer, Inc. in favor
of LINC Anthem Corporation dated July 25, 1996 in the amount
of $500,000.
++++10.90 Lease Agreement by and between PHC, Inc. and 94-19 Associates
dated October 31, 1996 for BSC-NY, Inc.
++++10.91 Note by and between PHC Inc. and Yakov Burstein in the amount
of $180,000.
++++10.92 Note by and between PHC, Inc. and Irwin Mansdorf in the amount
of $570,000.
++++10.93 Employment Agreement by and between BSC-NY, Inc. and Yakov
Burstein dated November 1, 1996.
++++10.94 Consulting Agreement by and between BSC-NY, Inc. and Irwin
Mansdorf dated November 1, 1996.
++++10.95 Agreement and Plan of Merger by and among PHC, Inc., BSC-NY,
Inc., Behavioral Stress Centers, Inc., Irwin Mansdorf, and
Yakov Burstein dated October 31, 1996.
++++10.96 Assignment and Assumption Agreement dated October 31, 1996
by and between Clinical Associates and Perlow Physicians, P.C.
++++10.97 Bill of Sale by and between Clinical Diagnostics and Perlow
Physicians, P.C.
++++10.98 Employment Agreement by and between Perlow Physicians, P.C. and
Yakov Burstein dated November 1, 1996.
++++10.99 Agreement for Purchase and Sale of Assets by and between
Clinical Associates and Clinical Diagnostics and PHC, Inc.,
BSC-NY, Inc., Perlow Physicians, P.C., Irwin Mansdorf, and
Yakov Burstein dated October 31, 1996.
++++10.100 Consulting Agreement by and between Perlow Physicians, P.C.
and Irwin Mansdorf dated November 1, 1996.
++++10.101 Option Agreement by and between Pioneer Healthcare and Gerald
M. Perlow M.D., dated November 15, 1996.
xx****10.102 Asset Purchase Agreement by and among Norton A. Roitman, M.D.,
Clinical Services of Nevada, Inc., Harmony Healthcare
Services, Inc. and the Company dated October 28, 1995.
10.103 Secured Bridge Note in the principal amount of $400,000 by and
between PHC of Michigan, Inc. and HealthCare Financial Partners,
Inc. dated January 13, 1996.
<PAGE>
Exhibit Index (Con't)
Exhibit No. Description
10.104 Guaranty by PHC. Inc. for Secured Bridge Note in principal
amount of $400,000 by and between PHC Michigan and HealthCare
Financial Partners, Inc. dated January 17, 1997.
*****10.105 First Amendment to Lease Agreement and Option Agreement by and
between NMI Realty, Inc. and PHC of Rhode Island, Inc. dated
December 20, 1996.
10.106 Mortgage by and between PHC of Michigan, Inc. and HCFP Funding
Inc. dated January 13, 1997 in the amount of $2,000,000.
10.107 Employment Agreement for Dr. Himanshu Patel; Employment
Agreement for Dr. Mukesh Patel; and Fringe Benefit Exhibit for
both of the Patels' Employment Agreements.
10.108 Plan of Merger by and between Pioneer Counseling of Virginia,
Inc. and Psychiatric & Counseling Associates of Roanoke, Inc.
10.109 Sales Agreement by and between Dillon & Dillon Associates and
Pioneer Counseling of Virginia Inc. for building and land
located at 400 East Burwell St., Salem Virginia in the amount
of $600,000.
10.110 Loan and Security Agreement by and between PHC of Michigan, Inc.
and HCFP Funding Inc., in the amount of $1,500,000.
++++10.111 Revolving Credit Agreement by and between HCFP and PHC of
Michigan, Inc. in the amount of $1,500.000.
+++++10.112 Unconditional Guaranty of Payment and Performance by and between
PHC, Inc. in favor of HCFP.
+++++10.113 Amendment number 1 to Loan and Security Agreement dated May 21,
1996 by and between PHC, of Utah, Inc. and HCFP Funding providing
collateral for the PHC of Michigan, Inc. Loan and Security
Agreement.
@ 10.114 Employment Agreement by and between Perlow Physicians P.C. and
Nissan Shliselberg, M.D dated March, 1997.
@ 10.115 Option and Indemnity Agreement by and between PHC, Inc. and
Nissan Shliselberg, M.D dated February, 1997.
@ 10.116 Secured Term Note by and between PHC of Michigan, Inc. and
Healthcare Financial Partners - Funding II, L.P. in the amount of
$1,100.000 dated March, 1997.
@ 10.117 Mortgage between PHC of Michigan, Inc. and Healthcare Financial
Partners - Funding II, L.P. in the amount of $1,100.000.00
dated March, 1997 for Secured Term Note.
@ 10.118 Mortgage between PHC of Michigan, Inc. and HCPF Funding in the
amount of $1,500.000.00 dated March, 1997 for Revolving Credit
Note.
@ 10.119 Submission of Lease between PHC, Inc. and Conestoga Corporation
dated 11/09/95 for space at 200 Lake Street, Suite 101b, Peabody,
MA 01960.
@ 10.120 Agreement by and between PHC of Michigan, Inc. and New Life
Treatment Centers, Inc. dated July 1, 1996 to provide treatment
and care.
@ 10.121 Lease Line of Credit Agreement by and between PHC, Inc. and LINC
Capital Partners dated March 18, 1997 in the amount of $200,000.
10.122 Agreement between Family Independence Agency and Harbor Oaks
Hospital effective January 1, 1997.
10.123 Master Contract by and between Family Independence Agency and
Harbor Oaks Hospital effective January 1, 1997.
10.124 Deed, Deed of Trust and Deed Trust Note in the amount of $540,000
by and between Dillon and Dillon Associates and Pioneer
Counseling of Virginia, Inc. (Related to Exhibit 10.109).
10.125 Financial Advisory Agreement, Indemnification Agreement and Form
of Warrant by and between Brean Murray & Company and PHC, Inc.
dated 06/10/97.
10.126 Employmen Agreemen by and between Harbor Oaks Hospital and
Sudhir Lingnurkar and Pioneer Counseling Center and Sudhir
Lingnurkar dated August 1, 1997.
10.127 Asset Purchasing Agreement, Restrictive Covenants Agreement and
Lease with Option to Purchase by and between Pioneer Counseling of
Virginia, Inc. and Dianne Jones-Freeman dated August _____, 1997.
10128 Employment Agreement by and between Pioneer Counseling of Virginia
and Dianne Jones-Freeman dated August _____, 1997.
##16.1 Letter on Change in Independent Public Accountants.
****21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors.
23.2 Exhibit intentionally omitted.
<PAGE>
Exhibit Index (Con't)
Exhibit No. Description
23.3 Consent of Choate, Hall & Stewart (included in Exhibit 5.1).
99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995.
+ Filed as an exhibit to the Company's Registration Statement on
Form SB-2 dated March 2, 1994 (Commission file number 33-71418).
++ 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.
+++ 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 May 15, 1995.
++++ 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 December 5, 1996.
+++++ 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 25, 1997.
* Filed as an exhibit to the amendment to the Company's Current
Report on Form 8-K, filed with the Securities and
Exchange Commission (Commission file number 0-23524) on August
15, 1994.
** Filed as an exhibit to the Company's annual report on Form
10-KSB, filed with the Securities and Exchange Commission
(Commission file number 0-23524) on September 28, 1994.
*** Filed as an exhibit to the Company's annual report on Form
10-KSB, filed with the Securities and Exchange (Commission
Coommission file number 0-23524) on October 2, 1995.
**** Filed as an exhibit to the Company's Post-Effective Amendment
No. 2 on Form S-3 to Registration Statement on Form SB-2
under the Securities Act of 1933 dated November 13, 1995
(Commission file number 33-71418).
***** Filed as an exhibit to the Company's Post-Effective Amendment No.
2 on Form S-3 to Registration Statement on Form SB-2 under the
Securities Act of 1933 dated November 13, 1995 (Commission file
number 33-71418).
# Filed as an exhibit to the Company's Registration Statement on
Form 3 dated March 12, 1996 (Commission file number 33-714418).
## Filed as an exhibit to the Company's report on Form 10-KSB, filed
with the Securities and Exchange Commission on September 28,
1994.
### Filed as an exhibit to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission
(Commission file number 0-23524) on November 5, 1996.
x Management contract or compensatory plan or arrangement.
xx Shown as Exhibit 10.76 in Registration Statement on Form S-3
dated March 12, 1996.
xxx Filed as an Amendment to SB-2, filed May 1997.
@ Filed as an exhibit to the Company's Registration Statement on
Form SB-2 dated April 15, 1997 (Commission file number 333-71418).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Cpmpany 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 14, 1997 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 14, 1997
Bruce A. Shear Executive Officer and
Director
(principal executive
officer)
/s/ PAULA C. WURTS Controller and Assistant October 14, 1997
Paula C. Wurts Treasurer
(principal financial and
accounting officer)
/s/ GERALD M. PERLOW Director October 14, 1997
Gerald M. Perlow
/s/ DONALD E. ROBAR Director October 14, 1997
Donald E. Robar
/s/ HOWARD PHILLIPS Director October 14, 1997
Howard Phillips
/s/ WILLIAM F. GRIECO Director October 14, 1997
William F. Grieco
<PAGE>
PHC, INC. AND SUBSIDIARIES
Contents
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheets as of June 30, 1997 and 1996 F-3
Statements of operations for the years ended
June 30, 1997 and 1996 F-4
Statements of changes in stockholders' equity for the
years ended June 30, 1997 and 1996 F-5
Statements of cash flows for the years ended June 30, F-6
1997 and 1996
Notes to financial statements F-7
F-1
<PAGE>
Richard A. Eisner & Company, LLP
Accountants and Consultants
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheets of PHC, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated financial position
of PHC, Inc. and subsidiaries at June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
September 19, 1997
F2
University Place, 124 Mt. Auburn Street, Suite 200, Harvard Square,
Cambridge, MA 02138 Telephone (617) 576-5790, Fax (617) 497-5490
New York, NY Melville, NY Cambridge, MA Florham Park, NJ
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets June 30,
1997 1996
_____________________________
Current assets:
Cash and cash equivalents $ 905,692 $ 293,515
Accounts receivable, net of allowance for
bad debts of $2,982,138 at June 30, 1997 and
$1,492,983 at June 30, 1996
(Notes A, C and M) 10,650,368 8,866,065
Prepaid expenses 375,382 259,893
Other receivables and advances 260,212 66,513
Deferred income tax asset (Note F) 515,300 515,300
Other receivables, related party (Note L) 80,000
____________ ____________
Total current assets 12,786,954 10,001,286
Accounts receivable, noncurrent 605,000 740,000
Loans receivable 134,284 113,805
Property and equipment, net (Notes A and B) 8,408,211 7,884,063
Deferred income tax asset (Note F) 154,700 154,700
Deferred financing costs, net of amortization 751,325 772,823
Goodwill, net of accumulated amortization (Note A) 1,644,252 841,413
Restricted deposits and funded reserves 170,874
Other assets (Note A) 222,032 252,445
Net assets of operations held for sale (Note J) 56,682
Other receivables, noncurrent, related party
(Note L) 2,983,177
____________ ____________
$27,860,809 $20,817,217
____________ ____________
LIABILITIES
Current liabilities:
Accounts payable $ 4,171,334 $ 3,127,052
Notes payable - related parties (Note E) 51,600 56,600
Current maturities of long-term debt (Note C) 580,275 403,894
Revolving credit note and secured term note 1,789,971
Current portion of obligations under capital
leases (Note D) 139,948 88,052
Accrued payroll, payroll taxes and benefits 703,842 715,515
Accrued expenses and other liabilities 587,024 738,784
____________ ____________
Total current liabilities 8,023,994 5,129,897
____________ ____________
Long-term debt and accounts payable (Note C) 9,759,601 7,754,262
Obligations under capital leases (Note D) 1,594,562 1,468,475
Notes payable - related parties (Note E) 23,696 47,394
Convertible debentures ($3,125,000 less discount
$390,625)(Note C) 2,734,375
____________ ____________
Total noncurrent liabilities 14,112,234 9,270,131
____________ _____________
Total liabilities 22,136,228 14,400,028
____________ _____________
Commitments and contingent liabilities
Notes A, G, H, K, L and M)
STOCKHOLDERS' EQUITY (Notes H and K)
Preferred stock, $.01 par value; 1,000,000
shares authorized, 500 shares issued and
outstanding in 1997 (liquidation preference
$504,333) 5
Class A common stock, $.01 par value; 20,000,000
shares authorized, 2,877,836 and 2,293,568 shares
issued and outstanding in 1997 and 1996,
respectively 28,778 22,936
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 730,360 and 812,237 issued and
outstanding in 1997 and 1996, respectively .
convertible into one share of Class A common stock 7,304 8,122
Class C common stock, $.01 par value; 200,000 shares
authorized, 199,816 shares issued and outstanding
in 1997 and 1996 1,998 1,998
Additional paid-in capital 10,398,630 8,078,383
Notes receivable related to purchase of 31,000
shares of Class A common stock (63,928)
Treasury stock, 8,656 shares at cost (37,818)
Accumulated deficit (4,674,316) (1,630,322)
____________ ____________
Total stockholders' equity 5,724,581 6,417,189
____________ ____________
$27,860,809 $20,817,217
____________ ____________
See notes to financial statements F-3
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
June 30,
1997 1996
_______________________
Revenues:
Patient care, net (Note A) $26,007,333 $21,569,594
Management fees (Note L) 597,278
Other 629,761 233,164
___________ ___________
Total revenue
27,234,372 21,802,758
___________ ___________
Operating expenses:
Patient care expenses 14,436,784 12,004,383
Cost of management contracts 324,440 146,407
Provision for doubtful accounts 3,397,693 1,894,087
Administrative expenses 10,341,973 7,800,715
___________ ___________
Total operating expenses 28,500,890 21,845,592
__________ __________
Loss from operations (1,266,518) (42,834)
__________ __________
Other income (expense):
Interest income 201,286 14,486
Other income, net 490,327 211,292
Start-up costs (Note A) (128,313)
Interest expense (2,094,301) (863,484)
Gain from operations held for Sale (Note J) 26,853 11,947
___________ ___________
Total other expense (1,375,835) (754,072)
Loss before income taxes (benefit) (2,642,353) (796,906)
Income taxes (benefit) (Note F) 197,311 (211,591)
___________ ___________
Net Loss $(2,839,664) $(585,315)
___________ ___________
Net loss per share (Note A) $(.87) $(.22)
___________ ___________
Weighted average number of shares outstanding 3,270,175 2,709,504
___________ ___________
See notes to financialstatements F-4
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
Class A Class B Class C
Common Stock Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1,504,662 $15,047 898,795 $8,988 199,966 $2,000
1995
Payment of notes
receivable
Conversion of shares 86,554 866 (86,558) (866) (150) (2)
Exercise of options 22,500 225
Issuance of stock
for obligations in
lieu of cash 6,600 66
Exercise of bridge
loan warrants 33,509 335
Sale of stock in
connection with
private placement 493,750 4,937
Costs related to
private placement
Exercise of IPO 21,493 215
warrants
Issuance of shares
with acquisitions 87,000 870
Exercise of private
placement warrants 37,500 375
Amount paid for
options, not yet
issued
Compensatory stock
options
Net loss, year ended ________ ________ _______ _______ _______ _______ ________ ______
June 30, 1996
Balance - June 30,
1996 2,293,568 22,936 812,237 8,122 199,816 1,998
Costs related to
private placements
Issuance of shares
with acquisitions 229,500 2,295
Exercise of options 13,475 135
Payment of notes
receivable
Conversion of shares 81,877 818 (81,877) (818)
Issuance of employee
stock purchase plan
shares ` 9,452 94
Issuance of shares
in connection with
consulting agreement 20,000 200
Issuance of warrants
with convertible
debentures
Cancellation of
notes receivable
Payment of notes
receivable
Issuance of
preferred stock 1,000 $10
Adjustment related
to beneficial
conversion
Conversion of
preferred stock 229,964 2,300 (500) (5)
Dividend on
preferred stock
Net loss, year ended ________ ________ _______ _______ _______ _______ ________ ______
June 30, 1997
Balance - June 30,
1997 2,877,836 $28,778 730,360 $7,304 199,816 $1,998 500 $ 5
</TABLE>
See notes to financial statements
<PAGE>
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Additional Notes Accumulated
Paid-in Receivable Treasury Shares Deficit Total
Capital, for Stock
Common Stock
Shares Amount
Balance - June 30, $5,554,874 $(75,362) $(1,045,007)$4,460,540
1995
Payment of notes
receivable 11,434 11,434
Conversion of shares 2 -0-
Exercise of options 113,575 113,800
Issuance of stock
for obligations in
lieu of cash 36,184 36,250
Exercise of bridge
loan warrants 153,617 153,952
Sale of stock in
connection with
private placement 1,970,063 1,975,000
Costs related to
private placement (442,395) (442,395)
Exercise of IPO
warrants 137,785 138,000
Issuance of shares
with acquisitions 392,678 393,548
Exercise of private
placement warrants 149,625 150,000
Amount paid for
options, not yet
issued 9,375 9,375
Compensatory stock
options 3,000 3,000
Net loss, year ended
June 30, 1996 (585,315) (585,315)
Balance - June 30,
1996 8,078,383 (63,928) (1,630,322) 6,417,189
Costs related to
private placements (141,295) (141,295)
Issuance of shares
with acquisitions 838,524 840,819
Exercise of options 59,709 59,844
Payment of notes
receivable 662 662
Conversion of shares -0-
Issuance of employee
shares
stock purchase plan 30,530 30,624
Issuance of shares
in connection with
consulting agreement 79,800 80,00
Issuance of warrants
with convertible
debentures 125,000 125,000
Cancellation of
notes receivable 37,818 8,656 $(37,818) -0-
Payment of notes
receivabl 25,448 25,448
Issuance of
preferred stock 999,990 1,000,000
Adjustment related
to beneficial
conversion
feature of
convertible stock
and convertible
debentures 330,284 (200,000) 130,284
Conversion of
preferred stock (2,295) -0-
Dividend on
preferred stock (4,330) (4,330)
Net loss, year ended
June 30, 1997 (2,839,664) (2,839,664)
____________ ____________ _______ _________ ___________ __________
Balance - June 30,
1997 $10,398,630 -0- 8,656 $37,818)$(4,674,316)$5,724,518
</TABLE>
See notes to financial statements F-5
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net loss $(2,839,664) $ (585,315)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred tax benefit (418,137)
Depreciation and amortization 679,248 554,025
Beneficial conversion feature of
convertible debt 130,284
Compensatory stock options and stock and warrants
issued for obligations 205,000 39,250
Changes in:
Accounts receivable (1,649,303) (2,985,052)
Prepaid expenses and other current assets (309,188) (69,978)
Other assets 113,419 (107,711)
Net assets of operations held for sale 56,682 106,886
Accounts payable 1,044,282 1,414,089
Accrued expenses and other liabilities (167,763) 295,475
___________ ___________
Net cash used in operating activities (2,737,003) (1,756,468)
___________ ___________
Cash flows from investing activities:
Acquisition of property and equipment
and intangibles (895,914) (1,557,419)
Loan receivable (3,063,177) (17,462)
Net cash used in investing activities (3,959,091) (1,574,881)
Cash flows from financing activities:
Revolving debt, net 1,789,981
Proceeds from borrowings 2,749,505 2,043,748
Payments on debt (696,886) (402,828)
Deferred financing costs 21,498 (711,960)
Issuance of capital stock 944,173 2,109,166
Convertible debt 2,500,000
_________ __________
Net cash provided by financing activities 7,308,271 3,038,126
_________ __________
Net increase (decrease) in cash and cash
equivalents 612,177 (293,223)
Beginning balance of cash and cash equivalents 293,515 586,738
Ending balance of cash and cash equivalents $ 905,692 $ 293,515
___________ ___________
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 1,933,133 $ 779,898
Income taxes $ 86,414 $ 187,120
Supplemental disclosures of noncash investing
and financing activities:
Stock issued for acquisitions of equipment
and services $ 840,819 $ 393,548
Note payable due for litigation
settlement $ 225,000
Capital leases $ 284,048 $ 94,699
Conversion of preferred stock $ 500,000
Beneficial conversion feature of preferred
stock $ 200,000
See notes to financial statements F-6
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation:
PHC, Inc. ("PHC") operates substance abuse treatment centers in several
locations in the United States, a nursing home in Massachusetts, a
psychiatric hospital in Michigan and psychiatric outpatient facilities in
Nevada, Kansas and Michigan. PHC, Inc. also manages a psychiatric practice
in New York, operates an outpatient facility through a physicians practice,
and operates behavioral health centers through its newest acquisitions. PHC
of Utah, Inc. ("PHU"), PHC of Virginia, Inc. ("PHV") and PHC of Rhode Island,
Inc. ("PHR") provide treatment of addictive disorders and chemical
dependency. PHC of Michigan, Inc. ("PHM") provides inpatient and outpatient
psychiatric care. PHC of Nevada, Inc. ("PHN") and PHC of Kansas, Inc.
("PHK") provide psychiatric treatment on an outpatient basis. North
Point-Pioneer, Inc. ("NPP") operates six outpatient behavioral health centers
under the name of Pioneer Counseling Centers. Behavioral Stress Centers,
Inc. ("BSC") provides management and administrative services to psychotherapy
and psychological practices (see Note L). Pioneer Counseling of Virginia,
Inc. ("PCV'), an 80% owned subsidiary provides outpatient services through a
physicians practice (see Note L). Quality Care Centers of Massachusetts,
Inc. ("Quality Care") operates a long-term care facility known as the
Franvale Nursing and Rehabilitation Center. STL, Inc. ("STL") operated day
care centers (see Note J). The consolidated financial statements include PHC
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
For the year ended June 30, 1996, the Company incurred start-up costs related
to an addition at Quality Care prior to obtaining a license to admit
patients. These costs, amounting to $128,313, are included in other expense
in the accompanying statement of operations under the caption "Start-up
Costs".
During the year ended June 30, 1997, the Company recorded an increase in its
accounts receivable reserve, a substantial portion of the increase was
recorded in the fourth fiscal quarter. The Company is currently reviewing
these adjustments to determine if some of these adjustments should have been
made in prior fiscal quarters.
Revenues and accounts receivable:
Patient care revenues are recorded at established billing rates or at the
amount realizable under agreements with third-party payors, including
Medicaid and Medicare. Revenues under third-party payor agreements are
subject to examination and adjustment, and amounts realizable may change due
to periodic changes in the regulatory environment. Provisions for estimated
third party payor settlements are provided in the period the related services
are rendered. Differences between the amounts accrued and subsequent
settlements are recorded in operations in the year of settlement.
A substantial portion of the Company's revenue at the Franvale Nursing and
Rehabilitation Center is derived from patients under the Medicaid and
Medicare programs. There have been, and the Company expects that there will
continue to be, a number of proposals to limit Medicare and Medicaid
reimbursement, as well as reimbursement from certain private payor sources
for both Franvale and substance abuse treatment center services. The Company
cannot predict at this time whether any of these proposals will be adopted
or, if adopted and implemented, what effect such proposals would have on the
Company.
Medicaid reimbursements are currently based on established rates depending on
the level of care provided and are adjusted prospectively at the beginning of
each calendar year. Medicare reimbursements are currently based on
provisional rates that are adjusted retroactively based on annual calendar
cost reports filed by the Company with Medicare. The Company's calendar year
cost reports to Medicare are routinely audited on an annual basis. The
Company periodically reviews its provisional billing rates and provides for
estimated Medicare adjustments. The Company believes that adequate provision
has been made in the financial statements for any adjustments that might
result from the outcome of Medicare audits.
F-7
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenues and accounts receivable: (continued)
The Company has $1,787,000 receivables, from Medicaid and Medicare, at June
30, 1997, which constitutes a concentration of credit risk should Medicaid
and Medicare defer or be unable to make reimbursement payments as due.
Charity care amounted to approximately $725,000 and $865,000 at June 30, 1997
and 1996, respectively and is classified as patient care revenue and an equal
amount of cost is charged to patient care expenses in the statements of
operations.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:
Estimated
Assets Useful Life
_______ __________________
Buildings 20 through 39 years
Furniture and equipment 3 through 10 years
Motor vehicles 5 years
Leasehold improvements Term of lease
Other assets:
Other assets represent deposits, deferred expenses and covenants not to
compete. Covenants not to compete are amortized over the life of the
underlying agreement using the straight line method.
Goodwill, net of accumulated amortization:
The excess of the purchase price over the fair market value of net assets
acquired are being amortized on a straightline basis over their estimated
useful lives, generally twenty years.
Loss per share:
Net loss per share is based on the weighted average number of shares of
common stock outstanding during each period excluding Class C common shares
held in escrow. Common stock equivalents have been excluded since they are
antidilutive.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTIN POLICIES (CONTINUED)
Cash equivalents:
Cash equivalents are short-term highly liquid investments with original
maturities of less than three months.
Fair value of financial instruments:
The carrying amounts of cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value.
Impairment of long-lived assets:
During the year ended June 30, 1997 the Company wrote-off the carrying
value of the goodwill for one of its subsidiaries in the amount of approximately
$50,000.
Stock-based compensation:
The Company accounts for its employee stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based
method of accounting for stock-based compensation plans. The Company adopted the
disclosure only alternative in fiscal year 1997 which requires disclosure of the
pro forma effects on loss and loss per share as if SFAS No. 123 had been
adopted, as well as certain other information.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised as follows:
June 30,
__________
1997 1996
_____________________
Land $ 302,359 $ 251,759
Buildings 7,854,419 7,338,838
Furniture and equipment 1,760,359 1,404,716
Motor vehicles 50,889 50,889
Leasehold improvements 385,543 301,067
__________ __________
10,353,569 9,347,269
Less accumulated depreciation
and amortization 1,945,358 1,463,206
__________ __________
$8,408,211 $7,884,063
__________ __________
NOTE C - LONG-TERM DEBT
At June 30, 1996, the Company had substantially completed an addition and
renovation to the Quality Care facility in which 37 new beds were added. The
Company financed this addition and renovation through the United States
Department of Housing and Urban Development ("HUD"). At June 30, 1997 and June
30, 1996 unamortized deferred financing costs related to the construction note
payable totalled $690,750 and $711,960, respectively, and are being amortized
over the life of the note. Interest costs capitalized in conjunction with the
construction approximated $65,250.
F-9
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, l997 and 1996
NOTE C - LONG-TERM DEBT (CONTINUED)
Long-term debt is summarized as follows:
June, 30,
__________
1997 1996
______________________
Note payable with interest at 9% requiring monthly
payments of $1,150 through May 2001 $44,816 $58,154
Note payable due in monthly installments of $2,000
including imputed interest at 8% through April 1,
1999 40,574 60,163
9% mortgage note due in monthly installments of $4,850
through July 1, 2012, when the remaining principal
balance is payable 492,996 505,485
Note payable due in monthly installments of $21,506
including interest at 10.5% through November 1, 1999,
collateralized by all assets of PHN and certain
receivables 547,092 735,213
Construction obligations:
Construction note payable collateralized by real
estate and insured by HUD due in monthly installments
of $53,635, including interest at 9.25%, through
December 2035 6,757,422 6,301,986
Other construction obligations to be added to note
payable 344,802
Note payable to a former vendor, payable in monthly
installments of $19,728 including interest at 9.5% 152,353
Note payable due in monthly installments of $26,131
including interest at 11.5% through June 2000 when
the remaining principal balance is payable,
collateralized by all assets of NPP (see Note L) 818,371
Note payable due in monthly installments of $5,558
including interest at 9.25% through May 2012 when
the remaining principal balance is payable,
collateralized by the real estate 538,605
Term mortgage note payable with interest only payments
through March 1998 principal due in monthly
installments of $9,167 beginning April 1998 through
February 2001, a balloon payment of approximately
$780,000 plus interest is due March 2001, interest
at prime plus 5% (13.5% at June 30, 1997)
collateralized by all assets of PHM 1,100,000
__________ __________
10,339,876 8,158,156
Less current maturities 580,275 403,894
__________ __________
Noncurrent maturities $9,759,601 $7,754,262
__________ __________
F-10
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE C - LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows as of June 30, 1997:
Year Ending
June 30, Amount
1998 $580,275
1999 692,681
2000 583,450
2001 1,388,742
2002 48,624
Thereafter 7,046,104
$10.339.876
In 1997, the Company issued 7% convertible debentures due December 31, 1998
in the aggregate principal amount of $3,125,000. The number of shares of Class A
common stock into which the debentures may be converted is determined by
dividing the principal amount to be converted by the conversion price. The
conversion price is equal to 94% of the average closing bid price of the Class A
common stock as reported by NASDAQ for the five trading days immediately
preceding the date of conversion. The beneficial conversion feature, valued at
$130,284, was recorded as additional interest. In addition, on March 31, 1997
the Company issued warrants to the debenture holders as compensation for
amending the debenture agreement to allow for a later filing of the Registration
Statement which was originally required to be filed in December 1996. The
warrants provide for the purchase of 150,000 shares of Class A common stock at
$2.00 per share and expire in 2003. The warrants were valued at $125,000.
Subsequent to June 30, 1997, all of the convertible debentures were converted
into 1,331,696 shares of Class A common stock.
The Company has entered into a revolving credit note and a secured note
with maximum advances of $1,500,000 and $1,000,000, respectively. Advances are
made based on a percentage of accounts receivable and principal is payable upon
receipt of proceeds of the accounts receivable. Interest is payable monthly at
prime plus 2.25% (10.75% at June 30, 1997). These agreements expire on February
1999 and July 1998, respectively, automatically renewable for one-year periods
thereafter unless terminated by either party. Upon expiration, all remaining
principal and interest is due. The notes are collateralized by substantially all
of the assets of the Company's subsidiaries.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 1997, the Company is obligated under various capital leases for
equipment and real estate providing for monthly payments of approximately
$31,000 for fiscal 1998 and terms expiring from December 1997 through February
2014. The carrying value of assets under capital leases is as follows:
June 30,
__________
1997 1996
_______________________
Building $1,477,800 $1,477,800
Equipment and improvements 485,004 214,754
Less accumulated depreciation and (501,732) (400,768)
amortization
$ 1,461,07 1,291,786
F-11
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
Future minimum lease payments under the terms of the capital lease
agreements are as follows at June 30, 1997:
Year Ending
June 30, Real
Equipment Property Total
1998 $140,307 $ 231,000 $371,307
1999 117,083 239,000 356,083
2000 95,121 259,248 354,369
2001 70,828 272,208 343,036
2002 13,557 295,188 308,745
Thereafter 4,641,341 4,641,348
__________ __________ __________
Total future minimum lease 436,896 5,937,992 6,374,888
payments
Less amount representing
interest 83,804 4,556,574 4,640,378
__________ __________ __________
Present value of future
minimum lease payments 353,092 1,381,418 1,734,510
Less current portion 102,632 37,316 139,948
__________ __________ __________
Long-term obligations under
capital lease $250,460 $1,344,102 $1,594,562
__________ __________ __________
The Company has an irrevocable option to purchase the real property noted
above for $1,150,000 on March 1, 1998 or $1,100,000 on March 1, 1999 or any
subsequent March 1 through the end of the lease.
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows:
June 30,
__________
1997 1996
_______________________
Note payable, President and principal stockholder,
interest at 8%, due in installments through 1998 $55,296 $ 78,996
Notes payable, other related parties, interest at
12% and payable on demand 20,000 24,998
________ ________
75,296 103,994
Less current maturities 51,600 56,600
________ ________
$23,696 47,394
________ ________
Maturities of related party debt are as follows at June 30, 1997:
Year Ending
June 30, Amount
___________ ___________
1998 $51,600
1999 23,696
__________
$75,296
__________
Related party interest on notes receivable related to the purchase of Class
A common stock approximated $1,699 and $4,295 for the years ended June 30, 1997
and 1996, respectively.
F-12
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the
accompanying balance sheets:
June 30,
__________
1997 1996
__________ ________
Temporary differences attributable to:
Allowance for doubtful accounts $1,007,000 $ 510,000
Depreciation 147,000 154,700
Other 3,000 5,300
Operating loss carryforward 340,000
___________ ________
Total deferred tax asset 1,497,000 670,000
Less:
Valuation allowance (827,000)
Current portion (515,300) (515,300)
___________ ________
Long-term portion $154,700 $154,700
___________ ________
The Company had no deferred tax liabilities at June 30, 1997 and 1996.
Income tax expense (benefit) is as follows:
YearEnded
June 30,
__________
1997 1996
__________ _________
Deferred income taxes benefit $(418,137)
Current income taxes $197,311 206,546
$197,311 $(211,591)
Reconciliations of the statutory U.S. Federal income taxes based on a rate
of 34% to actual income taxes is as follows:
YearEnded
June 30,
__________
1997 1996
__________ _________
Income tax benefit at statutory rate $(898,400) (271,000)
State income taxes 197,311 80,850
Increase in valuation allowance 827,000
Increase due to nondeductible items, primarily
penalties and travel and entertainment
expenses 12,000 12,100
Other 59,400 (33,541)
__________ _________
$ 197,311 $(211.591)
The Company has a net operating loss carryforward amounting to
approximately $994,000 which expires at various dates through 2012.
Subsequent to June 30, 1997, the Company may be subject to Internal Revenue
Code provisions which limit the loss carryforward available for use in any given
year.
F-13
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
Operating leases:
The Company leases office and treatment facilities and furniture and
equipment under operating leases expiring on various dates through January 2003.
Rent expense for the years ended June 30, 1997 and 1996 was approximately
$752,000 and $450,000, respectively. Minimum future rental payments under
noncancelable operating leases, having remaining terms in excess of one year as
of June 30, 1997 are as follows:
Year Ending
June 30, Amount
1998 $ 688,105
1999 441,833
2000 297,780
2001 202,876
2002 93,450
Thereafter 136,864
____________
$1,860,908
____________
Litigation:
The Company is involved in litigation related to the use of its trademark
name, PIONEER HEALTHCARE, in an action pending before a federal court. If the
Company were required to discontinue using the PIONEER HEALTHCARE mark, the
costs and/or monetary damages related to the litigation involved could have an
adverse effect on the Company's financial performance.
NOTE H - STOCK PLANS
[1] Stock plans:
The Company has three stock plans: a stock option plan, an employee stock
purchase plan and a nonemployee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
has the authority to select the optionees and determine the terms of the options
including: (i) the number of shares, (ii) option exercise terms, (iii) the
exercise or purchase price (which in the case of an incentive stock option will
not be less than the market price of the Class A common stock as of the date of
grant), (iv) type and duration of transfer or other restrictions and (v) the
time and form of payment for restricted stock upon exercise of options.
The employee stock purchase plan provides for the purchase of Class A
common stock at 85 percent of the fair market value at specific dates, to
encourage stock ownership by all eligible employees. A maximum of 1 00,000
shares may be issued under this plan.
Also in October 1995, the Company adopted a nonemployee directors' stock
option plan that provides for the grant of nonstatutory stock options
automatically at the time of each annual meeting of the Board. Through June 30,
1997, options for 1 1,500 shares were granted under this plan. A maximum of
30,000 shares may be issued under this plan. Each outside director shall be
granted an option to purchase 2,000 shares of Class A
F-14
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE H - STOCK PLANS (CONTINUED)
[1] Stock plans: (continued)
common stock at fair market value, vesting 25% immediately and 25% on each
of the first three anniversaries of the grant.
In February 1997, all 95,375 shares underlying the then outstanding
employee stock options were repriced to the current market price, using the
existing exercise
durations.
Under the above plans 179,198 shares are available for future grant or
purchase.
The Company had the following activity in its stock option plans for fiscal
1997 and 1996:
Number Weighted-Average
of Exercise Price
Shares Per Share
Option plans:
Balance - June 30, 1995 92,000 $5.10
Granted 46,500 $6.20
Cancelled (1,250) $5.00
Exercised (22,500) $5.06
Balance - June 30, 1996 114,750 $5.56
Granted 125,500 $4.56
Repriced options:
Original (95,375) $5.99
Repriced 95,375 $3.50
Cancelled (21,400) $6.05
Exercised (13,475) $5.16
Balance - June 30, 1997 205,375 $4.27
_________
Options for 89,250 shares are exercisable as of June 30, 1997 at exercise
prices ranging from $2.87 to $6.63 and a weighted-average exercise price of
approximately $3.71 per share, with a weighted-average remaining contractual
life of approximately three years.
The exercise prices of options outstanding at June 30, 1997 range from
$2.87 to $6.63 per share and have a weighted-average exercise price of
approximately $3.07 per share, with a weighted-average remaining contractual
life of approximately four years.
(2) Stock-based compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. There was no compensation expense recognized in
1997 or 1996. If the Company had elected to recognize compensation cost for the
plans based on the fair value at the grant date for awards granted, consistent
with the method prescribed by SFAS No. 123, net loss per share would have been
changed to the pro forma amounts indicated below:
Year Ended
June 30,
___________
1997 1996
___________ __________
Net loss As reported $(2,839,664) $(585,315)
Pro forma (2,893,272) (610,497)
Net loss per As reported
share $(0.87) $(0.22)
Pro forma (0.88) (0.23)
F-15
<PAGE>
PHC, INC.AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE H - STOCK PLANS (CONTINUED)
[2] Stock-based compensation: (continued)
The fair value of the Company's stock options used to compute pro forma net
loss and net loss per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1997 and 1996: dividend yield of 0%; expected
volatility of 30%; a risk-free interest rate of between 5% and 7%; and an
expected holding period of five years.
The per share weighed-average grant-date fair value of options granted
during the years ended June 30, 1997 and 1996 was $3.44 and $2.07, respectively.
NOTE I - SEGMENT INFORMATION
The Company's continuing operations are classified into two primary
business segments: substance abuse/psychiatric services and long-term care.
Year Ended
June 30,
_____________
1997 1996
___________ ___________
Revenue:
Substance abuse/psychiatric
services $20,700,616 $16,525,672
Long-term care 5,306,717 5,043,922
Other 629,761 233,164
Management fees 597,278
____________ ____________
$27,234,372 $21,802,758
____________ ____________
Income (loss) from operations:
Substance abuse/psychiatric
services $ 283,782 $818,188
Long-term care (1,447,468) (826,463)
Other 324,440 146,407
General corporate (427,272) (180,966)
Interest and other income expense,
net (1,375,835) (754,072)
____________ ____________
Loss before income taxes $(2,642,353) $ (796,906)
____________ ____________
Depreciation and amortization:
Substance abuse/psychiatric
services $ 449,641 349,437
Long-term care 210,130 176,450
____________ ____________
General corporate 19,477 28,138
$ 679,248 $ 554,025
____________ ____________
Capital expenditures:
Substance abuse/psychiatric
services $ 729,661 $ 233,466
Long-term care 213,489 982,978
General corporate 63,150 16,583
____________ ____________
$1,006,300 $ 1,233,027
____________ ____________
Identifiable assets:
Substance abuse/psychiatric
services $18,352,342 $10,877,197
Long-term care 7,437,633 8,619,133
General corporate 2,070,834 1,264,205
Net assets of operations held
for sale 56,682
____________ ____________
27,860,809 $ 20,817,217
____________ ____________
F-16
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE J - OPERATIONS HELD FOR SALE
The Company has systematically phased out its day care center operations
(STL). At June 30, 1996, the Company had net assets relating to its day care
centers amounting to approximately $57,000, which primarily represented the
depreciated cost of one remaining real estate parcel. The parcel was sold in
October 1996 at a gain of approximately $38,000.
NOTE K - CERTAIN CAPITAL TRANSACTIONS
In addition to the outstanding options under the Company's stock plans
(Note H), the Company has the following options and warrants outstanding at June
30, 1997:
Number of Exercise Expiration
Description Units/Shares Price Date
_____________________________________________________________________________
Bridge warrants 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
Warrant for services 25,000 shares $6.88 per share October 2001
Warrant for services 3,000 shares $3.50 per share February 2002
Consultant warrant (see below) 160,000 shares $2.62 per share March 2002
Convertible debenture warrants
(Note C) 150,000 shares $2.00 per share March 2002
Preferred stock warrant 50,000 shares $2.75 per share June 2000
Each unit consists of one share of Class A common stock and a warrant to
purchase one share of Class A common stock at $7.50 per share.
In June 1997, the Company received $1,000,000 in exchange for the issuance
of Series A convertible preferred stock and warrants to purchase 50,000 shares
of Class A common stock. The warrants are exercisable at $2.75 per share and
expire in 2000. The warrants were valued at $30,000. The number of shares of
Class A common stock into which the preferred stock may be converted is equal to
80% of the closing bid price of the Class A common stock as reported by NASDAQ
for the five trading days immediately preceding the conversion. The beneficial
conversion feature, due to the 80% discount above, valued at $200,000 was
recorded as additional dividends. In June 1997, 500 shares of preferred stock
were converted into 229,640 shares of Class A common stock. Subsequent to
year-end the 500 remaining shares of preferred stock were converted into 246,305
shares of Class A common stock. The issuance of these securities will result in
the issuance of some additional Class A common shares under existing dilution
agreements with other stockholders.
Cumulative preferred dividends are at the rate of $60 per share per year,
payable quarterly. Dividends are payable in cash or in shares of preferred stock
at $1,000 per share. At June 30, 1997, accrued dividends amounted to $4,330.
Certain Consultant Warrants may be canceled if certain stock prices, as
defined in the agreement, are not achieved by March 3, 1998.
In February 1996, the Company issued, in a private placement, units
comprised of 6,250 shares of Class A common stock and warrants to purchase 9,375
shares of Class A common stock. A total of 79 units, representing 493,750 shares
of Class A common stock and 740,625 warrants were issued in the offering at a
gross purchase price of $1,975,000. Fees and expenses payable in connection with
the offering total $442,395. Subject to the terms and conditions of the
applicable warrant agreement, each warrant is exercisable for one share of Class
A common stock at an exercise price of $4.00, subject to adjustment upon certain
events. The warrants expire in January 1999. Upon the issuance of the units
described above, certain additional shares of Class A common stock or securities
exercisable therefor become issuable under the antidilution provisions of
certain outstanding securities of the Company.
F-17
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE K - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Subsequent to June 30, 1997, the Class C common stock was canceled and
retired because of restrictions on the release of the stock, due to earnings
targets which were not achieved.
Subsequent to June 30, 1997, the Company issued a warrant for the purchase
of 150,000 shares of common stock in exchange for services. The exercise price
of the warrant is $2.50 per share and the warrant expires May 2002.
NOTE L - ACQUISITIONS
On November 1, 1995, the Company purchased an outpatient facility located
in Nevada ("PHN") which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of $631,000 in cash and 75,000 shares of
Class A common stock of PHC, Inc. which were valued at $323,000. The purchase
price was allocated as follows:
Accounts receivable $231,509
Equipment and other assets 54,397
Covenant not to compete 10,500
Goodwill 671,359
Accrued benefits payable (13,765)
_____________
$954,000
_____________
On March 29, 1996 PHN entered into a lease agreement for the real estate.
The lease payments, which increase annually, are due in equal monthly
installments over a
period of four years.
On March 16, 1996, the Company purchased an outpatient facility located in
Kansas ("PHK'') which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of 12,000 shares of Class A common stock
of PHC, Inc., valued at $70,548. The purchase price was allocated as follows:
Equipment and other assets $20,000
Covenant not to compete 10,000
Goodwill 40,548
_____________
$70,548
_____________
In connection with the acquisition, PHK entered into a lease agreement for
the real estate. The lease payments, which increase annually, are due in equal
monthly installments over a period of three years.
In September 1996, the Company purchased the assets of seven outpatient
behavioral health centers located in Michigan ("NPP"). The centers were
purchased for $532,559 and 15,000 shares of Class A common stock of PHC, Inc.
valued at $5.04 per share. The Company borrowed $900,000 (see Note C) to finance
the purchase and to provide working capital for the centers. The purchase price
was allocated as follows:
Office equipment $ 18,000
Covenants note-to-compete 20,000
Goodwill 597,746
Deposits 15,072
Liabilities assumed (42,659)
_____________
$608,159
_____________
F-18
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE L - ACQUISITIONS (CONTINUED)
Concurrent with the asset purchase agreement, NPP entered into an
employment agreement with a former owner which requires an annual salary of
$150,000 and an annual bonus. The agreement is effective for four years and is
automatically extended for successive one year terms unless terminated. The
salary and bonus are subject to adjustment based on collected billings.
NPP also entered into a management agreement whereby $1,500 per month would
be paid for five years to the former owners.
Subsequent to year-end, under the employment agreement, the Company issued
15,000 unregistered shares of Class A common stock.
On November 1, 1996, BSC-NY, Inc. ("BSC"), merged with Behavioral Stress
Centers, Inc., a provider of management and administrative services to
psychotherapy and psychological practices in the greater New York City
Metropolitan Area. In connection with the merger, the Company issued 150,000
shares of PHC, Inc. Class A common stock to the former owners of Behavioral
Stress Centers, Inc. Also, in connection with the merger, another entity was
formed, Perlow Physicians, P.C. ("Perlow"), to acquire the assets of the medical
practices theretofore serviced by BSC. The Company advanced Perlow the funds to
acquire those assets and at June 30, 1997 Perlow owed the Company $3,063,177
which includes in addition to acquisition costs, management fees of
approximately $511,000 and interest on the advances of approximately $176,000.
It is expected that the obligations will be paid over the next several years and
accordingly, most of these amounts have been classified as noncurrent. The
Company has no ownership interest in Perlow.
The purchase price of BSC was allocated as follows:
Goodwill $63,600
Equipment and other assets 20,000
________
$83,600
________
The merger agreement requires additional purchase price to be paid by BSC
to the former owners of Behavioral Stress Centers, Inc. for the three years
following the merger date. The additional purchase price is based on the income
of BSC before taxes and is to be paid in PHC stock, at market value up to
$200,000 and the balance, if any, in cash.
BSC also entered into a management agreement with Perlow. The agreement
requires Perlow to pay 25% of its practice expenses to BSC on a monthly basis
over a five-year period with an automatic renewal for an additional five-year
period.
On November 1, 1996, BSC entered into a lease agreement for its facilities.
The lease payments are due in equal monthly installments over a three year
period with an option to extend annually for three additional years. The lease
is to be paid by Perlow in accordance with the management agreement.
On January 17, 1997, with an effective date of January 1, 1997, the Company
entered into a Stock Exchange Agreement with a Virginia corporation owned by two
individuals to whom the Company has an outstanding note payable. The corporation
consists of private practices of psychiatry. The Stock Exchange Agreement
provided that in exchange for $50,000 in cash and 64,500 shares of restricted
Class A common stock, the Company received an 80% ownership interest in the
Virginia corporation. The Company also paid $80,444 in legal fees in connection
with the Agreement. Concurrent with the Stock Exchange Agreement the two owners
of the Virginia corporation each executed Employment Agreements with the
Virginia corporation to provide professional
F-19
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE L - ACQUISITIONS (CONTINUED)
services and each was granted an option to purchase 15,000 shares of Class
A common stock at an exercise price of $4.87 per share. The options expire on
April 1, 2002. Each agreement requires an annual salary of $200,000 and expires
in five years. Further, a Plan and Agreement of Merger was executed whereby the
Virginia corporation was merged into PCV.
On January 17, 1997 PCV entered into a purchase and sale agreement with an
unrelated general partnership, to purchase real estate with buildings and
improvements utilized by the Virginia Corporation for approximately $600,000 of
which $540,000 was paid through the issuance of a note (Note C).
In accordance with the above agreements the purchase price was allocated as
follows:
Land $ 50,600
Building 540,000
Covenant not-to-compete 50,000
Goodwill 285,038
_____________
$925,638
_____________
In accordance with the agreement the two owners will be paid a finders fee
for all subsequently acquired medical practices within a 200 mile radius of PCV
and those medical practices identified by the owners wherever the location. The
finders fee is payable in Class A common stock and in cash.
Information is not available to present pro forma financial information
relating to the 1997 acquisitions. The Company has so advised the Securities and
Exchange Commission and has received a no action letter with respect to this
matter. Had the acquisitions made during the fiscal years ended June 30, 1996,
been made as of July 1, 1995, the pro forma effect on the Company's results of
operations is immaterial.
NOTE M - SALE OF RECEIVABLES
The Company has entered into a sale and purchase agreement whereby
third-party receivables are sold at a discount with recourse. The interest rate
is calculated at 5.5% plus the six-month LIBOR rate which is 11.5% and 11.3% at
June 30, 1997 and 1996, respectively. The amount of receivables subject to
recourse at June 30, 1997 totaled approximately $577,000 and the agreement
states that total sales of such outstanding receivables are not to exceed
$4,000,000. Proceeds from the sale of these receivables totalled approximately
$3,000,000 and $3,500,000 for the years ended June 30, 1997 and 1996,
respectively. The purchase fees related to the agreement amount to approximately
$127,000 and $73,720 for the years ended June 30, 1997 and 1996, respectively,
and are included in interest expense in the accompanying consolidated statement
of operations. The agreement expires December 31, 1997.
NOTE N - SUBSEQUENT FINANCING
In September 1997, the Company received $500,000 in exchange for the
issuance of 170,414 shares of unregistered Class A common stock.
Also, subsequent to June 30, 1997, the Company purchased the assets of an
outpatient clinic in Virginia for 26,024 shares of Class A common stock and
$50,000 in cash. The clinic's operations will be included in PCV.
F-20
<PAGE>
AMENDMENT
10-KSB/A
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 [FEE REQUIRED] for the fiscal year ended June 30, 1997
[ ] Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from
______ to _____
Commission file number: 0-23524
PHC, INC.
(Name of small business issuer in its charter)
MASSACHUSETTS 04-2601571
(State or other jurisdiction of R.S. Employer Identification No.)
incorporation or organization)
200 LAKE STREET, SUITE 102, PEABODY, MA 01960
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (978) 536-2777
Securities registered under Section 12(b) of the Act:
NONE.
Securities registered under Section 12(g) of the Act:
Units (each unit consisting of one share of CLASS A COMMON
STOCK AND ONE CLASS A WARRANT
(Title of class)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
CLASS A WARRANTS TO PURCHASE ONE SHARE OF CLASS A COMMON STOCK
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes No X
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The issuer's revenues for the fiscal year ended June 30, 1997 were $
27,234,372.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of September 15, 1997, was $13,351,977. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At September 15, 1997, 4,470,866 shares of the issuer's Class A Common Stock,
730,331 shares of the issuer's Class B Common Stock and 199,816 shares of the
issuer's Class C Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following listing of Exhibits filed with 10K-SB for Fiscal Year ended June
30, 1997 was omitted from the Edgar filing in error:
Exhibit Index:
4.23 Warrant Agreement by and between Brean Murray & Company and PHC., Inc.
dated 07/31/97 (See 10.125).
4.24 Subscription Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. to purchase PHC, Inc. Units dated 09/19/97.
4.25 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. for up to 86,207 shares of Class A Common Stock
dated 09/19/97.
10.122 Agreement between Family Independence Agency and Harbor Oaks Hospital
effective January 1, 1997.
10.123 Master Contract by and between Family Independence Agency and Harbor
Oaks Hospital effective January 1, 1997.
10.124 Deed, Deed of Trust and Deed Trust Note in the amount of $540,000 by
and between Dillon and Dillon Associates and Pioneer Counseling of
Virginia, Inc. (Related to Exhibit 10.109).
10.125 Financial Advisory Agreement, Indemnification Agreement and Form of
Warrant by and between Brean Murray & Company and PHC, Inc. dated
06/10/97.
10.126 Employment Agreement by and between Harbor Oaks Hospital and Sudhir
Lingnurkar, and Pioneer Counseling Center and Sudhir Lingnurkar dated
August 1, 1997.
10.127 Asset Purchasing Agreement, Restrictive Covenants Agreement and Lease
with Option to Purchase by and between Pioneer Counseling of Virginia,
Inc. and Dianne Jones-Freeman dated August _____, 1997.
10.128 Employment Agreement by and between Pioneer Counseling of Virginia,
Inc. and Dianne Jones-Freeman dated August _____, 1997.
In the listing of Exhibits, the following misprints occurred:
4.8 Should read "Form of Warrant Agreement by and among the
Company, American Stock Transfer & Trust Company and
AmeriCorp Securities, Inc. executed in connection with the
Private Placement."
4.24 Incorrectly listed date of Units as 1/19/97. The correct
date is 9/19/97.
10.128 Listed as "10128"
There were two descriptions for footnotes ##. These should read:
## Filed as an exhibit to the Company's report on Form 10-KSB,
filed with the Securities and Exchange Commission on
September 28, 1994.
### Filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the securities and Exchange Commission
(Commission File number 0-23524) on November 5, 1996.
(b) Reports on Form 8-K
Omitted - should read "No reports on Form 8-K were filed by the Company during
the last quarter of the period covered by this report."
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Additional Information.
During the first three quarters of the fiscal year ended June 30, 1997, the
Company provided for allowances for bad debts based on historical experience
supplemented by certain other current information. During the preparation of
the annual financial statements for fiscal 1997, it was determined that the
allowances were understated based on a detailed analysis of accounts
receivable data. The Company reviewed the year-end adjustments to determine
if some of the adjustments should have been made in the prior fiscal quarters
of fiscal 1997.
The Company has concluded that it is not possible to determine what
adjustments, if any, should have been made to allowance reserves in prior
fiscal quarters of 1997 because the information on which the year-end
analysis was based is not available on a quarterly basis.
The Company has changed its internal systems to make such information
available on a quarterly basis in the future and will analyze such data to
determine the adequacy of its reserves for future quarterly financial
statements commencing with the quarter ended September 30, 1997.
ITEM 7 - FINANCIAL STATEMENTS
Many typographical errors were identified in the Financial Statement printing.
Note I - Segment Information was changed to show net revenues from PDSS
operations. Note K - Certain capital transactions were changed to show the
effect of dilution activity through June 30, 1997. Financial Statements are
being resubmitted in their entirety to avoid confusion.
<PAGE>
PHC, INC. AND SUBSIDIARIES
Contents
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheets as of June 30, 1997 and 1996 F-3
Statements of operations for the years ended
June 30, 1997 and 1996 F-4
Statements of changes in stockholders' equity for the
years ended June 30, 1997 and 1996 F-5
Statements of cash flows for the years ended June 30, F-6
1997 and 1996
Notes to financial statements F-7
F-1
<PAGE>
Richard A. Eisner & Company, LLP
Accountants and Consultants
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheets of PHC, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated financial position
of PHC, Inc. and subsidiaries at June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
September 19, 1997
F2
University Place, 124 Mt. Auburn Street, Suite 200, Harvard Square,
Cambridge, MA 02138 Telephone (617) 576-5790, Fax (617) 497-5490
New York, NY Melville, NY Cambridge, MA Florham Park, NJ
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets June 30,
_________________
1997 1996
_____________________________
Current assets:
Cash and cash equivalents $ 905,692 $ 293,515
Accounts receivable, net of allowance for
bad debts of $2,982,138 at June 30, 1997 and
$1,492,983 at June 30, 1996
(Notes A, C and M) 10,650,368 8,866,065
Prepaid expenses 375,382 259,893
Other receivables and advances 260,212 66,513
Deferred income tax asset (Note F) 515,300 515,300
Other receivables, related party (Note L) 80,000
____________ ____________
Total current assets 12,786,954 10,001,286
Accounts receivable, noncurrent 605,000 740,000
Loans receivable 134,284 113,805
Property and equipment, net (Notes A and B) 8,408,211 7,884,063
Deferred income tax asset (Note F) 154,700 154,700
Deferred financing costs, net of amortization 751,325 772,823
Goodwill, net of accumulated amortization (Note A) 1,644,252 841,413
Restricted deposits and funded reserves 170,874
Other assets (Note A) 222,032 252,445
Net assets of operations held for sale (Note J) 56,682
Other receivables, noncurrent, related party
(Note L) 2,983,177
____________ ____________
$27,860,809 $20,817,217
____________ ____________
LIABILITIES
Current liabilities:
Accounts payable $ 4,171,334 $ 3,127,052
Notes payable - related parties (Note E) 51,600 56,600
Current maturities of long-term debt (Note C) 580,275 403,894
Revolving credit note and secured term note 1,789,971
Current portion of obligations under capital
leases (Note D) 139,948 88,052
Accrued payroll, payroll taxes and benefits 703,842 715,515
Accrued expenses and other liabilities 587,024 738,784
____________ ____________
Total current liabilities 8,023,994 5,129,897
____________ ____________
Long-term debt and accounts payable (Note C) 9,759,601 7,754,262
Obligations under capital leases (Note D) 1,594,562 1,468,475
Notes payable - related parties (Note E) 23,696 47,394
Convertible debentures ($3,125,000 less discount
$390,625)(Note C) 2,734,375
____________ ____________
Total noncurrent liabilities 14,112,234 9,270,131
____________ _____________
Total liabilities 22,136,228 14,400,028
____________ _____________
Commitments and contingent liabilities
Notes A, G, H, K, L and M)
STOCKHOLDERS' EQUITY (Notes H and K)
Preferred stock, $.01 par value; 1,000,000
shares authorized, 500 shares issued and
outstanding in 1997 (liquidation preference
$504,333) 5
Class A common stock, $.01 par value; 20,000,000
shares authorized, 2,877,836 and 2,293,568 shares
issued and outstanding in 1997 and 1996,
respectively 28,778 22,936
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 730,360 and 812,237 issued and
outstanding in 1997 and 1996, respectively .
convertible into one share of Class A common stock 7,304 8,122
Class C common stock, $.01 par value; 200,000 shares
authorized, 199,816 shares issued and outstanding
in 1997 and 1996 1,998 1,998
Additional paid-in capital 10,398,630 8,078,383
Notes receivable related to purchase of 31,000
shares of Class A common stock (63,928)
Treasury stock, 8,656 shares at cost (37,818)
Accumulated deficit (4,674,316) (1,630,322)
____________ ____________
Total stockholders' equity 5,724,581 6,417,189
____________ ____________
$27,860,809 $20,817,217
____________ ____________
See notes to financial statements F-3
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended
June 30,
_______________________
1997 1996
_______________________
Revenues:
Patient care, net (Note A) $26,007,333 $21,569,594
Management fees (Note L) 597,278
Other 629,761 233,164
___________ ___________
Total revenue 27,234,372 21,802,758
___________ ___________
Operating expenses:
Patient care expenses 14,436,784 12,004,383
Cost of management contracts 324,440 146,407
Provision for doubtful accounts 3,397,693 1,894,087
Administrative expenses 10,341,973 7,800,715
___________ ___________
Total operating expenses 28,500,890 21,845,592
___________ ___________
Loss from operations (1,266,518) (42,834)
__________ __________
Other income (expense):
Interest income 201,286 14,486
Other income, net 490,327 211,292
Start-up costs (Note A) (128,313)
Interest expense (2,094,301) (863,484)
Gain from operations held for Sale (Note J) 26,853 11,947
___________ ___________
Total other expense (1,375,835) (754,072)
___________ ___________
Loss before income taxes (benefit) (2,642,353) (796,906)
Income taxes (benefit) (Note F) 197,311 (211,591)
___________ ___________
Net Loss $(2,839,664) $(585,315)
___________ ___________
Net loss per share (Note A) $(.87) $(.22)
___________ ___________
Weighted average number of shares outstanding 3,270,175 2,709,504
___________ ___________
See notes to financial statements
F-4
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
Class A Class B Class C
Common Stock Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30,
1995 1,504,662 $15,047 898,795 $8,988 199,966 $2,000
Payment of notes
receivable
Conversion of shares 86,554 866 (86,558) (866) (150) (2)
Exercise of options 22,500 225
Issuance of stock
for obligations in
lieu of cash 6,600 66
Exercise of bridge
loan warrants 33,509 335
Sale of stock in
connection with
private placement 493,750 4,937
Costs related to
private placement
Exercise of IPO 21,493 215
warrants
Issuance of shares
with acquisitions 87,000 870
Exercise of private
placement warrants 37,500 375
Amount paid for
options, not yet
issued
Compensatory stock
options
Net loss, year ended ________ ________ _______ _______ _______ _______ _______ ______
June 30, 1996
Balance - June 30,
1996 2,293,568 22,936 812,237 8,122 199,816 1,998
Costs related to
private placements
Issuance of shares
with acquisitions 229,500 2,295
Exercise of options 13,475 135
Payment of notes
receivable
Conversion of shares 81,877 818 (81,877) (818)
Issuance of employee
stock purchase plan
shares ` 9,452 94
Issuance of shares
in connection with
consulting agreement 20,000 200
Issuance of warrants
with convertible
debentures
Cancellation of
notes receivable
Payment of notes
receivable
Issuance of
preferred stock 1,000 $10
Adjustment related
to beneficial
conversion
Conversion of
preferred stock 229,964 2,300 (500) (5)
Dividend on
preferred stock
Net loss, year ended ________ ________ _______ _______ _______ _______ ________ ______
June 30, 1997
Balance - June 30,
1997 2,877,836 $28,778 730,360 $7,304 199,816 $1,998 500 $ 5
</TABLE>
See notes to financial statements
<PAGE>
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Additional
Paid-in Notes
Capital, Receivable Treasury Shares Accumulated
Common Stock for Stock Shares Amount Deficit Total
____________ _________ ________ ______ ___________ ____________
Balance - June 30,
1995 $5,554,874 $(75,362) $(1,045,007) $4,460,540
Payment of notes
receivable 11,434 11,434
Conversion of shares 2 -0-
Exercise of options 113,575 113,800
Issuance of stock
for obligations in
lieu of cash 36,184 36,250
Exercise of bridge
loan warrants 153,617 153,952
Sale of stock in
connection with
private placement 1,970,063 1,975,000
Costs related to
private placement (442,395) (442,395)
Exercise of IPO
warrants 137,785 138,000
Issuance of shares
with acquisitions 392,678 393,548
Exercise of private
placement warrants 149,625 150,000
Amount paid for
options, not yet
issued 9,375 9,375
Compensatory stock
options 3,000 3,000
Net loss, year ended
June 30, 1996 (585,315) (585,315)
_________ _______ _______ _________ ___________ _________
Balance - June 30,
1996 8,078,383 (63,928) (1,630,322) 6,417,189
Costs related to
private placements (141,295) (141,295)
Issuance of shares
with acquisitions 838,524 840,819
Exercise of options 59,709 59,844
Payment of notes
receivable 662 662
Conversion of shares -0-
Issuance of employee
shares stock
purchase plan 30,530 30,624
Issuance of shares
in connection with
consulting agreement 79,800 80,000
Issuance of warrants
with convertible
debentures 125,000 125,000
Cancellation of
notes receivable 37,818 8,656 $(37,818) -0-
Payment of notes
receivable 25,448 25,448
Issuance of
preferred stock 999,990 1,000,000
Adjustment related
to beneficial
conversion
feature of
convertible preferred
stock
and convertible
debentures 330,284 (200,000) 130,284
Conversion of
preferred stock (2,295) -0-
Dividend on
preferred stock (4,330) (4,330)
Net loss, year ended
June 30, 1997 (2,839,664) (2,839,664)
____________ _________ _______ _________ ___________ __________
Balance - June 30,
1997 $10,398,630 -0- 8,656 $(37,818) $(4,674,316) $5,724,518
</TABLE>
See notes to financial statements F-5
<PAGE>
PHC, INC. AND SUBSIDIARIES Year Ended
June 30,
____________
1997 1996
__________________________
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net loss $ (2,839,664) $ (585,315)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred tax benefit (418,137)
Depreciation and amortization 679,248 554,025
Beneficial conversion feature of
convertible debt 130,284
Compensatory stock options and stock and warrants
issued for obligations 205,000 39,250
Changes in:
Accounts receivable (1,649,303) (2,985,052)
Prepaid expenses and other current assets (309,188) (69,978)
Other assets 113,419 (107,711)
Net assets of operations held for sale 56,682 106,886
Accounts payable 1,044,282 1,414,089
Accrued expenses and other liabilities (167,763) 295,475
___________ ___________
Net cash used in operating activities (2,737,003) (1,756,468)
___________ ___________
Cash flows from investing activities:
Acquisition of property and equipment
and intangibles (895,914) (1,557,419)
Loan receivable (3,063,177) (17,462)
Net cash used in investing activities (3,959,091) (1,574,881)
Cash flows from financing activities:
Revolving debt, net 1,789,981
Proceeds from borrowings 2,749,505 2,043,748
Payments on debt (696,886) (402,828)
Deferred financing costs 21,498 (711,960)
Issuance of capital stock 944,173 2,109,166
Convertible debt 2,500,000
_________ __________
Net cash provided by financing activities 7,308,271 3,038,126
_________ __________
Net increase (decrease) in cash and cash
equivalents 612,177 (293,223)
Beginning balance of cash and cash equivalents 293,515 586,738
Ending balance of cash and cash equivalents $ 905,692 $ 293,515
___________ ___________
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 1,933,133 $ 779,898
Income taxes $ 86,414 $ 187,120
Supplemental disclosures of noncash investing
and financing activities:
Stock issued for acquisitions of equipment
and services $ 840,819 $ 393,548
Note payable due for litigation
settlement $ 225,000
Capital leases $ 284,048 $ 94,699
Conversion of preferred stock $ 500,000
Beneficial conversion feature of preferred
stock $ 200,000
See notes to financial statements F-6
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation:
PHC, Inc. ("PHC") operates substance abuse treatment centers in several
locations in the United States, a nursing home in Massachusetts, a
psychiatric hospital in Michigan and psychiatric outpatient facilities in
Nevada, Kansas and Michigan. PHC, Inc. also manages a psychiatric practice
in New York, operates an outpatient facility through a physicians practice,
and operates behavioral health centers through its newest acquisitions. PHC
of Utah, Inc. ("PHU"), PHC of Virginia, Inc. ("PHV") and PHC of Rhode Island,
Inc. ("PHR") provide treatment of addictive disorders and chemical
dependency. PHC of Michigan, Inc. ("PHM") provides inpatient and outpatient
psychiatric care. PHC of Nevada, Inc. ("PHN") and PHC of Kansas, Inc.
("PHK") provide psychiatric treatment on an outpatient basis. North
Point-Pioneer, Inc. ("NPP") operates six outpatient behavioral health centers
under the name of Pioneer Counseling Centers. Behavioral Stress Centers,
Inc. ("BSC") provides management and administrative services to psychotherapy
and psychological practices (see Note L). Pioneer Counseling of Virginia,
Inc. ("PCV'), an 80% owned subsidiary provides outpatient services through a
physicians practice (see Note L). Quality Care Centers of Massachusetts,
Inc. ("Quality Care") operates a long-term care facility known as the
Franvale Nursing and Rehabilitation Center. STL, Inc. ("STL") operated day
care centers (see Note J). The consolidated financial statements include PHC
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
For the year ended June 30, 1996, the Company incurred start-up costs related
to an addition at Quality Care prior to obtaining a license to admit
patients. These costs, amounting to $128,313, are included in other expense
in the accompanying statement of operations under the caption "Start-up
Costs".
During the year ended June 30, 1997, the Company recorded an increase in its
accounts receivable reserve, a substantial portion of the increase was
recorded in the fourth fiscal quarter. The Company is currently reviewing
these adjustments to determine if some of these adjustments should have been
made in prior fiscal quarters.
Revenues and accounts receivable:
Patient care revenues are recorded at established billing rates or at the
amount realizable under agreements with third-party payors, including
Medicaid and Medicare. Revenues under third-party payor agreements are
subject to examination and adjustment, and amounts realizable may change due
to periodic changes in the regulatory environment. Provisions for estimated
third party payor settlements are provided in the period the related services
are rendered. Differences between the amounts accrued and subsequent
settlements are recorded in operations in the year of settlement.
A substantial portion of the Company's revenue at the Franvale Nursing and
Rehabilitation Center is derived from patients under the Medicaid and
Medicare programs. There have been, and the Company expects that there will
continue to be, a number of proposals to limit Medicare and Medicaid
reimbursement, as well as reimbursement from certain private payor sources
for both Franvale and substance abuse treatment center services. The Company
cannot predict at this time whether any of these proposals will be adopted
or, if adopted and implemented, what effect such proposals would have on the
Company.
Medicaid reimbursements are currently based on established rates depending on
the level of care provided and are adjusted prospectively at the beginning of
each calendar year. Medicare reimbursements are currently based on
provisional rates that are adjusted retroactively based on annual calendar
cost reports filed by the Company with Medicare. The Company's calendar year
cost reports to Medicare are routinely audited on an annual basis. The
Company periodically reviews its provisional billing rates and provides for
estimated Medicare adjustments. The Company believes that adequate provision
has been made in the financial statements for any adjustments that might
result from the outcome of Medicare audits.
F-7
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenues and accounts receivable: (continued)
The Company has $1,787,000 receivables, from Medicaid and Medicare, at June
30, 1997, which constitutes a concentration of credit risk should Medicaid
and Medicare defer or be unable to make reimbursement payments as due.
Charity care amounted to approximately $725,000 and $865,000 at June 30, 1997
and 1996, respectively and is classified as patient care revenue and an equal
amount of cost is charged to patient care expenses in the statements of
operations.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:
Estimated
Assets Useful Life
_______ __________________
Buildings 20 through 39 years
Furniture and equipment 3 through 10 years
Motor vehicles 5 years
Leasehold improvements Term of lease
Other assets:
Other assets represent deposits, deferred expenses and covenants not to
compete. Covenants not to compete are amortized over the life of the
underlying agreement using the straight line method.
Goodwill, net of accumulated amortization:
The excess of the purchase price over the fair market value of net assets
acquired are being amortized on a straightline basis over their estimated
useful lives, generally twenty years.
Loss per share:
Net loss per share is based on the weighted average number of shares of
common stock outstanding during each period excluding Class C common shares
held in escrow. Common stock equivalents have been excluded since they are
antidilutive.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTIN POLICIES (CONTINUED)
Cash equivalents:
Cash equivalents are short-term highly liquid investments with original
maturities of less than three months.
Fair value of financial instruments:
The carrying amounts of cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value.
Impairment of long-lived assets:
During the year ended June 30, 1997 the Company wrote-off the carrying
value of the goodwill for one of its subsidiaries in the amount of approximately
$50,000.
Stock-based compensation:
The Company accounts for its employee stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based
method of accounting for stock-based compensation plans. The Company adopted the
disclosure only alternative in fiscal year 1997 which requires disclosure of the
pro forma effects on loss and loss per share as if SFAS No. 123 had been
adopted, as well as certain other information.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised as follows:
June 30,
________
1997 1996
_____________________
Land $ 302,359 $ 251,759
Buildings 7,854,419 7,338,838
Furniture and equipment 1,760,359 1,404,716
Motor vehicles 50,889 50,889
Leasehold improvements 385,543 301,067
__________ __________
10,353,569 9,347,269
Less accumulated depreciation
and amortization 1,945,358 1,463,206
__________ __________
$8,408,211 $7,884,063
__________ __________
NOTE C - LONG-TERM DEBT
At June 30, 1996, the Company had substantially completed an addition and
renovation to the Quality Care facility in which 37 new beds were added. The
Company financed this addition and renovation through the United States
Department of Housing and Urban Development ("HUD"). At June 30, 1997 and June
30, 1996 unamortized deferred financing costs related to the construction note
payable totalled $690,750 and $711,960, respectively, and are being amortized
over the life of the note. Interest costs capitalized in conjunction with the
construction approximated $65,250.
F-9
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, l997 and 1996
NOTE C - LONG-TERM DEBT (CONTINUED)
Long-term debt is summarized as follows:
June, 30,
_________
1997 1996
______________________
Note payable with interest at 9% requiring monthly
payments of $1,150 through May 2001 $44,816 $58,154
Note payable due in monthly installments of $2,000
including imputed interest at 8% through April 1,
1999 40,574 60,163
9% mortgage note due in monthly installments of $4,850
through July 1, 2012, when the remaining principal
balance is payable 492,996 505,485
Note payable due in monthly installments of $21,506
including interest at 10.5% through November 1, 1999,
collateralized by all assets of PHN and certain
receivables 547,092 735,213
Construction obligations:
Construction note payable collateralized by real
estate and insured by HUD due in monthly installments
of $53,635, including interest at 9.25%, through
December 2035 6,757,422 6,301,986
Other construction obligations to be added to note
payable 344,802
Note payable to a former vendor, payable in monthly
installments of $19,728 including interest at 9.5% 152,353
Note payable due in monthly installments of $26,131
including interest at 11.5% through June 2000 when
the remaining principal balance is payable,
collateralized by all assets of NPP (see Note L) 818,371
Note payable due in monthly installments of $5,558
including interest at 9.25% through May 2012 when
the remaining principal balance is payable,
collateralized by the real estate 538,605
Term mortgage note payable with interest only payments
through March 1998 principal due in monthly
installments of $9,167 beginning April 1998 through
February 2001, a balloon payment of approximately
$780,000 plus interest is due March 2001, interest
at prime plus 5% (13.5% at June 30, 1997)
collateralized by all assets of PHM 1,100,000
__________ __________
10,339,876 8,158,156
Less current maturities 580,275 403,894
__________ __________
Noncurrent maturities $9,759,601 $7,754,262
__________ __________
F-10
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE C - LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows as of June 30, 1997:
Year Ending
June 30, Amount
___________ ___________
1998 $580,275
1999 692,681
2000 583,450
2001 1,388,742
2002 48,624
Thereafter 7,046,104
$10,339,876
In 1997, the Company issued 7% convertible debentures due December 31, 1998
in the aggregate principal amount of $3,125,000. The number of shares of Class A
common stock into which the debentures may be converted is determined by
dividing the principal amount to be converted by the conversion price. The
conversion price is equal to 94% of the average closing bid price of the Class A
common stock as reported by NASDAQ for the five trading days immediately
preceding the date of conversion. The beneficial conversion feature, valued at
$130,284, was recorded as additional interest. In addition, on March 31, 1997
the Company issued warrants to the debenture holders as compensation for
amending the debenture agreement to allow for a later filing of the Registration
Statement which was originally required to be filed in December 1996. The
warrants provide for the purchase of 150,000 shares of Class A common stock at
$2.00 per share and expire in 2003. The warrants were valued at $125,000.
Subsequent to June 30, 1997, all of the convertible debentures were converted
into 1,331,696 shares of Class A common stock.
The Company has entered into a revolving credit note and a secured note
with maximum advances of $1,500,000 and $1,000,000, respectively. Advances are
made based on a percentage of accounts receivable and principal is payable upon
receipt of proceeds of the accounts receivable. Interest is payable monthly at
prime plus 2.25% (10.75% at June 30, 1997). These agreements expire on February
1999 and July 1998, respectively, automatically renewable for one-year periods
thereafter unless terminated by either party. Upon expiration, all remaining
principal and interest is due. The notes are collateralized by substantially all
of the assets of the Company's subsidiaries.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 1997, the Company is obligated under various capital leases for
equipment and real estate providing for monthly payments of approximately
$31,000 for fiscal 1998 and terms expiring from December 1997 through February
2014. The carrying value of assets under capital leases is as follows:
June 30,
_________
1997 1996
_______________________
Building $1,477,800 $1,477,800
Equipment and improvements 485,004 214,754
Less accumulated depreciation and (501,732) (400,768)
amortization
$ 1,461,07 1,291,786
__________ __________
F-11
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
Future minimum lease payments under the terms of the capital lease
agreements are as follows at June 30, 1997:
Year Ending
June 30, Real
Equipment Property Total
____________ __________ __________ __________
1998 $140,307 $ 231,000 $371,307
1999 117,083 239,000 356,083
2000 95,121 259,248 354,369
2001 70,828 272,208 343,036
2002 13,557 295,188 308,745
Thereafter 4,641,341 4,641,348
__________ __________ __________
Total future minimum lease 436,896 5,937,992 6,374,888
payments
Less amount representing
interest 83,804 4,556,574 4,640,378
__________ __________ __________
Present value of future
minimum lease payments 353,092 1,381,418 1,734,510
Less current portion 102,632 37,316 139,948
__________ __________ __________
Long-term obligations under
capital lease $250,460 $1,344,102 $1,594,562
__________ __________ __________
The Company has an irrevocable option to purchase the real property noted
above for $1,150,000 on March 1, 1998 or $1,100,000 on March 1, 1999 or any
subsequent March 1 through the end of the lease.
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows:
June 30,
________
1997 1996
_______________________
Note payable, President and principal stockholder,
interest at 8%, due in installments through 1998 $55,296 $ 78,996
Notes payable, other related parties, interest at
12% and payable on demand 20,000 24,998
________ ________
75,296 103,994
Less current maturities 51,600 56,600
________ ________
$23,696 47,394
________ ________
Maturities of related party debt are as follows at June 30, 1997:
Year Ending
June 30, Amount
___________ ___________
1998 $51,600
1999 23,696
__________
$75,296
__________
Related party interest on notes receivable related to the purchase of Class
A common stock approximated $1,699 and $4,295 for the years ended June 30, 1997
and 1996, respectively.
F-12
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the
accompanying balance sheets:
Year Ended
June 30,
____________
1997 1996
___________ ________
Temporary differences attributable to:
Allowance for doubtful accounts $1,007,000 $ 510,000
Depreciation 147,000 154,700
Other 3,000 5,300
Operating loss carryforward 340,000
___________ ________
Total deferred tax asset 1,497,000 670,000
Less:
Valuation allowance (827,000)
Current portion (515,300) (515,300)
___________ ________
Long-term portion $154,700 $154,700
___________ ________
The Company had no deferred tax liabilities at June 30, 1997 and 1996.
Income tax expense (benefit) is as follows:
YearEnded
June 30,
____________
1997 1996
__________ _________
Deferred income taxes benefit $(418,137)
Current income taxes $197,311 206,546
__________ _________
$197,311 $(211,591)
__________ _________
Reconciliations of the statutory U.S. Federal income taxes based on a rate
of 34% to actual income taxes is as follows:
YearEnded
June 30,
____________
1997 1996
__________ _________
Income tax benefit at statutory rate $(898,400) $(271,000)
Increase in valuation allowance 827,000
Increase due to nondeductible items, primarily
penalties and travel and entertainment
expenses 12,000 12,100
Other 59,400 (33,541)
__________ _________
$ 197,311 $(211,591)
__________ _________
The Company has a net operating loss carryforward amounting to
approximately $994,000 which expires at various dates through 2012.
Subsequent to June 30, 1997, the Company may be subject to Internal Revenue
Code provisions which limit the loss carryforward available for use in any given
year.
F-13
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
Operating leases:
The Company leases office and treatment facilities and furniture and
equipment under operating leases expiring on various dates through January 2003.
Rent expense for the years ended June 30, 1997 and 1996 was approximately
$752,000 and $450,000, respectively. Minimum future rental payments under
noncancelable operating leases, having remaining terms in excess of one year as
of June 30, 1997 are as follows:
Year Ending
June 30, Amount
_____________ __________
1998 $ 688,105
1999 441,833
2000 297,780
2001 202,876
2002 93,450
Thereafter 136,864
____________
$1,860,908
____________
Litigation:
The Company is involved in litigation related to the use of its trademark
name, PIONEER HEALTHCARE, in an action pending before a federal court. If the
Company were required to discontinue using the PIONEER HEALTHCARE mark, the
costs and/or monetary damages related to the litigation involved could have an
adverse effect on the Company's financial performance.
NOTE H - STOCK PLANS
[1] Stock plans:
The Company has three stock plans: a stock option plan, an employee stock
purchase plan and a nonemployee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
has the authority to select the optionees and determine the terms of the options
including: (i) the number of shares, (ii) option exercise terms, (iii) the
exercise or purchase price (which in the case of an incentive stock option will
not be less than the market price of the Class A common stock as of the date of
grant), (iv) type and duration of transfer or other restrictions and (v) the
time and form of payment for restricted stock upon exercise of options.
The employee stock purchase plan provides for the purchase of Class A
common stock at 85 percent of the fair market value at specific dates, to
encourage stock ownership by all eligible employees. A maximum of 1 00,000
shares may be issued under this plan.
Also in October 1995, the Company adopted a nonemployee directors' stock
option plan that provides for the grant of nonstatutory stock options
automatically at the time of each annual meeting of the Board. Through June 30,
1997, options for 1 1,500 shares were granted under this plan. A maximum of
30,000 shares may be issued under this plan. Each outside director shall be
granted an option to purchase 2,000 shares of Class A
F-14
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE H - STOCK PLANS (CONTINUED)
[1] Stock plans: (continued)
common stock at fair market value, vesting 25% immediately and 25% on each
of the first three anniversaries of the grant.
In February 1997, all 95,375 shares underlying the then outstanding
employee stock options were repriced to the current market price, using the
existing exercise
durations.
Under the above plans 179,198 shares are available for future grant or
purchase.
The Company had the following activity in its stock option plans for fiscal
1997 and 1996:
Number Weighted-Average
of Exercise Price
Shares Per Share
_________ ________________
Option plans:
Balance - June 30, 1995 92,000 $5.10
Granted 46,500 $6.20
Cancelled (1,250) $5.00
Exercised (22,500) $5.06
_________
Balance - June 30, 1996 114,750 $5.56
Granted 125,500 $4.56
Repriced options:
Original (95,375) $5.99
Repriced 95,375 $3.50
Cancelled (21,400) $6.05
Exercised (13,475) $5.16
_________
Balance - June 30, 1997 205,375 $4.27
_________
Options for 89,250 shares are exercisable as of June 30, 1997 at exercise
prices ranging from $2.87 to $6.63 and a weighted-average exercise price of
approximately $3.71 per share, with a weighted-average remaining contractual
life of approximately three years.
The exercise prices of options outstanding at June 30, 1997 range from
$2.87 to $6.63 per share and have a weighted-average exercise price of
approximately $3.07 per share, with a weighted-average remaining contractual
life of approximately four years.
(2) Stock-based compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. There was no compensation expense recognized in
1997 or 1996. If the Company had elected to recognize compensation cost for the
plans based on the fair value at the grant date for awards granted, consistent
with the method prescribed by SFAS No. 123, net loss per share would have been
changed to the pro forma amounts indicated below:
Year Ended
June 30,
___________
1997 1996
______________________________
Net loss As reported $(2,839,664) $(585,315)
Pro forma (2,893,272) (610,497)
Net loss per As reported
share $(0.87) $(0.22)
Pro forma (0.88) (0.23)
F-15
<PAGE>
PHC, INC.AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE H - STOCK PLANS (CONTINUED)
[2] Stock-based compensation: (continued)
The fair value of the Company's stock options used to compute pro forma net
loss and net loss per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1997 and 1996: dividend yield of 0%; expected
volatility of 30%; a risk-free interest rate of between 5% and 7%; and an
expected holding period of five years.
The per share weighed-average grant-date fair value of options granted
during the years ended June 30, 1997 and 1996 was $3.44 and $2.07, respectively.
NOTE I - SEGMENT INFORMATION
The Company's continuing operations are classified into two primary
business segments: substance abuse/psychiatric services and long-term care.
Year Ended
June 30,
_____________
1997 1996
___________________________
Revenue:
Substance abuse/psychiatric
services $20,700,616 $16,525,672
Long-term care 5,306,717 5,043,922
Other 629,761 233,164
Management fees 597,278
____________ ____________
$27,234,372 $21,802,758
____________ ____________
Income (loss) from operations:
Substance abuse/psychiatric
services $ 627,341 $1,024,245
Long-term care (1,447,468) (826,463)
Other (PDSS) 305,321 86,757
General corporate (427,272) (180,966)
Interest and other income expense,
net (1,700,275) (900,479)
____________ ____________
Loss before income taxes $(2,642,353) $ (796,906)
____________ ____________
Depreciation and amortization:
Substance abuse/psychiatric
services $ 449,641 $ 349,437
Long-term care 210,130 176,450
____________ ____________
General corporate 19,477 28,138
$ 679,248 $ 554,025
____________ ____________
Capital expenditures:
Substance abuse/psychiatric
services $ 729,661 $ 233,466
Long-term care 213,489 982,978
General corporate 63,150 16,583
____________ ____________
$1,006,300 $ 1,233,027
____________ ____________
Identifiable assets:
Substance abuse/psychiatric
services $18,352,342 $10,877,197
Long-term care 7,437,633 8,619,133
General corporate 2,070,834 1,264,205
Net assets of operations held
for sale 56,682
____________ ____________
27,860,809 $20,817,217
____________ ____________
F-16
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE J - OPERATIONS HELD FOR SALE
The Company has systematically phased out its day care center operations
(STL). At June 30, 1996, the Company had net assets relating to its day care
centers amounting to approximately $57,000, which primarily represented the
depreciated cost of one remaining real estate parcel. The parcel was sold in
October 1996 at a gain of approximately $38,000.
NOTE K - CERTAIN CAPITAL TRANSACTIONS
In addition to the outstanding options under the Company's stock plans
(Note H), the Company has the following options and warrants outstanding at June
30, 1997:
Number of Exercise Expiration
Description Units/Shares Price Date
_____________________________________________________________________________
Bridge warrants 5,024 units $4.38 per unit September 1998
Unit purchase option 148,171 units $5.91 per unit March 1999
IPO warrants 1,681,832 shares $6.29 per share March 1999
Private placement warrants 715,682 shares $3.93 per share January 1999
Bridge warrants 34,710 shares $7.39 per share March 1999
Warrant for services 25,000 shares $6.88 per share October 2001
Warrant for services 3,093 shares $3.39 per share February 2002
Consultant warrant
(see below) 160,000 shares $2.62 per share March 2002
Convertible debenture warrants
(Note C) 150,000 shares $2.00 per share March 2002
Preferred stock warrant 50,000 shares $2.75 per share June 2000
Each unit consists of one share of Class A common stock and a warrant to
purchase one share of Class A common stock at $7.50 per share.
In June 1997, the Company received $1,000,000 in exchange for the issuance
of Series A convertible preferred stock and warrants to purchase 50,000 shares
of Class A common stock. The warrants are exercisable at $2.75 per share and
expire in 2000. The warrants were valued at $30,000. The number of shares of
Class A common stock into which the preferred stock may be converted is equal to
80% of the closing bid price of the Class A common stock as reported by NASDAQ
for the five trading days immediately preceding the conversion. The beneficial
conversion feature, due to the 80% discount above, valued at $200,000 was
recorded as additional dividends. In June 1997, 500 shares of preferred stock
were converted into 229,640 shares of Class A common stock. Subsequent to
year-end the 500 remaining shares of preferred stock were converted into 246,305
shares of Class A common stock. The issuance of these securities will result in
the issuance of some additional Class A common shares under existing dilution
agreements with other stockholders.
Cumulative preferred dividends are at the rate of $60 per share per year,
payable quarterly. Dividends are payable in cash or in shares of preferred stock
at $1,000 per share. At June 30, 1997, accrued dividends amounted to $4,330.
Certain Consultant Warrants may be canceled if certain stock prices, as
defined in the agreement, are not achieved by March 3, 1998.
In February 1996, the Company issued, in a private placement, units
comprised of 6,250 shares of Class A common stock and warrants to purchase 9,375
shares of Class A common stock. A total of 79 units, representing 493,750 shares
of Class A common stock and 740,625 warrants were issued in the offering at a
gross purchase price of $1,975,000. Fees and expenses payable in connection with
the offering total $442,395. Subject to the terms and conditions of the
applicable warrant agreement, each warrant is exercisable for one share of Class
A common stock at an exercise price of $4.00, subject to adjustment upon certain
events. The warrants expire in January 1999. Upon the issuance of the units
described above, certain additional shares of Class A common stock or securities
exercisable therefor become issuable under the antidilution provisions of
certain outstanding securities of the Company.
F-17
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE K - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Subsequent to June 30, 1997, the Class C common stock was canceled and
retired because of restrictions on the release of the stock, due to earnings
targets which were not achieved.
Subsequent to June 30, 1997, the Company issued a warrant for the purchase
of 150,000 shares of common stock in exchange for services. The exercise price
of the warrant is $2.50 per share and the warrant expires May 2002.
NOTE L - ACQUISITIONS
On November 1, 1995, the Company purchased an outpatient facility located
in Nevada ("PHN") which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of $631,000 in cash and 75,000 shares of
Class A common stock of PHC, Inc. which were valued at $323,000. The purchase
price was allocated as follows:
Accounts receivable $231,509
Equipment and other assets 54,397
Covenant not to compete 10,500
Goodwill 671,359
Accrued benefits payable (13,765)
_____________
$954,000
_____________
On March 29, 1996 PHN entered into a lease agreement for the real estate.
The lease payments, which increase annually, are due in equal monthly
installments over a
period of four years.
On March 16, 1996, the Company purchased an outpatient facility located in
Kansas ("PHK'') which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of 12,000 shares of Class A common stock
of PHC, Inc., valued at $70,548. The purchase price was allocated as follows:
Equipment and other assets $20,000
Covenant not to compete 10,000
Goodwill 40,548
_____________
$70,548
_____________
In connection with the acquisition, PHK entered into a lease agreement for
the real estate. The lease payments, which increase annually, are due in equal
monthly installments over a period of three years.
In September 1996, the Company purchased the assets of seven outpatient
behavioral health centers located in Michigan ("NPP"). The centers were
purchased for $532,559 and 15,000 shares of Class A common stock of PHC, Inc.
valued at $5.04 per share. The Company borrowed $900,000 (see Note C) to finance
the purchase and to provide working capital for the centers. The purchase price
was allocated as follows:
Office equipment $ 18,000
Covenants note-to-compete 20,000
Goodwill 597,746
Deposits 15,072
Liabilities assumed (42,659)
_____________
$608,159
_____________
F-18
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE L - ACQUISITIONS (CONTINUED)
Concurrent with the asset purchase agreement, NPP entered into an
employment agreement with a former owner which requires an annual salary of
$150,000 and an annual bonus. The agreement is effective for four years and is
automatically extended for successive one year terms unless terminated. The
salary and bonus are subject to adjustment based on collected billings.
NPP also entered into a management agreement whereby $1,500 per month would
be paid for five years to the former owners.
Subsequent to year-end, under the employment agreement, the Company issued
15,000 unregistered shares of Class A common stock.
On November 1, 1996, BSC-NY, Inc. ("BSC"), merged with Behavioral Stress
Centers, Inc., a provider of management and administrative services to
psychotherapy and psychological practices in the greater New York City
Metropolitan Area. In connection with the merger, the Company issued 150,000
shares of PHC, Inc. Class A common stock to the former owners of Behavioral
Stress Centers, Inc. Also, in connection with the merger, another entity was
formed, Perlow Physicians, P.C. ("Perlow"), to acquire the assets of the medical
practices theretofore serviced by BSC. The Company advanced Perlow the funds to
acquire those assets and at June 30, 1997 Perlow owed the Company $3,063,177
which includes in addition to acquisition costs, management fees of
approximately $511,000 and interest on the advances of approximately $176,000.
It is expected that the obligations will be paid over the next several years and
accordingly, most of these amounts have been classified as noncurrent. The
Company has no ownership interest in Perlow.
The purchase price of BSC was allocated as follows:
Goodwill $63,600
Equipment and other assets 20,000
________
$83,600
________
The merger agreement requires additional purchase price to be paid by BSC
to the former owners of Behavioral Stress Centers, Inc. for the three years
following the merger date. The additional purchase price is based on the income
of BSC before taxes and is to be paid in PHC stock, at market value up to
$200,000 and the balance, if any, in cash.
BSC also entered into a management agreement with Perlow. The agreement
requires Perlow to pay 25% of its practice expenses to BSC on a monthly basis
over a five-year period with an automatic renewal for an additional five-year
period.
On November 1, 1996, BSC entered into a lease agreement for its facilities.
The lease payments are due in equal monthly installments over a three year
period with an option to extend annually for three additional years. The lease
is to be paid by Perlow in accordance with the management agreement.
On January 17, 1997, with an effective date of January 1, 1997, the Company
entered into a Stock Exchange Agreement with a Virginia corporation owned by two
individuals to whom the Company has an outstanding note payable. The corporation
consists of private practices of psychiatry. The Stock Exchange Agreement
provided that in exchange for $50,000 in cash and 64,500 shares of restricted
Class A common stock, the Company received an 80% ownership interest in the
Virginia corporation. The Company also paid $80,444 in legal fees in connection
with the Agreement. Concurrent with the Stock Exchange Agreement the two owners
of the Virginia corporation each executed Employment Agreements with the
Virginia corporation to provide professional
F-19
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE L - ACQUISITIONS (CONTINUED)
services and each was granted an option to purchase 15,000 shares of Class
A common stock at an exercise price of $4.87 per share. The options expire on
April 1, 2002. Each agreement requires an annual salary of $200,000 and expires
in five years. Further, a Plan and Agreement of Merger was executed whereby the
Virginia corporation was merged into PCV.
On January 17, 1997 PCV entered into a purchase and sale agreement with an
unrelated general partnership, to purchase real estate with buildings and
improvements utilized by the Virginia Corporation for approximately $600,000 of
which $540,000 was paid through the issuance of a note (Note C).
In accordance with the above agreements the purchase price was allocated as
follows:
Land $ 50,600
Building 540,000
Covenant not-to-compete 50,000
Goodwill 285,038
_____________
$925,638
_____________
In accordance with the agreement the two owners will be paid a finders fee
for all subsequently acquired medical practices within a 200 mile radius of PCV
and those medical practices identified by the owners wherever the location. The
finders fee is payable in Class A common stock and in cash.
Information is not available to present pro forma financial information
relating to the 1997 acquisitions. The Company has so advised the Securities and
Exchange Commission and has received a no action letter with respect to this
matter. Had the acquisitions made during the fiscal years ended June 30, 1996,
been made as of July 1, 1995, the pro forma effect on the Company's results of
operations is immaterial.
NOTE M - SALE OF RECEIVABLES
The Company has entered into a sale and purchase agreement whereby
third-party receivables are sold at a discount with recourse. The interest rate
is calculated at 5.5% plus the six-month LIBOR rate which is 11.5% and 11.3% at
June 30, 1997 and 1996, respectively. The amount of receivables subject to
recourse at June 30, 1997 totaled approximately $577,000 and the agreement
states that total sales of such outstanding receivables are not to exceed
$4,000,000. Proceeds from the sale of these receivables totalled approximately
$3,000,000 and $3,500,000 for the years ended June 30, 1997 and 1996,
respectively. The purchase fees related to the agreement amount to approximately
$127,000 and $73,720 for the years ended June 30, 1997 and 1996, respectively,
and are included in interest expense in the accompanying consolidated statement
of operations. The agreement expires December 31, 1997.
NOTE N - SUBSEQUENT FINANCING
In September 1997, the Company received $500,000 in exchange for the
issuance of 170,414 shares of unregistered Class A common stock.
Also, subsequent to June 30, 1997, the Company purchased the assets of an
outpatient clinic in Virginia for 26,024 shares of Class A common stock and
$50,000 in cash. The clinic's operations will be included in PCV.
F-20
<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 in behalf by the
undersigned, thereunto duly authorized.
PHC, INC.
Date: October 29, 1997
By: /S/ BRUCE A. SHEAR
Bruce A. Shear, President
and Chief Executive Officer
