As filed with the Securities and Exchange Commission on December 4, 1997
Registration No. 333-25231
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(POST-EFFECTIVE AMENDMENT # 2)
______________________________
PHC, INC.
(Name of small business issuer in its charter)
Massachusetts 8069 04-2601571
(State or jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or Classification Code Number) Identification No.)
organization)
200 Lake Street
Suite 102
Peabody, MA 01960
(978) 536-2777
(Address and telephone number of principal executive offices)
200 Lake Street
Suite 102
Peabody, MA 01960
(978) 536-2777
(Address of principal place of business or intended principal place of
business)
BRUCE A. SHEAR
President and Chief Executive Officer
PHC, Inc.
200 Lake Street
Suite 102
Peabody, MA 01960
(978) 536-2777
(Name, address and telephone number of agent for service)
Copies to:
ROSLYN G. DAUM, ESQ.
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, Massachusetts 02109
(617) 248-5000
Approximate date of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title of Each Class of Securities Amount Proposed Proposed
to be Registered to be Maximum Maximum Amount of
Registered Offering Aggregate Registration
(1) Price Offering Fee
Per Price (2)
Share
(2)
Class A Common Stock 2,130,000 $3.75 $7,987,500 $2,420(3)
(1) Pursuant to Rule 416, there are also being registered such additional
shares of Class A Common Stock as may become issuable upon the conversion of
the Debentures, the Infinity/Seacrest Warrants, the Alpine Warrant and the
Barrow Street Warrant.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(3) This filing fee was previously paid in connection with the original
filing on form SB-2 filed on April 15, 1997.
______________________
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of up to 2,130,000
shares of Class A Common Stock of PHC, Inc., a Massachusetts corporation (the
"Company"), for sale by the holders thereof (the "Selling Security
Holders"). 1,562,500 of the shares of Class A Common Stock offered pursuant
to this Prospectus are issuable upon the conversion of the Company's 7%
Convertible Debentures due December 31, 1998 in aggregate principal amount of
$3,125,000 (the "Debentures") assuming a conversion price of $2.00 per
share. 150,000 shares of Class A Common Stock offered pursuant to this
Prospectus are issuable upon the exercise of two warrants, one for 90,000
shares and the other for 60,000 shares, issued by the Company to Infinity
Investors Ltd. and Seacrest Capital Limited, respectively (the
"Infinity/Seacrest Warrants"). 25,000 shares of the Class A Common Stock
offered pursuant to this Prospectus are issuable upon the exercise of a
warrant issued by the Company to Alpine Capital Partners (the "Alpine
Warrant"). 3,000 shares of the Class A Common Stock offered pursuant to this
Prospectus are issuable upon the exercise of a warrant issued by the Company
to Barrow Street Research, Inc. (the "Barrow Street Warrant"). 160,000
shares of the Class A Common Stock offered pursuant to this Prospectus are
issuable upon the exercise of a warrant issued by the Company to C.C.R.I.
Corporation (the "CCRI Warrant"). 229,500 shares of the Class A Common
Stock offered pursuant to this Prospectus were issued by the Company in
connection with certain business acquisitions (the "Acquisition Shares").
The Debentures, the Infinity/Seacrest Warrants, the Alpine Warrant, the
Barrow Street Warrant, the CCRI Warrant and the Acquisition Shares were
issued by the Company in transactions exempt from registration under the
Securities Act of 1933, as amended (the "Act"), and applicable state
securities laws.
<PAGE>
==================================================
Information contained herein is subject to
completion or amendment. A registration statement
statement relating to these securities has been
filed with the Securities and Exchange commission.
These securities may not be sold nor may offers
to buy be accepted prior to the time the
registration statement becomes effective. This
prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State
in which such offer, solicitation or sale would
be unlawful prior to registration or qualification
under the securities laws of any such State.
==================================================
Subject to Completion, dated
December 4, 1997
==================================================
PROSPECTUS
2,130,000 Shares of Class A
Common Stock of
PHC, INC.
PIONEER HEALTHCARE(trademark)
This Prospectus relates to the public offering that may be made from time
to time of up to 2,130,000 shares of the Class A Common Stock, par value $.01
per share (the "Class A Common Stock") of PHC, Inc., a Massachusetts
corporation (the "Company"), by, or for the accounts of, the holders thereof
(the "Selling Security Holders"). See "Selling Security Holders."
1,562,500 of the shares of Class A Common Stock offered pursuant to this
Prospectus are issuable upon the conversion of the Company's 7% Convertible
Debentures due December 31, 1998 in the aggregate principal amount of
$3,125,000 (the "Debentures") assuming a conversion price of $2.00 per
share. 150,000 shares of the Class A Common Stock offered pursuant to this
Prospectus are issuable upon the exercise of two warrants one for 90,000
shares and the other for 60,000 shares, issued by the Company to Infinity
Investors Ltd. and Seacrest Capital Limited, respectively (the
"Infinity/Seacrest Warrants"). 25,000 shares of the Class A Common Stock
offered pursuant to this Prospectus are issuable upon the exercise of a
warrant issued by the Company to Alpine Capital Partners (the "Alpine
Warrant"). 3,000 shares of the Class A Common Stock offered pursuant to this
Prospectus are issuable upon the exercise of a warrant issued by the Company
to Barrow Street Research, Inc. (the "Barrow Street Warrant"). 160,000 shares
of the Class A Common Stock offered pursuant to this Prospectus are issuable
upon the exercise of a warrant issued by the Company to C.C.R.I. Corporation
(the "CCRI Warrant"). 229,500 shares of the Class A Common Stock offered
pursuant to this Prospectus were issued by the Company in connection with
certain business acquisitions (the "Acquisition Shares"). The Debentures,
the Alpine Warrant, the Barrow Street Warrant, the CCRI Warrant and the
Acquisition Shares were issued by the Company in transactions exempt from
registration under the Securities Act of 1933, as amended (the "Act"), and
applicable state securities laws.
The shares offered pursuant to this Prospectus may be sold from time to
time by the Selling Security Holders or their transferees. No underwriting
arrangements have been entered into by the Selling Security Holders as of the
date hereof. The distribution of the shares offered pursuant to this
Prospectus by the Selling Security Holders may be effected in one or more
transactions that may take place in the over-the-counter market, including
ordinary broker's transactions, privately negotiated transactions, or through
sales to one or more dealers for resale of such shares as principals, at
prevailing market prices at the time of sale, prices related to such
prevailing market prices, or negotiated prices. Underwriting discounts and
usual and customary or specifically negotiated brokerage fees or commissions
will be paid by the Selling Security Holders in connection with sales of such
shares. See"Plan of Distribution."
The Company will not receive any proceeds from the sale of the shares
offered pursuant to this Prospectus. By agreement with the Selling Security
Holders, the Company will pay all of the expenses incident to the
registration of such shares under the Act (other than agent's or
underwriter's commissions and discounts), estimated to be approximately
$76,000.
The Selling Security Holders, and any broker-dealers, agents, or
underwriters through whom the shares offered pursuant to this Prospectus are
sold, may be deemed "underwriters" within the meaning of the Act with respect
to securities offered by them, and any profits realized or commissions
received by them may be deemed underwriting compensation.
The Class A Common Stock and the Company's Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"), are similar in all
respects except that holders of Class B Common Stock have five votes per
share and holders of Class A Common Stock have one vote per share on all
matters on which stockholders may vote and that 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 of the
remaining members of the Board of Directors. Subject to certain limitations,
each share of the 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. See "Description of Securities." The Class A
Common Stock and the Class B Common Stock are sometimes collectively
referred to herein as the "Common Stock.") As of the date of this Prospectus,
and without giving effect to the exercise of any options or warrants, the
holders of Class A Common Stock own approximately 86.597% of the outstanding
common stock and hold approximately 56.2% of the total voting power, and the
holders of Class B Common Stock own approximately 13.5% of the outstanding
Common Stock and hold approximately 43.8% of the total voting power. Bruce
A. Shear, the President and Chief Executive Officer and a Director of the
Company owns approximately 12.5% of the outstanding Common Stock and holds
approximately 40.3% of the total voting power.
The Class A Common Stock is traded on the Nasdaq SmallCap Market under the
symbol PIHC. On November 19, 1997, the closing bid price of the Class A
Common Stock was $ 2.375.
AN INVESTMENT IN THESE SECURITIES INVOLVES HIGH DEGREE OF RISK. SEE "RISK
FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Price to Public (1) Proceeds to
Selling
Stockholders
(1)
Per Share.................. $2.375 $2.375
Total................... $5,058,750 $5,058,750
(1) Estimated on the basis of the average of the bid and asked prices of
the Class A Common Stock on November 19, 1997, as reported on the Nasdaq
SmallCap Market.
The date of this Prospectus is ___________________________
The Company intends to furnish its stockholders and holders of rights
exercisable for publicly traded securities of the Company with annual reports
containing audited financial statements and such other periodic reports as
the Company may from time to time deem appropriate or as may be required by
law.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") under
the Securities Act of 1933, as amended (the "Act") with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and
the securities offered hereby, reference is hereby made to the Registration
Statement, and the exhibits and schedules thereto which may be inspected
without charge at the public reference facilities maintained at the principal
office of the Commission at 450 Fifth Street, N.W., Room 1024, Washington
D.C. 20549 and at the Commission's regional offices at 7 World Trade Center,
New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be
obtained upon written request from the public reference section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Reference is made to the copies of any contracts or other documents
filed as exhibits to the Registration Statement.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can
be obtained at prescribed rates from the Commission at such address. Such
reports, proxy statements and other information can also be inspected at the
Commission's regional offices at 7 World Trade Center, New York, New York,
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661.
A copy of the Company's Annual report on Form 10-KSB, as filed with the
Commission, is available upon request, without charge, by writing to PHC,
Inc., 200 Lake Street, Suite 102, Peabody, Massachusetts 01960, Attention:
Bruce A. Shear.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the Consolidated Financial Statements (including the
Notes thereto) appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus does not give effect to the
exercise of (i) shares issuable upon conversion of the Debentures, (ii)
shares issuable upon exercise of the Infinity/Seacrest Warrants; (iii) shares
issuable upon exercise of the Alpine Warrant, (iv) shares issuable upon
exercise of the Barrow Street Warrant, (v) shares issuable upon exercise of
the warrants issued in connection with the Company's February 1996 private
placement, (vi) the warrants issued to certain persons in lieu of fees for
investor relation services, (vii) the Company's redeemable Class A Warrants
(the "IPO Warrants") issued in connection with the Company's initial public
offering ("IPO") in March 1994, (viii) the unit purchase option ("Unit
Purchase Option") granted to the underwriter and its designees in connection
with the IPO, (ix) those warrants issued in connection with a bridge
financing by the Company, completed in October 1993 ("Bridge Warrants") that
remain unexercised, (x) warrants issued to former holders of Bridge Warrants,
(xi) options granted or reserved for issuance under the Company's 1993 Stock
Purchase and Option Plan (the "Stock Plan"), (xii) options granted or
reserved for issuance under the Company's 1995 Employee Stock Purchase Plan
(the "Stock Purchase Plan"), (xiii) options granted or reserved for issuance
under the Company's 1995 Non-Employee Director Stock Option Plan (the
"Non-Employee Director Plan"), (xiv) shares issuable to the former owners of
Behavioral Stress Centers, Inc. and Pioneer Counseling of Virginia, Inc. in
the event that certain earning targets are achieved and (xv) shares issuable
upon the exercise of the CCRI warrant.
The Company
PHC, Inc. (the "Company") is a national health care company specializing in
the treatment of substance abuse, which includes alcohol and drug dependency
and related disorders, and in the provision of psychiatric services and
long-term care. The Company currently operates three substance abuse
treatment facilities: Highland Ridge Hospital, located in Salt Lake City,
Utah, ("Highland Ridge"); Mount Regis Center, located in Salem, Virginia,
near Roanoke ("Mount Regis"); and Good Hope Center, located in West
Greenwich, Rhode Island ("Good Hope"). Until August 16, 1994, the Company
operated Marin Grove, a substance abuse treatment facility in California
("Marin Grove"). The Company operates six psychiatric facilities: Harbor
Oaks Hospital ("Harbor Oaks"), a 64-bed psychiatric hospital located in New
Baltimore, Michigan; Harmony Healthcare ("Harmony Healthcare"), a provider of
outpatient behavioral health services in Las Vegas, Nevada; Total Concept EAP
("Total Concept"), a provider of outpatient behavioral health services in
Shawnee Mission, Kansas; BSC-NY, Inc. ("BSC") which provides management and
administrative services to psychotherapy and psychological practices in the
greater New York City metropolitan area; North Point-Pioneer, Inc. ("NPP")
which operates five outpatient behavioral health centers under the name
Pioneer Counseling Center in the greater Detroit metropolitan area, and
Pioneer Counseling of Virginia, Inc. ("PCV"), an 80% owned subsidiary
providing outpatient services through a physicians' practice in Roanoke,
Virginia. The Company also operates a subacute long-term care facility,
Franvale Nursing and Rehabilitation Center ("Franvale"), in Braintree,
Massachusetts.
The Company's substance abuse facilities provide specialized treatment
services to patients who typically have poor recovery prognoses and who are
prone to relapse. These services are offered in small specialty care and
subacute facilities (i.e., facilities designed to provide care to individuals
who no longer require hospital care but who require some medical care), which
permits the Company to provide its clients with efficient and customized
treatment without the significant costs associated with the management and
operation of general acute care hospitals. The Company tailors these
programs and services to "safety-sensitive" industries and concentrates its
marketing efforts on the transportation, oil and gas exploration, heavy
equipment, manufacturing, law enforcement, gaming, and health services
industries.
Harbor Oaks provides psychiatric care to children, adolescents and adults.
The Company draws patients from the local population and uses the facility as
a mental health resource to complement its substance abuse facilities.
Harmony Healthcare and Total Concept provide psychiatric treatment for
adults, adolescents and children with a concentration in the gaming
industry. BSC is a manager of psychological service providers with contracts
at over 35 long-term care facilities. 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. NPP
provides outpatient psychiatric treatment for adults, adolescents and
children in the Metropolitan Detroit area. PCV is a physicians' practice
specializing in the treatment of addictive behavior in adults, adolescents
and children in the Roanoke Valley, Virginia area.
Franvale provides traditional geriatric care services as well as
specialized subacute services. The facility provides care to the high acuity
segment (patients requiring a significant amount of medical care) of the
geriatric population and to younger patients who require skilled nursing care
for longer terms than typically associated with a general acute care
hospital. The Company's long-term care services are offered in a larger,
more traditional setting than the Company's substance abuse facilities,
enabling the Company to take advantage of economies of scale to provide
cost-effective treatment alternatives. The Company markets its long-term
care to hospitals, insurers and managed care providers, in addition to
marketing directly to prospective residents and their families.
The Company's strategy of providing services to particular markets has
resulted in customized, outcome-oriented programs, which the Company believes
produce overall cost savings to the patient or client organization. The
substance abuse facilities provide treatment services designed to prevent
relapse. Such services, while potentially more costly on a per patient stay
basis, often result in long-term health care cost savings to insurers,
patients and patients' families. The goal of the Company's psychiatric
treatment programs is to provide care at the lowest level of intensity
appropriate for the patient in an integrated delivery system that includes
inpatient and outpatient treatment opportunities. The integrated nature of
the Company's psychiatric programs, which generally involves the same
caregivers supervising different treatment modalities, provides for efficient
care delivery and the avoidance of repeat procedures and diagnostic and
therapeutic errors. The Company's long-term care facility achieves its cost
containment objective by providing care to high acuity patients in a setting
that produces positive outcomes through the use of tailored services. The
specific skilled services that are provided are similar to those offered in
acute care hospitals without the added overhead cost.
The Company was organized as a Delaware corporation in 1976 under the name
American International Health Services, Inc. In 1980, the Company merged
into an inactive publicly held Massachusetts corporation and was the
surviving corporation in the merger. The Company changed its name to "PHC,
Inc." as of November 24, 1992. The Company is based in Massachusetts and is
unaffiliated with an inactive Minnesota corporation of the same name. The
Company does 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 operates as a holding
company, providing administrative, legal and programmatic support to its
subsidiaries. The Company plans to expand its operations through the
acquisition or establishment of additional substance abuse and psychiatric
treatment facilities.
Unless the context otherwise requires, references in this Prospectus to
"Pioneer" and the "Company" mean PHC, Inc. and its subsidiaries. The
Company's executive offices are located at 200 Lake Street, Suite 102,
Peabody, Massachusetts 01960 and its telephone number is (978) 536-2777.
<PAGE>
The Offering
Securities Offered:... 2,130,000 shares of Class A Common Stock. See
"Description of Securities."
Securities Outstanding as of November 19, 1997:
Class A Common Stock 4,690,174
Class B Common Stock 730,331
Class C Common Stock 0
Preferred Stock 0
NASDAQ Symbol Common Stock: PIHC
Use of Proceeds The Company will not receive any proceeds from the sale of
securities in this offering.
Risk Factors An investment in these securities involves a high degree of
risk. Prospective purchasers should carefully review the factors set forth
under "Risk Factors."
<PAGE>
Summary Consolidated Financial Data
Three Months Ended
September 30, Year Ended June 30,
1997 1996 1997 1996
__________ _________ ___________ ___________
Statements of
Operations Data:
Revenue................. $6,310,755 $5,918,060 $27,234,372 $21,802,758
Operating expenses...... 6,900,444 5,596,231 28,500,890 21,845,592
Income (loss) from (589,689) 321,829 (1,266,518) (42,834)
operations..............
Other expense........... 320,949 211,954 1,375,835 754,072
Net income (loss)....... (918,638) 65,742 (2,839,664) (585,315)
Net income (loss)
per share........ (.21) .02 (.87) (.22)
As of September 30,1997
Balance Sheet Data:
Total assets..................... $26,749,524
Working capital.................. $3,893,341
Long-term obligations............ $11,175,376
Stockholders' equity............. $8,066,131
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative in nature and
involves a high degree of risk. In addition to the other information in this
Prospectus, the following risk factors should be considered carefully in
evaluating whether to invest in the securities offered hereby.
Negative Cash Flow; Need for Additional Financing; Significant and
Increasing Amounts of Accounts Receivable. The Company generated a loss of
$918,638 during the first fiscal quarter of 1998, a loss of $2,839,664 during
fiscal year 1997 and a loss of $585,315 during fiscal year 1996. There can be no
assurance that the Company will not incur additional losses in the future. As a
result of significant losses in prior years, as of September 30, 1997 the
Company had an accumulated deficit of $5,592,954. The Company experienced a
significant increase in accounts receivable from $9,606,065, as of June 30, 1996
to $14,349,321 as of September 30, 1997. Primarily as a result of the losses
noted above, in part due to a decline in census, and the increase in accounts
receivable, the Company has had negative cash flow from operations in recent
periods. Although the Company has entered into accounts receivable funding
facilities with LINC Finance Corporation VIII and Healthcare Financial Partners
(HCFP) (see the Consolidated Financial Statements and notes related thereto
included herein or incorporated herein by reference), there can be no assurance
that the Company will be able to obtain any additional required financing on
terms acceptable to the Company. The Company intends to expand its operations
through the acquisition or establishment of additional facilities, and may seek
to obtain additional financing from various sources including banks. The
inability to obtain needed financing could have a material adverse effect on the
Company's financial condition, operations and business prospects and there can
be no assurance that the Company will be able to attain or maintain
profitability in the future. See Consolidated Financial Statements and notes
related thereto included herein or incorporated herein by reference.
Lack of Access to Capital to Achieve Acquisition Strategy. The Company's
plan to acquire additional facilities in the future is highly dependent upon its
access to capital, of which there can be no assurance. See "Negative Cash Flow;
Need for Additional Financing; Significant and Increasing Amounts of Accounts
Receivable." If the Company is unable to secure the necessary access to capital
it will be unable to acquire additional facilities which, in turn, will limit
the Company's growth.
Reimbursement by Third-Party Payors; Significant and Increasing Accounts
Receivable; Concentration of a Receivable; Change in Service Mix. Payment for
substance abuse treatment is provided by private insurance carriers and managed
care organizations; payment for long-term and subacute care is provided by
private insurance carriers, managed care organizations and the Medicare and the
Medicaid programs; payment for psychiatric services is provided by private
insurance carriers, managed care organizations and the Medicare and the Medicaid
programs. Changes in the sources of the Company's revenues could significantly
alter the profitability of the Company's operations. In general, revenues
derived from the Medicare and Medicaid programs in connection with the long-term
and subacute care services provided by the Company have been less profitable to
the Company than revenues derived from private insurers and managed care
organizations. In addition, the Company experiences greater delays in the
collection of amounts reimbursable by the Medicare and the Medicaid programs
than in the collection of amounts reimbursable by private insurers and managed
care organizations. Accordingly, a change in the Company's service mix from
substance abuse and psychiatric to long-term care could have a material adverse
effect on the Company as would an increase in the percentage of the Company's
patients who are insured by Medicare or Medicaid. In addition, cost containment
pressures from private insurers and the Medicare and the Medicaid programs have
begun to restrict the amount that the Company can charge for its services. If a
substantial number of private insurers and managed care organizations were to
adopt more restrictive reimbursement schedules and if such schedules did not
permit the Company to profitably provide substance abuse treatment and long-term
and subacute health care, the Company's business would be materially adversely
affected. In addition, there can be no assurance that the Company's existing
facilities will continue to meet, or that proposed facilities will meet, the
requirements for reimbursement by third-party or governmental payors.
The Company had substantial receivables from Medicaid and Medicare of
approximately $1,787,000 at June 30, 1997, which would constitute a
concentration of credit risk should these agencies defer or be unable to make
reimbursement payments as due.
A number of substance abuse facilities in the New England area have closed
in recent years, purportedly in part because certain managed care organizations
are no longer willing to pay for inpatient treatment beyond five or ten days,
making it difficult for such facilities to remain in operation. The Company has
marketed, and intends to continue marketing, its services to managed care
organizations and insurance companies that are willing to reimburse the Company
for longer lengths of stay, particularly with respect to those patients with
severe substance abuse addictions. However, if a growing number of managed care
organizations and insurance companies adopt policies which limit the length of
stay for substance abuse treatment, the Company's business would be materially
adversely affected.
Reimbursement for substance abuse and psychiatric treatment from private
insurers is largely dependent on the Company's ability to substantiate the
medical necessity of treatment in accordance with varying requirements of
different insurance companies. The process of substantiating a claim often takes
up to four months and, as a result, the Company experiences significant delays
in the collection of amounts reimbursable by third-party payors which adversely
affects the Company's working capital condition. The Company's accounts
receivable (net of allowance for bad debts) were $14,349,321 at September 30,
1997, compared with $14,318,545 at June 30, 1997 and $9,606,065 at June 30,
1996. Those changes are due primarily to an increase in patient census in
connection with acquisitions, management fees generated by the BSC-NY
acquisition and an increase in the number of beds available at Franvale due to
completion of construction. If the Company's expansion plans are successful, the
Company will be required to seek payment from a larger number of payors and the
amount of the Company's accounts receivable will likely increase. In the June
30, 1997 year end detailed review of the Company's allowance for doubtful
accounts, the reserve was deemed to be inadequate to cover future potential bad
debt and was adjusted accordingly. This adjustment resulted in an increase in
allowance for doubtful accounts to $2,982,138 at June 30, 1997 from $1,492,983
at June 30, 1996. The Company further increased this allowance to $3,219,992 at
September 30, 1997 in line with its more aggressive reserve policy. If the
amount of receivables which eventually become uncollectible exceeds such
allowance, the Company could be materially adversely affected. In addition, any
decrease in the Company's ability to collect its accounts receivable or any
further delay in the collection of accounts receivable would have a material
adverse effect on the Company. See the Consolidated Financial Statements and
notes related thereto included herein.
As a general rule, the Company attempts not to accept patients who do not
have either insurance coverage or adequate financial resources to pay for
treatment. Each of the Company's substance abuse facilities does, however,
provide treatment free of charge to a small number of patients each year who are
unable to pay for treatment but who meet certain clinical criteria and who are
believed by the Company to have the requisite degree of motivation for treatment
to be successful. In addition, the Company provides follow-up treatment free of
charge to relapse patients who satisfy certain criteria. Most of the Company's
psychiatric patients are either covered by insurance or pay at least a portion
of treatment costs. The number of patient days attributable to all patients who
receive treatment free of charge in any given fiscal year is in the Company's
discretion and has been less than 5%.
Private insurers, managed care organizations and, to a lesser extent,
Medicaid and Medicare, are beginning to carve-out specific services, including
mental health and substance abuse services, and establish small, specialized
networks of providers for such services. Continued growth in the use of
carve-out systems could materially adversely affect the Company to the extent
the Company is not selected to participate in such smaller specialized networks.
Risks of Governmental Action Relating to Deficiencies. 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 which is due in
monthly installments. 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.
<PAGE>
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. HCFA had informed the Company that it would publish a
notice of impending termination in the Boston Globe unless Franvale had been
found to be in substantial compliance by that date.
The Company replaced the management team at Franvale and expended
significant sums for staffing and programmatic improvements in an attempt to
bring the facility into substantial compliance at the earliest possible date. If
the Franvale facility was not in substantial compliance before April 30, 1997,
the facility would have been unable to admit new patients, would have continued
to be subject to a case by case review of readmissions, would have continued to
incur significant civil penalties, and would have lost its certification under
the Medicare and Medicaid programs, which would materially affect the number of
residents at the facility and would call into question its ability to operate,
and could have resulted in the loss of its licensure altogether.
On April 29, 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.
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, and the expenses that have been incurred by
the Company in an attempt to cure the cited deficiencies, the Company
experienced a material adverse effect on its financial results for the year
ended June 30, 1997 and the quarter ended September 30, 1997 and and the quarter
ended September 30, 1997 anticipates continued adverse financial impacts in
future quarters due to the slow increase in patient census.
Acquisition Strategies and Expansion Risks. The Company's strategy is to
acquire businesses that will contribute to overall profitability within a short
period of time after the acquisition. The Company may also make acquisitions in
areas that will further support the integrated delivery system in markets that
the Company currently services. There can be no assurance that the Company will
be successful in identifying appropriate acquisition opportunities or, if it
does, that the Company will be successful in acquiring such facilities or that
the acquired facilities will be profitable. The ability of the Company to
acquire and develop additional facilities will depend on a number of factors
beyond the control of the Company, including the availability of financing, the
ability of the Company to obtain necessary permits, licenses and approvals as
well as the employment of appropriate personnel to manage and staff the acquired
facilities. The failure of the Company to implement its acquisition strategy
could have a material adverse effect on the Company's financial performance.
Moreover, the attendant risks of expansion could also have a material adverse
effect on the Company's business. Start-up facilities could operate at a loss
for a substantial period of time following acquisition. The operating losses and
negative cash flow associated with start-up acquisitions could have a material
adverse effect on the profitability of the Company unless and until such
facilities are fully integrated with the Company's other operations and become
profitable.
Variable Patient Census. The patient census at the Company's long-term care
facility declined from 87.1% to 84.1% occupancy from fiscal year 1996 to fiscal
year 1997 and to 67.0% occupancy for the quarter ended September 30, 1997. The
patient census at the Company's substance abuse and psychiatric facilities
decreased from 63.4% to 58.8% occupancy from fiscal year 1996 to fiscal year
1997 and to 54.4% for the quarter ended September 30, 1997. There can be no
assurance that occupancy rates will continue at those levels. Similarly, there
can be no assurance that the Company will be able to fill the beds which have
been added at its long-term care facility or that the patient census, which had
declined during construction and the February 1997 State survey which placed the
facility in Jeopardy and precluded admissions for a time, will reach maximum
capacity now that construction has been completed and admissions are no longer
restricted. Furthermore, there can be no assurance that the Company will be able
to maintain sufficient capacity utilization or pricing in the future to ensure
profitability.
Blind Pool/Acquisition Program. The Company's acquisition program is
directed by Bruce A. Shear, a Director and the President and Chief Executive
Officer of the Company, in conjunction with other members of the Company's Board
of Directors. As consideration for any acquisition, in addition to the payment
of cash (if any), the Company may issue notes, common stock, preferred stock or
other securities. Key employees of acquired companies may become employees of
the Company and may hold management positions in the Company. The Company does
not intend to seek stockholder approval for any such acquisitions unless
required by applicable law or regulations. Accordingly, investors will be
substantially dependent upon the business judgment of management in making such
acquisitions. The Company intends to engage in a program to seek acquisitions in
business areas related or complementary to the present business of the Company
and currently plans to acquire one or more substance abuse facilities,and/or
psychiatric facilities. There can be no assurance that the Company will be able
to attract management to operate any additional facilities or, if the Company
cannot attract such management, that the Company's current management will be
able to devote a sufficient amount of time to managing any additional
facilities.
Seasonality and Fluctuation in Quarterly Results. The Company experiences
and expects to continue to experience a decline in revenue in its fiscal
quarters ending December 31 primarily due to a seasonality decline in revenue
from the Company's substance abuse facilities during this period.
Regulation. The Company and the health care industry are subject to
extensive federal, state and local regulation with respect to licensure and
conduct of operations at existing facilities, construction of new facilities,
acquisition of existing facilities, the addition of new services, compliance
with physical plant safety and land use requirements, implementation of certain
capital expenditures and reimbursement for services rendered. Health care
facilities, including those operated by the Company, are subject to periodic
inspections by governmental authorities to ensure compliance with licensure
standards and to permit continued participation in third-party payor
reimbursement programs, including the Medicare and the Medicaid programs, where
applicable. Although, to the best of the Company's knowledge, all of the
Company's existing facilities are currently in compliance with all material
governmental requirements, there can be no assurance that the Company will be
able to obtain new licenses to effect its acquisition strategy or maintain its
existing licenses and reimbursement program participation approvals. It is not
possible to accurately predict the content or impact of future legislation and
regulations affecting the health care industry. The Company's ability to develop
or acquire new facilities is dependent upon its ability to secure requisite
certificates or determinations of need, licenses, permits and reimbursement
program participation approvals. If the Company is unable to obtain required
licenses and approvals for new projects, or if its existing licenses or
approvals are restricted, rescinded or revoked, its growth would be limited and
its business would be materially adversely affected.
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.
Currently, Congress and the President contemplate plans to reduce Medicare
spending-growth cuts within the next ten years. Preliminary indications suggest
that, in addition to increased costs to beneficiaries, the plan would attempt to
impose a disproportionate share of the burdens of reform upon health care
providers. Additionally, proposed congressional spending reductions for the
Medicaid program, possibly 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. The Commonwealth of Massachusetts has already
implemented a mental health/substance abuse managed care program for its
Medicaid population, which, in general, has increased administrative oversight
and reduced revenues for mental health/substance abuse providers. 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.
Unpredictability of BSC Financial Statements. BSC maintained its financial
records on a cash basis. There are no audited financial statements with respect
to BSC for any historical period. The Company's ability to predict the future
financial performance of BSC is diminished because of the lack of audited
financial information.
Non-compliance with Reporting Obligations. The Company was unable to
provide audited financial statements in connection with its acquisition of BSC
as required by Item 7 of Form 8-K and, accordingly, is currently not in
compliance with its reporting obligations under the Exchange Act. As a result of
its failure to file audited financial statements of BSC as required, the Company
will be unable to file any registration statements under the Securities Act of
1933 with respect to the offer or sale of securities by the Company for its own
account until it has filed financial statements which include the operations of
BSC covering a period of at least two years. In addition, until at least
February 1, 1998, the Company is precluded from filing any registration
statement covering the offer and sale (or resale) of shares of the Company for
its own account or for others using Form SB-3, which is a short form, less
costly registration statement than Form SB-1 or SB-2. As a result, the Company's
ability to raise funds for its operations or for acquisitions in the public
capital markets has been impaired, which could have a material adverse effect on
its operations and acquisition program.
Prior Securities Act Violations. On November 9, 1984, the Company entered a
plea of guilty with the United States District Court for the District of
Massachusetts to a one count Information (the "Information") charging the
Company with filing a false or misleading registration statement in connection
with a proposed public offering of stock in the Company in 1981. In its
Information, the United States Attorney charged that the Company falsely omitted
to disclose in the registration statement that Maurice Shear, Bruce A. Shear's
father, was a controlling person of the Company, and that Maurice Shear had
prior criminal convictions not involving the Company. The Information also
charged the Company with falsely stating and omitting to state other material
facts, including that Maurice Shear, Steven Shear (Bruce A. Shear's brother) and
Bruce A. Shear had provided $50,000 to the proposed underwriter of the Company's
public offering, F.L. Putnam, so that Putnam would undertake the offering of
securities. Bruce A. Shear was a director and the President of the Company at
the time the registration statement was filed. The Company was sentenced with a
fine of $10,000 and was placed on probation for a period of three years. As a
condition to probation, the Company agreed, for a minimum of three years, to
nominate to its Board of Directors a majority of persons independent of the
Company and of the Shear family, to cause the Board of Directors to meet no less
than six times a year, and to compensate reasonably the independent directors.
The Company withdrew the registration statement and the proposed public offering
was not consummated. The Company has continued to maintain a Board of Directors
comprised of a majority of independent directors. Maurice Shear does not
currently own any outstanding shares of the Common Stock of the Company,
however, his wife, Gertrude Shear, owns 14,460 shares of the Company's Class A
Common Stock and 298 shares of the Company's Class B Common Stock. In addition,
Mrs. Shear is the beneficiary of the Shear Trusts which, pursuant to the terms
of a settlement agreement entered into by the Shear Trusts in partial settlement
of certain litigation brought by Bruce A. Shear's mother against a former
trustee of the Shear Trusts, own an aggregate of 59,280shares of the Company's
Class A Common Stock or 1.1% of the Company's outstanding Common Stock.
Maurice Shear previously had pleaded guilty to an indictment charging him
with securities fraud and mail fraud in connection with the registration
statement referred to above and a fraudulent scheme to control trading in the
Company's Common Stock between 1979 and 1981.
Control of the Company by Bruce A. Shear. The holders of the Company's
Class B Common Stock are entitled to five votes per share on any matter
requiring stockholder action, and the holders of the Class A Common Stock are
entitled to one vote per share, except with respect to the election of
directors. The holders of the Class A Common Stock are entitled to elect two
members to the Company's five-member Board of Directors and the holders of the
Class B Common Stock are entitled to elect the remaining directors. Assuming no
exercise of any options or warrants and no conversion of any debentures, the
holders of the Class B Common Stock beneficially own 13.5% of the Company's
Common Stock, but have 43.8% of the total voting power. Bruce A. Shear and his
affiliates own and control 13.8% of the Common Stock, but hold 41.2% of the
total voting power
Dependence Upon Attraction and Retention of Key Personnel; Potential
Staffing Shortages. The Company is highly dependent on the principal members of
its management and professional staff, particularly Bruce A. Shear, the
Company's President and Chief Executive Officer, Robert H. Boswell, the
Company's Executive Vice President and the other members of the Company's
management. Although the Company has obtained key man insurance in the amount of
$1,000,000 on the life of Mr. Shear, the loss of any key person would have a
material adverse effect on the Company's business. In addition, the Company's
success will depend, in large part, on its ability to attract and retain highly
qualified personnel, particularly skilled health care personnel. The Company
faces competition for such personnel from governmental agencies, health care
providers and other companies. The Company has not to date experienced
substantial difficulty in hiring appropriate personnel to staff its facilities.
However, if there were a shortage of trained health care personnel in the
geographic markets in which the Company conducts or proposes to conduct its
business, such shortages could increase the Company's operating costs and limit
its expansion opportunities. There can be no assurance that the Company will be
successful in hiring or retaining the personnel it requires for continued
growth. Similarly, if the Company acquires additional facilities, there can be
no assurance that it will be able to attract management to operate such
facilities or, if it cannot attract such management, that the Company's current
management will be able to devote a sufficient amount of time to managing such
additional facilities.
Competition. The health care business is highly competitive and subject to
excess capacity. The Company's competitors include both not-for-profit and
for-profit hospitals, health care companies specializing in substance abuse,
psychiatric services and subacute services and nursing home chains, many of
which have substantially greater resources than the Company.
Reliance on Key Clients. The Company has entered into relationships with
large employers, health care institutions and labor unions to provide treatment
for psychiatric disorders, chemical dependency and substance abuse in
conjunction with employer-sponsored employee assistance programs. The employees
of such institutions may be referred to the Company for treatment, the cost of
which is reimbursed on a per diem or per capita basis. Although none of these
large employers, health care institutions or labor unions accounts for 10% or
more of the Company's consolidated revenues, the loss of any of these key
clients would require the Company to expend considerable effort to replace
patient referrals and would result in revenue losses to the Company and
attendant loss in income.
Environmental Matters. As a result of an environmental site assessment
conducted by the Company in connection with its acquisition of the assets of
Franvale, the Company learned that the presence of fuel oil and certain other
contaminants had been detected on the site in Braintree, Massachusetts upon
which Franvale is located. On July 23, 1993, the Company received a letter from
the Massachusetts Department of Environmental Protection ("DEP") advising that
the Franvale site would be included in the August 1993 Transition List of
Confirmed Disposal Sites as a "Location to be Investigated." The Company has
submitted evidence of the site clean-up to a Licensed Site Professional ("LSP"),
an independent expert licensed by the DEP to coordinate site assessment and
clean-up activities. The LSP has investigated conditions at the site and
rendered an opinion to the Company that the site clean-up has brought the site
into compliance with the Massachusetts Contingency Plan ("MCP"), and that the
site presents no significant risk to health, safety, public welfare or the
environment. Notwithstanding the foregoing, under the MCP, the DEP retains the
right to audit the clean-up activities at the site and the work and conclusions
of the LSP, without cause, for a period of five years, and with cause, for an
indefinite period.
There are three underground storage tanks on the property on which Good
Hope is located. Although this property is leased, the Company assumed
responsibility for compliance with registration requirements and applicable
state and local laws as of July 31, 1994. The Company has indemnified the
landlord for liabilities relating to the tanks resulting from acts or omissions
by the Company. The tanks are registered with the Rhode Island Department of
Environmental Management.
Litigation. On or about December 31, 1993, the Company received a notice
from Pioneer Health Care, Inc., a Massachusetts non-profit corporation, claiming
that the Company's use of its PIONEER HEALTHCARE trademark infringes certain
rights of Pioneer Health Care, Inc., under applicable law, and demanding that
the Company cease and desist from any further use of the PIONEER HEALTHCARE mark
and cancel its federal registration of the mark with the United States Patent
and Trademark Office ("PTO"). By letter dated March 17, 1994, the Company
declined to accede to these demands. On May 25, 1994, Pioneer Health Care, Inc.,
filed a petition with the PTO seeking to cancel the Company's registration of
the PIONEER HEALTHCARE mark. On December 9, 1994, the Company filed a civil
action in federal court seeking a declaratory adjudication of its rights to
continue to use, and maintain the federal registration of, the PIONEER
HEALTHCARE mark. On or about February 10, 1995, the PTO suspended the
cancellation proceeding initiated by Pioneer Health Care, Inc. pending the
adjudication of the Company's civil action. That civil action remains pending
before the federal court. It is possible that an adverse decision will result in
money damages which could have a material adverse effect on the Company. If the
Company were required to discontinue using the PIONEER HEALTHCARE mark, the
costs involved could have an adverse effect on the Company's financial
performance.
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.
Possible Nasdaq Delisting. The Company has been informally advised by the
staff of Nasdaq that an issuance of stock by the Company at a significant
discount to market would likely result in a review by Nasdaq of the Company's
continued listing. From time to time the company does issue stock at a discount
to market. Although the Company believes that the pricing of the securities
issued by the Company at a discount to market from time to time is not
significant enough to result in a Nasdaq review of the Company's listing, there
can be no assurance that Nasdaq will not conduct such a review, or otherwise
take action to delist the Class A Common Stock. The Company would oppose such
action through all reasonable administrative and judicial means.
Although the Company's Class A Common Stock is listed on Nasdaq, there can
be no assurance that the Company will meet the criteria for continued listing of
securities on Nasdaq. These continued listing criteria include that (i) the
Company maintain at least $2,000,000 in total assets and $1,000,000 in capital
and surplus, (ii) the minimum bid price of the Class A Common Stock be $1.00 per
share or the market value of the freely tradable Class A Common Stock ("public
float") be at least $1,000,000 and the value of its capital and surplus be at
least $2,000,000, (iii) there be at least 100,000 shares in the Company's public
float with a market value of at least $200,000, (iv) there be at least two
active market makers in the Class A Common Stock and (v) the Company's Stock be
held by at least 300 holders.
Furthermore, Nasdaq's Board of Directors has recently voted to revise the
listing standards for the SmallCap Market. Such proposed changes would require
that (i) for two of the last three years, the Company must maintain at least
$2,000,000 in net tangible assets, or at least $35,000,000 in market
capitalization, or at least 500,000 shares in the Company's public float with a
market value of at least $1,000,000. The criteria relating to bid price, market
makers and shareholders would not be changed by this proposal. Currently, the
Company meets these new criteria, but there can be no assurances that it will
continue to meet such criteria.
If the Company becomes unable to meet such criteria and is delisted from
Nasdaq, trading, if any, in the Class A Common Stock would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
then available, on the National Association of Securities Dealers Inc.'s
"Electronic Bulletin Board." As a result, an investor would likely find it more
difficult to dispose of, or to obtain accurate quotations as to the value of,
the Company's securities.
Risk of Low-Priced Stocks; Possible Effect of "Penny Stock" Rules on
Liquidity for the Company's Securities. If the Company's securities were
delisted from Nasdaq, they may become subject to Rule 15g-9 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional
sales practice requirements on broker-dealers which sell such securities to
persons other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with their spouses). For transactions covered by
this Rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, such Rule may affect the ability of broker-dealers
to sell the Company's securities and may affect the ability of purchasers in
this offering to sell any of the securities acquired hereby in the secondary
market.
The Commission has adopted regulations which define a "penny stock" to be
any equity security that has a market price (as therein defined) of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. As of November 19, 1997 the closing price of the
Company's stock as reported on Nasdaq was $2.375. For any transaction involving
a penny stock, unless exempt, the rules require delivery, prior to any
transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also required to be
made about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on the Nasdaq National Market
System, are otherwise listed on Nasdaq and have certain price and volume
information provided on a current and continuing basis, or if the Company meets
certain minimum net tangible assets or average revenue criteria. While the
Company currently meets these criteria, there can be no assurance that the
Company's securities will continue to qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, the Company would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the Commission the authority to prohibit any person
that is engaged in unlawful conduct while participating in a distribution of
penny stock from associating with a broker-dealer or participating in a
distribution of penny stock, if the Commission finds that such a restriction
would be in the public interest.
If the Company's securities were subject to the rules on penny stocks, the
market liquidity for the Company's securities would be materially adversely
affected.
Dividends. The Company has not paid any cash dividends since its inception
and, while there are currently no restrictions on the Company's ability to pay
dividends, the Company does not anticipate paying cash dividends in the
foreseeable future.
Possible Adverse Effects of Authorization of Preferred Stock. The Company's
Restated Articles of Organization authorize the issuance of 1,000,000 shares of
Preferred Stock on terms which may be fixed by the Company's Board of Directors
without further stockholder action. The terms of any series of Preferred Stock,
which may include priority claims to assets and dividends and special voting
rights, could adversely affect the rights of holders of the Common Stock. The
issuance of the Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions, financing transactions and other
corporate transactions, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, capital
stock of the Company. The Company issued 1,000 shares of Convertible Preferred
Stock for $1,000,000. As of June 30, 1997 half of the Convertible Preferred
Stock had been converted into 229,964 shares of Class A Common Stock. On August
20, 1997, 246,305 shares of Class A Common Stock were issued upon conversion of
the remaining shares of Convertible Preferred Stock. In accordance with the
Preferred Stock agreement, these shares were issued at a discount of $200,000
from fair market value which was reflected as additional dividend in the June
30, 1997 Financial Statements.
Thin Float. The average weekly trading volume of the Company's Class A
Common Stock for the period from July 1, 1997 to November 18, 1997 was 319,563
shares. There can be no assurance that the weekly trading volume will not remain
at the same level or decline. As a result of the thin float in the Company's
stock, a small number of transactions can result in significant swings in the
market price of the Company's stock, and it may be difficult for stockholders to
dispose of the Company's stock in a timely way at a desirable market price.
<PAGE>
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 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.
MARKET FOR COMMON STOCK
The following table sets forth, for the periods indicated, the high and low
sale prices of the Company's Class A Common Stock, as reported on the Nasdaq
SmallCap Market.
1995 High Low
First Quarter...................... $ 6 3/4 $ 6
Second Quarter..................... $ 6 1/2 $ 6
Third Quarter...................... $ 6 1/4 $ 5 1/8
Fourth Quarter..................... $ 7 3/8 $ 5 1/8
1996
First Quarter...................... $ 7 3/4 $ 6 1/2
Second Quarter..................... $ 7 3/8 $ 5 1/2
Third Quarter...................... $ 9 5/8 $ 5 1/4
Fourth Quarter..................... $ 9 3/4 $ 7
1997
First Quarter...................... $ 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
Second Quarter (through $ 3 $ 2 3/8
November 19, 1997)
On November 19, 1997, the last reported sale price of the Class A Common
Stock on the Nasdaq SmallCap Market was $2.375. As of November 19, 1997, there
were 111 holders of record of the Company's Class A Common Stock and 320 holders
of record of the Company's Class B Common Stock.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the securities
offered hereby.
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997. This table should be read in conjunction with the
Consolidated Financial Statements and related notes appearing elsewhere in this
Prospectus.
As of
September 30,
1997
______________
Short-term debt....................................... $2,301,430
Long-term debt........................................ 11,175,376
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; 500 shares issued and outstanding
June 30, 1997.................................... --
Class A Common Stock; $.01 par value; 20,000,000
shares authorized; 4,643,280 shares issued(1),
4,634,624 Outstanding(8,656 Treasury shares)..... 46,433
Class B Common Stock, $.01 par value; 2,000,000
shares authorized; 730,331 shares issued.......... 7,303
Class C Common Stock, $.01 par value; 200,000
shares authorized; 199,816 shares issued.......... --
Additional paid-in capital.................... 13,643,167
Treasury Stock at cost........................ (37,818)
Accumulated deficit........................... (5,592,954)
Total stockholders' equity................... 8,066,131
____________
Total capitalization.................................. $21,542,937
____________
(1) Does not include: (i) 1,681,832 shares reserved for issuance upon exercise
of the IPO Warrants; (ii) 148,171 shares included in the Units which may be
sold pursuant to the Unit Purchase Option and 148,171 shares reserved for
issuance upon the exercise of the Warrants included in the Unit Purchase
Option; (iii) 205,375 shares which may be issued upon the exercise of
outstanding stock options; (iv) 124,625 shares which may be issued upon the
exercise of options available for grant under the Company's Stock Plans; or
(v) up to 5,024 shares included in the Bridge Units which may be sold
pursuant to the Bridge Warrants; (vi) up to 39,734 shares reserved for
issuance upon the exercise of the Warrants included in the Bridge Units;
and (vii) up to 715,682 shares reserved for issuance upon the exercise of
the Private Placement Warrants; (viii) 150,000 shares which may be issued
upon the exercise of two warrants, one for 90,000 shares and one for 60,000
shares, issued to Infinity Investors, Ltd. and Seacrest Capital Limited,
respectively; (ix) 25,000 shares issuable upon the exercise of a warrant
issued to Alpine Capital Partners; (x) 3,093 shares issuable upon the
exercise of a warrant issued to Barrow Street Research, Inc.; or (xi) up to
160,000 shares issuable upon the exercise of a warrant issued to CCRI,
Corporation; (xii) 50,000 shares issuable upon the exercise of a warrant
issued to ProFutures Special Equities Fund, L. P. in conjunction with the
issuance of Preferred Stock. Includes 1,331,696 shares which were issued
upon the convesion of the Company's 7% Convertible Debentures in the first
quarter of 1998. See "Management -- Stock Plan," "Certain Transactions,"
"Description of Securities" and "Underwriting.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for each of the
two years ended June 30, 1997 and 1996 have been derived from the Company's
consolidated financial statements, which have been audited by Richard A. Eisner
& Company, LLP, independent auditors, as of June 30, 1997 and June 30, 1996. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and other financial
information appearing elsewhere in this Prospectus.
Three Months Year Ended
Ended September 30, June 30,
________________ ____________
1997 1996 1997 1996
___________ __________ ____________ ____________
Statements of
Operations Data:
Revenue.............. $ 6,310,755 $5,918,060 $27,234,372 $21,802,758
Operating expenses... 6,900,444 5,596,231 28,500,890 21,845,592
Income (loss) from (589,689) 321,829 (1,266,518) (42,834)
operations...........
Other expense........ 320,949 211,954 1,375,835 754,072
Net income (loss).... (918,638) 65,742 (2,839,664) (585,315)
Net income (loss) (.21) .02 $(.87) $(.22)
per share
As of September 30,
1997
____________________
Balance Sheet Data:
Total assets......... $26,749,524
Working capital...... $3,893,341
Long-term obligations $11,175,376
Stockholders' equity. $8,066,131
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three months ended September 30, 1997 and
September 30, 1996 and the two years ended June 30, 1997. It should be read in
conjunction with the Consolidated Financial Statements of the Company and
related Notes appearing elsewhere in this Prospectus.
Overview
The Company presently provides health care services through several
substance abuse treatment centers, a 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 greatly as a percentage of total revenue but
the percentage tends to decrease slightly as revenue increases because of the
fixed components of these expenses.
The healthcare industry is subject to extensive federal, state and local
regulation governing, among other things, licensure and certification, conduct
of operations, audit and retroactive adjustment of prior government billings and
reimbursement In addition, there are ongoing debates and initiatives regarding
the restructuring of the health care system in its entirety. 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.
Results of Operations
Three months ended September 30, 1997 Compared to the three months ended
September 30, 1996
Net patient care revenue increased 2% to $5,903,995 for the three months
ended September 30, 1997 from $5,784,856 for the three months ended September
30, 1996. This increase in revenue is due to the acquisition of Pioneer
Counseling of Virginia in January 1997. This amount does not include $203,283 in
management fees generated by BSC-NY, Inc. which was acquired in November 1996.
The Company recorded a loss of $918,638 for the three months ended September 30,
1997 as compared to net income of $65,742 for the three months ended September
30, 1996. This loss is due in part to a decline in census in the chemical
dependency facilities and an overall increase in provision for bad debts. Good
Hope, the Company's chemical dependency facility in Rhode Island, 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. Also contributing to the loss is the continued low census at the
Company's long-term care facility. The occupancy rate for the long-term care
facility for the three months ended September 30, 1997 was 67.0% as compared to
94.1% for the same period last year. The Company's intention is to sell Franvale
allowing management to focus its efforts on its core business.
Net patient care revenue for Pioneer's core behavioral healthcare business
increased to $5,177,495 for the quarter ended September 30, 1997 from $4,346,076
for the same period in 1996. This increase in revenue is due primarily to newly
acquired psychiatric practice in Virginia and the Management fees generated by
BSC-NY, Inc. Net patient care revenue for the long term care facility decreased
to $1,133,260 for the three months ended September 30, 1997 from $1,571,984 for
the three months ended September 30, 1996 due to the decline in patient census.
Year ended June 30, 1997 Compared to Year ended June 30, 1996
The Company experienced a loss for fiscal year ended June 30, 1997,
primarily in the fourth quarter of the fiscal year, as a result of 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. The Company's intention is to sell
Franvale allowing management to focus its efforts on its core business.
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. A substantial
portion of the increase in the reserve was recorded in the fourth fiscal
quarter. The Company reviewed these adjustments to determine if some of the
adjustments should have been made in prior fiscal quarters. The Company
concluded that it is not possible to determine what adjustments, if any, should
have been made 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 which
commenced with the quarter ended September 30, 1997.
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
Prior to 1992, the Company's primary lender was a bank which failed in May
1992 and was taken over by the FDIC. During fiscal 1994 the Company negotiated
the repayment of this debt resulting in a reduction in the amount due of
approximately $400,000. Of the total negotiated amount to be paid, $1,100,000
was paid in fiscal 1994 and $497,500 was paid in fiscal 1996 out of the proceeds
received from HUD financing relating to construction at the Company's long-term
care facility.
During the second fiscal 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 September 30, 1997 the Company had approximately $144,645 in cash and
cash equivalents, working capital of approximately $3,893,341 and a working
capital ratio of approximately 1.5 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 September 30, 1997 Perlow owed the Company $3,438,062 which
includes, in addition to acquisition costs, management fees of approximately
$744,283 and interest on the advances of approximately $254,697. 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. The amount receivable
from Perlow Physicians is not included as accounts receivable from patient care.
During the first fiscal quarter of 1998 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 $445,000.00.
During the second fiscal quarter of 1998 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. The
operations of the Blacksburg clinic will be included in Pioneer Counseling of
Virginia, Inc. which is an 80% owned subsidiary.
BUSINESS
Introduction
PHC, Inc. (the "Company") is a national health care company specializing in
behavioral healthcare which consists of treating substance abuse, including
alcohol and drug dependency and related disorders, and providing psychiatric
sub-acute and long-term care. The Company currently operates three substance
abuse treatment facilities: Highland Ridge Hospital, located in Salt Lake City,
Utah, ("Highland Ridge"); Mount Regis Center, located in Salem, Virginia, near
Roanoke ("Mount Regis"); and Good Hope Center, located in West Greenwich, Rhode
Island ("Good Hope"). Until August 16, 1994, the Company operated Marin Grove, a
substance abuse treatment facility in California ("Marin Grove"). The Company
operates six psychiatric facilities: Harbor Oaks Hospital ("Harbor Oaks"), a
64-bed psychiatric hospital located in New Baltimore, Michigan; Harmony
Healthcare ("Harmony Healthcare"), a provider of outpatient behavioral health
services in Las Vegas, Nevada; Total Concept EAP ("Total Concept"), a provider
of outpatient behavioral health services in Shawnee Mission, Kansas; BSC-NY,
Inc. ("BSC") which provides management and administrative services to
psychotherapy and psychological practices in the greater New York City
metropolitan area; North Point-Pioneer, Inc. ("NPP") which operates five
outpatient behavioral health centers under the name Pioneer Counseling Center in
the greater Detroit metropolitan area, and Pioneer Counseling of Virginia, Inc.
("PCV"), an 80% owned subsidiary providing outpatient services through a
physicians" practice in Roanoke, Virginia. The Company also operates a subacute
long-term care facility, Franvale Nursing and Rehabilitation Center
("Franvale"), in Braintree, Massachusetts.
The Company's substance abuse facilities provide specialized treatment
services to patients who typically have poor recovery prognoses and who are
prone to relapse. These services are offered in small specialty care and
subacute facilities (i.e., facilities designed to provide care to individuals
who no longer require hospital care but who require some medical care), which
permits the Company to provide its clients with efficient and customized
treatment without the significant costs associated with the management and
operation of general acute care hospitals. The Company tailors these programs
and services to "safety-sensitive" industries and concentrates its marketing
efforts on the transportation, oil and gas exploration, heavy equipment,
manufacturing, law enforcement, gaming and health services industries.
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.
Franvale, the Company's long-term care facility, provides traditional
geriatric care services as well as specialized subacute services. The facility
provides care to the high acuity segment (patients requiring a significant
amount of medical care) of the geriatric population and to younger patients who
require skilled nursing care for longer terms than typically associated with a
general acute care hospital. The Company's long-term care services are offered
in a larger, more traditional setting than the Company's substance abuse
facilities, enabling the Company to take advantage of economies of scale to
provide cost-effective treatment alternatives. The Company markets its long-term
care to hospitals, insurers and managed care providers, in addition to marketing
directly to prospective residents and their families. Since long-term care is
not a part of the Company's core business, the Company's intention is to sell
Franvale allowing management to focus its efforts on its core business.
The Company's strategy of providing services to particular markets has
resulted in customized, outcome-oriented programs, which the Company believes
produce overall cost savings to the patient or client organization. The
substance abuse facilities provide treatment services designed to prevent
relapse. Such services, while potentially more costly on a per patient stay
basis, often result in long-term health care cost savings to insurers, patients
and patients' families. The goal of the Company's psychiatric treatment programs
is to provide care at the lowest level of intensity appropriate for the patient
in an integrated delivery system that includes inpatient and outpatient
treatment. The integrated nature of the Company's psychiatric program, which
generally involves the same caregivers supervising different treatment
modalities, provides for efficient care delivery and the avoidance of repeat
procedures and diagnostic and therapeutic errors. The Company's long-term care
facility achieves its cost containment objective by providing care to high
acuity patients in a setting that produces positive outcomes through the use of
tailored services. The specific skilled services that are provided are similar
to those offered in acute care hospitals without the added overhead cost.
The Company was organized as a Delaware corporation in 1976 under the name
American International Health Services, Inc. In 1980, the Company merged into an
inactive publicly held Massachusetts corporation and was the surviving
corporation in the merger. The Company changed its name to "PHC, Inc." as of
November 24, 1992. The Company is based in Massachusetts and is unaffiliated
with an inactive Minnesota corporation of the same name. The Company does
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 operates as a holding company, providing
administrative, legal and programmatic support to its subsidiaries.
The Company plans to expand its operations through the acquisition or
establishment of additional inpatient and outpatient substance abuse and
psychiatric treatment facilities. Facilities, Programs and Properties
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 also leases a small
amount of nearby space in the same building, part of which is subleased. The
Company believes that this facility will be adequate to satisfy its needs for
the foreseeable future.
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 substance abuse, 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 1980's
many private payors instituted managed care programs for reimbursement, which
include pre-admission certification, case management or utilization review and
limits on financial coverage or length of stay. These cost containment measures
have encouraged outpatient care for behavioral problems, resulting in a
shortening of the length of stay and revenue per day in inpatient substance
abuse facilities. The Company believes that it has addressed these cost
containment measures by specializing in treating relapse-prone patients with
poor prognoses who have failed in other treatment settings. These patients
require longer lengths of stay and come from a wide geographic area. The Company
continues to develop alternatives to inpatient care including partial day and
evening programs in addition to onsite and offsite outpatient programs.
The Company believes that because of the apparent unmet need for certain
intense clinical and medical services, its strategy has been successful despite
national trends towards outpatient treatment, shorter inpatient stays and
rigorous scrutiny by managed care organizations.
The Company has been able to secure insurance reimbursement for longer-term
inpatient treatment as a result of its success with poor prognosis patients. The
Company's three substance abuse facilities work together to refer patients to
the center that best meets the patient's clinical and medical needs. Each
facility caters to a slightly different patient population. Highland Ridge in
Utah specializes in providing services to high-risk, relapse-prone chronic
alcoholics and drug addicts. Mount Regis in Virginia specializes in the
treatment of minority groups and dual diagnosis patients (those suffering from
both substance abuse and psychiatric disorders). Good Hope Center concentrates
on providing services to insurers, managed care networks and health maintenance
organizations for both adults and adolescents. The Company's clinicians often
work directly with managers of employee assistance programs to select the best
treatment facility possible for their clients.
Each of the Company's facilities operates a case management program for
each patient. This includes a clinical and financial evaluation of a patient's
circumstances to determine the most cost-effective modality of care from among
outpatient treatment, detoxification, inpatient, day care, specialized relapse
treatment and others. In addition to any care provided at one of the Company's
facilities, the case management program for each patient includes aftercare.
Aftercare may be provided through the outpatient services provided by a
facility. Alternatively, the Company may arrange for outpatient aftercare, as
well as family and mental health services, through its numerous affiliations
with clinicians located across the country once the patient is discharged.
In general, the Company attempts not to accept patients who do not have
either insurance coverage or adequate financial resources to pay for treatment.
Each of the Company's substance abuse facilities does, however, provide
treatment free of charge to a small number of patients each year who are unable
to pay for treatment but who meet certain clinical criteria and who are believed
by the Company to have the requisite degree of motivation for treatment to be
successful. In addition, the Company provides follow-up treatment free of charge
to relapse patients who satisfy certain criteria. The number of patient days
attributable to all patients who receive treatment free of charge in any given
fiscal year is less than 5%.
The Company believes that it has benefited from an increased awareness of
the need to make substance abuse treatment services accessible to the nation's
workforce. For example, subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as The Drug Free Workplace Act) (the "Drug Free Workplace Act"),
requires employers who are Federal contractors or Federal grant recipients to
establish drug free awareness programs to inform employees about available drug
counseling, rehabilitation and employee assistance programs and the consequences
of drug abuse violations. In response to the Drug Free Workplace Act, many
companies, including many major national corporations and transportation
companies, have adopted policies that provide for treatment options prior to
termination of employment.
Although the Company does not provide federally approved mandated drug
testing, the Company treats employees who have been referred to the Company as a
result of compliance with the Drug Free Workplace Act, particularly from
companies that are part of the gaming industry as well as safety sensitive
industries such as railroads, airlines, trucking firms, oil and gas exploration
companies, heavy equipment companies, manufacturing companies and health
services.
Highland Ridge
Highland Ridge is a 34-bed alcohol and drug treatment hospital which the
Company has been operating since 1984. It is the oldest free-standing substance
abuse hospital in Utah. Highland Ridge is accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") and is licensed by the Utah
Department of Health. Highland Ridge 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 assessment, psychiatric support, stress management,
dietary planning, vocational counseling and pastoral support. Highland Ridge
also offers extensive aftercare assistance at programs strategically located in
areas of client concentration throughout the United States. Highland Ridge
maintains a comprehensive array of professional affiliations to meet the needs
of discharged patients and other individuals not admitted to the hospital for
treatment.
Highland Ridge periodically conducts or participates in research projects.
Highland Ridge was the site of a recent research project conducted by the
University of Utah Medical School. The research explored the relationship
between individual motivation and treatment outcomes. The research was regulated
and reviewed by the Human Subjects Review Board of the University of Utah and
was subject to federal standards that delineated 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.
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
its fourteenth year of a fifteen-year lease, which 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.
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.
Mount Regis Center
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.
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 and is subject to
a mortgage in the approximate amount of $500,000. 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.
<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. See "Description of
Property - Good Hope."
Good Hope concentrates on providing services to insurers, managed care
networks and health maintenance organizations (HMOs). Good Hope provides the
same quality of individualized treatment provided by the Company's other
facilities by working closely with the 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.
<PAGE>
The Company leases the West Greenwich property. The lease runs for twenty
years and is currently in its fourth year. The rent is $16,000 through December,
1997 at which time the landlord has agreed to renegotiate the terms. 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. The West Greenwich facility consists of three buildings, containing a
total of approximately 25,000 square feet, located on an approximately 70-acre
parcel of land.
The Company has leased the North Smithfield satellite location for a three
year term ending October 31, 1998 and pays $1,700 per month. The North
Smithfield location consists of approximately 2,180 square feet. The Company
believes that these premises are adequate for its current and anticipated needs.
General Psychiatric Facilities
Introduction
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
main 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.
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 and do not accept any
patients who require physical or chemical restraints or pose a risk of violence
or harm to other patients.
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 and 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. Under this contract, Harbor Oaks must pay New Life a minimum of
$52,500 per month. In addition, Harbor Oaks must pay New Life 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, located in Las Vegas, Nevada, provides outpatient
psychiatric care to children, adolescents and adults in the local area. Harmony
also operates employee assistance programs for railroads, health care 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 consists of five psychiatric clinics in Michigan. The clinics provide
outpatient psychiatric and substance abuse treatment to children, adolescents
and adults operating under the name Pioneer Counseling Center. The five clinics
are located in close proximity to the Harbor Oaks facility which provides 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 provides outpatient psychiatric services to adults, adolescents and
children through a physicians' practice in Roanoke, Virginia. PCV is 80% owned
by the Company. The medical directors, who are employees of the Company, own the
remaining 20%.
<PAGE>
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.
Psychiatric Facilities
The Company owns or leases premises for each of its psychiatric facilities.
The Company believes that all of these premises are adequate for its current and
anticipated needs.
The Company owns the building in which Harbor Oaks operates, which is a
single story brick and wood frame structure comprising approximately 32,000
square feet situated on an approximately three acre site. The Company has a
$1,100,000 mortgage on this property.
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.
Harmony, Total Concept, NPP and BSC each lease their premises. The Company
believes that each of these premises is leased at fair market value and could be
replaced without significant time or expense if necessary.
<PAGE>
Operating Statistics
The following table reflects selected financial and statistical information
for all psychiatric services.
Three Months Ended
September 30, Year Ended June 30,
1997 1996 1997 1996
__________ __________ ___________ __________
Inpatient
Net patient service revenues $3,020,732 $3,068,683 $13,557,703 $13,000,822
Net revenues per patient day(1) $389 $426 $414 $385
Average occupancy rate(2) 54.4% 53.2% 58.8% 63.4%
Total number of licensed beds at 172 172 172 172
end of period
Source of Revenues:
Private(3) 87.6% 90.4% 91.6% 90.0%
Government(4) 12.4% 9.6% 8.4% 10.0%
Partial Hospitalization and
Outpatient
Net Revenues:
Individual $1,468,498 $948,212 $5,629,760 $ 3,021,486
Contract $261,341 $195,977 $1,459,580 $503,365
Sources of revenues:
Private 98.8% 98.4% 98.4% 93.9%
Government 1.2% 1.6% 1.6% 6.1%
Other Psychiatric
services PDSS(5) $173,477 $133,204 $ 629,761 $ 233,164
Practice Management(6) $ 203,283 $ 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) PDSS, 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 if 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.
In September, 1994, the Company received approval from the Commonwealth of
Massachusetts for a 25-bed addition to the Franvale facility. Under a one-time
regulatory exemption, the Company added an additional 12 beds to Franvale, for a
total of 37 new beds, and renovated the existing facility during the 1995 and
1996 fiscal years. To finance this addition and renovation, the Company applied
for and received Section 232 Mortgage Financing in an amount of $6,822,700 from
HUD. Approximately $2.9 million of that amount was used for the new construction
and renovation, which began September 13, 1994, and approximately $2,327,230 was
used to repay all indebtedness, plus accrued interest, relating to Franvale,
including $497,500 of indebtedness owing to the FDIC. The construction was
completed in September 1995. The Company began operation of the new addition on
September 29, 1995. The final amount of the mortgage was $6,822,700 as
determined by the HUD process of cost certification on July 9, 1996. The monthly
debt service is approximately $54,000.
The refinancing described in the preceding paragraph was accomplished
through guarantees provided by the U.S. Department of Housing and Urban
Development under Section 232 of The National Housing Act. A non-recourse loan
in the amount of $6,822,700 was provided by Charles River Mortgage Company of
Boston, Massachusetts in return for a promissory note and mortgage of the
Company in the same amount. This amount was adjusted after HUD's final cost
certification process completed in July, 1996. The annual interest is 9.25% and
the note is payable over a forty-year period commencing January 1, 1996.
Pre-payment is allowed with penalty from October 1, 2000 through October 1,
2005, with no penalty after October 1, 2005. All pre-existing debt relating to
Franvale was paid by the Company out of the proceeds of the refinancing;
$497,500 was paid to the Federal Deposit Insurance Company, $1,823,839 was paid
to CMS Capital Ventures, Inc. and $5,888 was paid to Trans National Leasing.
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 subject to the HUD mortgage as
described above. 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 Franvales 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 ("Oasis") on November 1, 1996 to 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. The Company's intention is to sell
Franvale allowing management to focus its efforts on its core business.
<PAGE>
Operating Statistics
The following table reflects selected financial and statistical information for
Franvale:
For the Three Months For the Year Ended
End September 30, June 30,
1997 1996 1997 1996
__________ __________ __________ __________
Net patient service revenues $1,133,260 $1,571,984 $5,306,717 $5,043,922
Net revenues per patient
day(1) $143 $142 $135 $137
Average occupancy rate(2) 67.0% 94.1% 84.1% 87.1%
Total number of licensed beds at
end of period............... 128 128 128 128
Source of revenues:
Private(3)............. 19.1% 32.1% 12.5% 8%
Government(4).......... 80.9% 67.9% 87.5% 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.
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 both in Nevada and
nationally.
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 complimented 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. They make
it possible for the Company to offer 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, Hard Rock, 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 long-term care facilities will continue
to emphasize the specialized, transitional, sub-acute services provided by
Franvale. The Franvale facility provides care to patients who no longer require
higher, more costly, acute care provided in intensive care settings at
hospitals, but still require nursing intervention and use of a significant
amount of auxiliary medical services including intravenous rehabilitation,
respiratory and integral therapies. The Company believes that acute care
hospitals seek to transfer certain patients who have entered recuperative
periods, but who are not yet well enough to be cared for at home, to facilities
which offer the type of intensive care available at Franvale. The Company
believes that such patients represent a large market, but one which currently is
underserved. The Company hopes to continue its relationship with existing acute
care hospitals for transitional patients and to develop other networks with
health care providers to increase its census, particularly of higher paying
private pay and long-term care insured patients.
Competition
The Company's substance abuse programs compete nationally with other health
care providers, including general and chronic care hospitals, both non-profit
and for-profit, other substance abuse facilities and short-term detoxification
centers. Some competitors have substantially greater financial resources than
the Company. The Company believes, however, that it can compete successfully
with such institutions because of its success in treating poor-prognosis
patients. The Company will compete through its focus on such patients, its
willingness to negotiate appropriate rates and its capacity to build and service
corporate relationships.
The Company's 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 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 25-mile
radius from its Franvale facility. 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 and psychiatric 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 facilities. Most of the Company's psychiatric patients either have
insurance or pay at least a portion of treatment costs. Free treatment provided
each year amounts to less than 5% of the Company's total patient days.
Each contract is negotiated separately, taking into account the insurance
coverage provided to employees and members, and, depending on such coverage, may
provide for differing amounts of compensation to the Company for different
subsets of employees and members. 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 any additional ancillary services provided to them by the
Company.
Quality Assurance and Utilization Review
The Company has established comprehensive quality assurance programs at all
of its facilities. These 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. To this end, the Company's inpatient facilities are accredited by
the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") and
the Company's outpatient facilities comply with the standards of National
Commission Quality Assurance ("NCQA") although the facilities are not NCQA
certified. The Company's professional staff, including physicians, social
workers, psychologists, nurses, dietitians, therapists and counselors, must meet
the minimal requirements of licensure related to their specific discipline, in
addition to each facility's own internal quality assurance criteria. 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
likely 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. DoN's 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 DoN's 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, the existence of 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 review 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 have occurred or
occur after July 1984. Ancillary costs are reimbursed at actual cost to Medicare
beneficiaries based on prescribed cost allocation principles.
On December 13, 1989, the Catastrophic Care Act of 1988 (the "Catastrophic
Care Act") was repealed. Prior to the effective date of the Catastrophic Care
Act, federal law provided, as a precondition to Medicare coverage of skilled
nursing facility services, that the Medicare beneficiary must have been an
inpatient in an acute care hospital for at least three days preceding admission
to the nursing facility, with such admission occurring within thirty days after
discharge from the acute care hospital. Because the Catastrophic Care Act has
been repealed, that precondition to Medicare coverage of skilled nursing
facility services has been reinstated. However, the Catastrophic Care Act's
expanded definition of skilled care, which increased beneficiaries' access to
skilled nursing services, has been retained.
The Medicare program generally reimburses psychiatric facilities pursuant
to its prospective payment system ("PPS"), in which each facility receives an
interim payment of its allowable costs during the year which is later adjusted
to reflect actual allowable direct and indirect costs of services based upon the
submission of a cost report at the end of each year. However, current Medicare
payment policies allow certain psychiatric service providers an exemption from
PPS. In order for a facility to be eligible for exemption from PPS, the facility
must comply with numerous organizational and operational requirements.
PPS-exempt providers are cost reimbursed, receiving the lower of reasonable
costs or reasonable charges. The Medicare program fiscal intermediary pays a per
diem rate based upon prior year costs, which may be retroactively adjusted upon
the submission of annual cost reports.
The Harbor Oaks facility is currently PPS-exempt. The amount of its
cost-based reimbursement may be limited by the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA") and regulations promulgated thereunder.
Generally, TEFRA limits the amount of reimbursement a facility may receive to a
target amount per discharge, adjusted annually for inflation. This target amount
is based upon a facility's reasonable Medicare operating cost divided by
Medicare discharges, plus a per diem allowance for capital costs, during its
base year of operations. It is not possible to predict the ability of Harbor
Oaks to remain PPS-exempt or to anticipate the impact of TEFRA upon the
reimbursement received by Harbor Oaks in future periods.
In order to receive Medicare reimbursement, each participating facility
must meet the applicable conditions of participation set forth by the federal
government relating to the type of facility, its equipment, its personnel and
its standards of medical care, as well as compliance with all state and local
laws and regulations. In addition, Medicare regulations generally require that
entry into such facilities be through physician referral. The Company must offer
services to Medicare recipients on a non-discriminatory basis and may not
preferentially accept private pay or commercially insured patients.
Medicaid Reimbursement
Currently the only facilities of the Companythat 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, the
ordering, arranging, or providing of covered services, items or equipment.
Violations of these provisions may result in civil and criminal penalties and/or
exclusion from participation in the Medicare, Medicaid and other
government-sponsored programs. 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. Failure to fall within a safe harbor does not
constitute a per se 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 November 15, 1997, the Company had 535 employees, of which 11 were
dedicated to Marketing , 156 (34 part time) to finance and administration and
368 (151 part time) to patient care. Of the Company's 535 employees, 411 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.
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 the 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.
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 Medica 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
proceedings described above.
<PAGE>
MANAGEMENT
Directors and Officers
The directors and officers of the Company are as follows:
Name Age Position
Bruce A. Shear.................... 42 Director, President and Chief
Executive Officer
Robert H. Boswell................. 48 Executive Vice President
Paula C. Wurts.................... 48 Controller, Assistant Clerk and
Assistant Treasurer
Gerald M. Perlow, M.D. (1)(2)..... 60 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. The Compensation Committee reviews and sets executive compensation.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. There are no family relationships among any of the
directors or officers of the Company.
Information with respect to the business experience and affiliations of the
directors and officers of the Company is set forth below.
BRUCE A. SHEAR has been President, Chief Executive Officer and a Director
of the Company since 1980 and Treasurer of the Company from September 1993 until
February, 1996. From 1976 to 1980 he served as Vice President, Financial
Affairs, of the Company. Mr. Shear has served on the Board of Governors of the
Federation of American Health Systems for over ten years. Mr. Shear received an
M.B.A. from Suffolk University in 1980 and a B.S. in Accounting and Finance from
Marquette University in 1976.
ROBERT H. BOSWELL has served as the Executive Vice President of the Company
since 1992. From 1989 until the 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 and
as Assistant Treasurer since 1993 and as Assistant Clerk since January, 1996.
Ms. Wurts served as the Company's Accounting Manager from 1985 until 1989. Ms.
Wurts received an Associate's degree in Accounting from the University of South
Carolina in 1980, a B.S. in Accounting from Northeastern University in 1989 and
passed the examination for Certified Public Accountants. She received a Master's
Degree 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 30, 1996 to
March 1, 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 B.A. from Harvard College in
1959 and an M.D. from Tufts University School of Medicine in 1963.
DONALD E. ROBAR has served as a Director of the Company since 1985 and as
the Treasurer since February, 1996. He served as the 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 an Ed.D. from the University of Massachusetts in 1978, an M.A. from
Boston College in 1968 and a B.A. from the University of Massachusetts in 1960.
HOWARD W. PHILLIPS has served as a Director of the Company since August 27,
1996 and has been employed by the Company as a public relations specialist since
August 1, 1995. From 1982 until October 31, 1995, Mr. Phillips was the Director
of Corporate Finance for D.H. Blair Investment Corp. From 1969 until 1981, Mr.
Phillips was associated with Oppenheimer & Co. where he was a partner and
Director of Corporate Finance. Mr. Phillips currently is a member of the Board
of Directors of Food Court Entertainment Network, Inc., an operator of shopping
mall television networks, and Telechips Corp., a manufacturer of visual phones.
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.
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 $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 1997, 1996 and 1995:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
__________________________________ __________________
(a) (b) (c) (d) (e) (g) (i)
Name and Other Annual Securities All Other
Principal Year Salary Bonus Compensation Underlying Compensation
Position ($) ($) ($) Options/
SARs ($)
_________ ____ ________ _____ ___________ _________ __________
Bruce A. Shear..... 1997 $294,167 -- $12,633(1) -- --
President and Chief 1996 $294,063 -- $10,818(2) -- --
Executive Officer 1995 $237,500 -- $ 8,412(3) -- --
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 a 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 full time employees of the Company receive no
compensation for services as members of the Board of Directors. Directors who
are not employees of the Company receive a $2,500 stipend per year and $1,000
for each meeting of the Board of Directors which they attend. In fiscal year
1997 two members of the board of directors of the Company server 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. Mr.
Grieco is a member of the Board of Directors of Fresenius National Medical Care
Holdings, Inc
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
"Non-Employee Director Plan"). Pursuant to the Non-Employee Director Plan, in
February 1997, Dr. Perlow, Dr. Robar and Mr. Grieco were each granted an option
to purchase 2,000 shares of the Company's Class A Common Stock at an exercise
price of $3.50 per share. Pursuant to the Company's 1993 Stock Plan, in February
of 1997, Mr. Phillips was granted an option to purchase 2,000 shares of the
Company's Class A Common Stock at an exercise price of $3.50 per share. All of
these options are immediately exercisable for 25% of the shares with an
additional 25% becoming exercisable on each of the first three anniversaries of
the grant date.
Additionally, pursuant to the Company's 1993 Stock Plan, in February 1997,
each of Drs. Perlow and Robar and Messrs. Phillips and Grieco was granted an
option to purchase 5,000 shares of the Company's Class A Common Stock at an
exercise price of $3.50 per share. These options become exercisable six months
after the date of the grant for 25% of the shares with an additional 25%
becoming exercisable on each of the first three anniversaries of the grant date.
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 and
upon exercise of options. Generally, an option is not transferable by the option
holder 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.
On November 17, 1997 the Board of Directors voted to amend the 1993 Stock
Plan to increase the number of shares of Class A Common Stock available for
issuance thereunder from 300,000 shares to 400,000 shares. This amendment will
be presented to the Stockholders at the annual meeting on December 26, 1997.
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.
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 the average of the
bid and ask price on the first day of the plan period and the last day of the
plan period. An offering period under the plan began on February 1, 1996 and
ended on January 31, 1997. Seventeen employees purchased an aggregate of 9,452
shares of Class A Common Stock. A new offering commenced on February 1, 1997 and
will end on January 31, 1998. There are thirty employees participating in the
second offering under this plan.
On November 17, 1997 the Board of Directors voted to amend The Plan to
increase the number of shares of Class A Common Stock available for issuance
thereunder from 100,000 shares to 150,000 shares. This amendment will be
presented to the Stockholders at the annual meeting on December 26, 1997.
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 the first meeting of the Board
of Directors subsequent to each annual meeting of stockholders, each
non-employee director is granted under the Director Plan an option to purchase
2,000 shares of the Class A Common Stock of the Company. The option exercise
price is the fair market value of the shares of the Company's Class A Common
Stock on the date of grant. The options are non-transferable and become
exercisable as follows: 25% immediately and 25% on each of the first, second and
third anniversaries of the grant date. If an optionee ceases to be a member of
the Board of Directors other than for death or permanent disability, the
unexercised portion of the options, to the extent unvested, immediately
terminate, and the unexercised portion of the options which have vested lapse
180 days after the date the optionee ceases to serve on the Board. In the event
of death or permanent disability, all unexercised options vest and the optionee
or his or her legal representative has the right to exercise the option for a
period of 180 days or until the expiration of the option, if sooner.
On January 23, 1996, a total of 5,500 shares were issued under the Director
Plan at an exercise price of $6.63 per share. In February, 1997, a total of
6,000 shares were issued under the Director Plan at an exercise price of $3.50
per share. As of March 31, 1997, none of these options had been exercised.
On November 17, 1997 the Board of Directors voted to amend the Director
Plan to increase the number of shares of Class A Common Stock available for
issuance thereunder from 30,000 shares to 50,000 shares.This amendment will be
presented to the Stockholders at the annual meeting on December 26, 1997.
<PAGE>
The following table provides information about options granted to the named
executive officers during fiscal 1997 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
(a) (b) (c) (d) (e)
Number % of Total
Securities Options/SARs
Underlying Granted Exercise or
Options/SARs Employees Base Expiration
Name Granted (#) in Fiscal ($/Share) Date
____________ ____________ _________ _________ __________
Bruce A. Shear... -- -- -- --
Robert H. Boswell 5,000 9.7% $3.50 2/18/2002
The following table provides information about options exercised by the
named executive officers during fiscal 1997 and the number and value of options
held at the end of fiscal 1997.
(a) (b) (c) (d) (e)
Number of Securies Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Value Options/SARs at Options/SARs at
on Realized FY-End FY-End ($)
Name Exercise (($) Exercisable/ Exercisable/
Unexercisable Unexercisable
______ ________ _______ _____________ _____________
Bruce A. Shear........ -- -- -- --
Robert H. Boswell..... 0 $0 34,000/6,250 $0/$0
Certain Relationships and Related Transactions
For approximately the last ten years, Bruce A. Shear, a director and the
President and Chief Executive Officer 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 period ended June 30, 1997, the Company paid Mr. Shear and
affiliates approximately $111,971 in principal and accrued interest under
various notes. 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.
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 Form 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.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of shares of the Company's Class A Common Stock and Class B Common Stock (the
only classes of capital stock of the Company currently outstanding) as of
November 19, 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:
Name and Address Amount and Nature Percent
Title of Class of Beneficial Owner of Beneficial of
Owner Class (11)
__________________ ___________________ _________________ __________
Class A Common Stock ... Gerald M. Perlow *
c/o PHC, Inc. 16,000(1)
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 38,004(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 188,283(8) 3.9%
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)
<PAGE>
_________________________
* 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 37,504 shares issuable upon the exercise of a currently
exercisable Unit Purchase Option for 18,752 Units, at a price per unit of
$5.60, of which each unit consists of one share of Class A Common Stock and
one warrant to purchase an additional share of Class A Common Stock at a
price per share of $7.50 and 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.
(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 37,504 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.
<PAGE>
(11) 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 hold,ers of the
Class A Common Stock are entitled to elect two members of the Company's
Board of Directors and holders of the Class B Common Stock are entitled to
elect all the remaining members of the Company's Board of Directors).
Based on the number of shares listed under the column headed "Amount and
Nature of Beneficial Ownership," the following persons or groups held the
following percentages of voting rights for all shares of common stock combined
as of November 19, 1997:
Bruce A. Shear ......................40.29%
J. Owen Todd...........................0.7%
William F. Grieco......................0.7%
All Directors and Officers as a Group
(7 persons)......................42.49%
SELLING SECURITY HOLDERS
The following table sets forth the ownership of the shares offered pursuant
to this Prospectus by the Selling Security Holders as of the dates such
information was provided to the Company. The information contained in the
following table is based on the Company's records and on information provided by
the Selling Security Holders. Since the dates such information was provided to
the Company, such information may have changed. Except as otherwise noted in the
footnotes to the following table, none of the Selling Security Holders has had
any position, office or material relationship with the Company or affiliates
during the past three years.
Name of Selling Number of Shares Number of Shares Number of Shares of
Security Holder of Class A of Class A Class A Common Stock
Common Stock Common Stock Owned after the
Owned Offered Offering
Before the
Offering
________________ __________________ _________________ ____________________
Infinity
Investors Ltd......... 889,079 889,079(1) 0
Seacrest Capital
Limited............... 592,617 592,617(2) 0
Alpine Capital
Partners, Inc......... 25,000 25,000(3) 0
Barrow Street
Research, Inc......... 3,000 3,000(4) 0
Leon Rubenfaer, M.D..... 6,000 6,000(5) 0
Alan Rickfelder, Ph.D... 9,000 9,000(6) 0
Mukesh Patel, M.D....... 32,250 32,250(7) 0
Himanshu Patel, M.D..... 32,250 32,250(7) 0
Irwin Mansdorf, Ph.D.... .120,375 114,375(8) 6,000
Yakov Burstein, Ph.D.... 45,625 35,625(9) 10,000
C.C.R.I. Corporation.... 160,000 160,000(10) 0
<PAGE>
(1) Consists only of 799,079 shares of Class A Common Stock issued upon the
conversion of a 7% convertible debenture due December 31, 1998 in the
principal amount of $1,875,000 and 90,000 shares of Class A Common Stock
issuable upon the exercise of a warrant at an exercise price of $2.00 per
share.
The debentures were converted into Class A Common Stock from July 8, 1997
through August 20, 1997 at prices ranging from $2.310 through $2.964 per
share.
(2) Consists only of 532,617 shares of Class A Common Stock issued upon the
conversion of a 7% convertible debenture due December 31, 1998 in the
principal amount of $1,250,000 and 60,000 shares of Class A Common Stock
issuable upon the exercise of a warrant issued by the Company to
Seacrest Capital Limited at an exercise price of $2.00 per share. The
debentures were converted into Class A Common Stock from July 8, 1997
through August 20, 1997 at prices ranging from $2.310 through $2.964 per
share.
(3) Consists of shares of Class A Common Stock issuable upon the exercise of
a warrant issued by the Company to Alpine Capital Partners, Inc. for
consulting services at an exercise price of $6.88 per share. The
warrant may be exercised in whole or in part any time prior to October
7, 2001. Alpine Capital Partners, Inc. may not sell in excess of 5,000
shares of Class A Common Stock in any thirty day period without the
written consent of the Company.
(4) Consists of shares of Class A Common Stock issuable upon the exercise of
a warrant issued by the Company to Barrow Street Research, Inc. for
investor relation services at an exercise price of $2.50 per share. The
warrant may be exercised in whole or in part at any time prior to
February 18, 2002.
(5) Consists of shares of Class A Common Stock issued to Leon Rubenfaer,
M.D. pursuant to Section 3.1 of an Asset Purchase Agreement for NPP
dated May 24, 1996 and entered into by and between certain persons and
entities, including Leon Rubenfaer, M.D., Alan Rickfelder, Ph.D. and the
Company.
(6) Consists of shares of Class A Common Stock issued to Alan Rickfelder,
Ph.D. pursuant to Section 3.1 of an Asset Purchase Agreement for NPP
dated May 24, 1996 and entered into by and between certain persons and
entities, including Leon Rubenfaer, M.D., Alan Rickfelder, Ph.D. and the
Company.
(7) Consists of shares of Class A Common Stock issued to Mukesh Patel, M.D.
and to Himanshu Patel, M.D. by the Company pursuant to Section 2.3 of a
Stock Exchange Agreement for PCV dated January 17, 1997 entered into by
and between Mukesh Patel, M.D., Himanshu Patel, M.D. and the Company.
(8) Consists of 114,375 shares of Class A Common Stock issued to Irwin
Mansdorf by the Company pursuant to an Agreement and Plan of Merger
dated October 31, 1996 and entered into by and between the Company,
BSC-NY, Inc., Behavioral Stress Center, Inc., Irwin Mansdorf and Yakov
Burstein. Pursuant to a Registration Rights Agreement entered into by
and among, Irwin Mansdorf, Yakov Burstein and the Company, Dr. Mansdorf
may not sell in the aggregate in excess of 5,000 shares of Class A
Common Stock during any calendar month.
(9) Consists of 35,625 shares of Class A Common Stock issued to Yakov
Burstein by the Company pursuant to an Agreement and Plan of Merger
dated October 31, 1996 and entered into by and between the Company,
BSC-NY, Inc., Behavioral Stress Center, Inc., Irwin Mansdorf and Yakov
Burstein. Pursuant to a Registration Rights Agreement entered into by
and among, Irwin Mansdorf, Yakov Burstein and the Company, Dr. Burstein
may not sell in the aggregate in excess of 5,000 shares of Class A
Common Stock during any calendar month.
(10) Consists of 160,000 shares of Class A Common Stock issuable upon the
exercise of a warrant issued by the Company to C.C.R.I Corporation at an
exercise price of $2.62 per share. The warrant is exercisable as to
40,000 shares of Class A Common Stock at any time prior to March 3,
2002. The warrant becomes exercisable as to an additional 40,000 shares
of Class A Common Stock on July 3, 1997 provided that the closing price
of the Company's Class A Common Stock as reported by the Nasdaq SmallCap
Market has been in excess of $5.62 for ten days prior to July 3, 1997.
The warrant becomes exercisable as to an additional 40,000 shares of
Class A Common Stock on October 3, 1997 provided that the closing price
of the Company's Class A Common Stock as reported by the Nasdaq Small
Cap Market has been in excess of $7.62 for 10 days prior to October 3,
1997. The warrant becomes exercisable as to an additional 40,000 shares
of Class A Common Stock on January 3, 1998 provided that the closing
price of the Company's Class A Common Stock as reported by the Nasdaq
SmallCap Market has been in excess of $9.62 for 10 days prior to January
3, 1998. In the event that any of the shares do not become exercisable
by their target dates, such shares shall become exercisable
retroactively if the respective target prices of the Company's Class A
Common Stock are achieved by March 3, 1998. All shares which become
exercisable by March 3, 1998 may be exercised at any time prior to March
3, 2002. The warrant shall terminate with respect to such shares which
do not become exercisable by March 3, 1998. C.C.R.I. Corporation may
not sell in excess of 5,000 shares on any single day or 20,000 shares in
any single month without the prior consent of the Company.
<PAGE>
PLAN OF DISTRIBUTION
The shares of Class A Common Stock offered by this Prospectus may be sold
from time to time by the Selling Security Holders or by transferees thereof. No
underwriting arrangements have been entered into by the Selling Security
Holders. The distribution of the shares offered by this Prospectus by the
Selling Security Holders may be effected in one or more transactions that may
take place in the over-the-counter market, including ordinary broker's
transactions, privately negotiated transactions, or through sales to one or more
dealers for resale of such shares as principals, at prevailing market prices at
the time of sale, prices related to prevailing market prices, or negotiated
prices. Underwriter's discounts and usual and customary or specifically
negotiated brokerage fees or commissions may be paid by a Selling Security
Holder in connection with sales of the shares.
In order to comply with certain state securities laws, if applicable, the
shares of Class A Common Stock offered by this Prospectus will be sold in such
jurisdictions only through registered or licensed brokers or dealers. In certain
states, such shares may not be sold unless they have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the shares of Class A Common Stock offered by this
Prospectus may not simultaneously engage in market-making activities with
respect to such shares for a period of two to nine business days prior to the
commencement of such distribution. In addition to, and without limiting the
foregoing, each of the selling Security Holders and any other person
participating in a distribution will be subject to the applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
limitation, rules 10b-2, 10b-6, and 10b-7, which provisions may limit the timing
of purchases and sales of any of the shares by the Selling Security Holders or
any such other person. All of the foregoing may affect the marketability of the
shares.
Pursuant to a Registration Rights Agreement between the Company and
Infinity Investors Ltd. ("Infinity") and Seacrest Capital Limited ("Seacrest")
(the "Infinity/Seacrest Agreement"), the Company will pay all the fees and
expenses incident to the registration of the shares owned by them and offered by
this Prospectus (other than underwriting discounts and commissions, if any, and
counsel fees and expenses in excess of $10,000, if any). The Company was
required, pursuant to the Registration Rights Agreement, to prepare and file
with the Commission the Registration Statement of which this Prospectus forms a
part, pursuant to Rule 415 under the Act, with respect to all of the shares of
Class A Common Stock covered by this Prospectus and owned by Infinity and
Seacrest. Pursuant to the Infinity/Seacrest Agreement, the Company agreed to
maintain the effectiveness of the Registration Statement for a maximum of 180
days from the date the Registration Statement is declared effective.
Pursuant to a Registration Rights Agreement between the Company and Irwin
Mansdorf ("Mansdorf") and Yakov Burstein ("Burstein") (the "Mansdorf/Burstein
Agreement"), the Company will pay all the fees and expenses incident to the
registration of the shares owned by them and offered by this Prospectus (other
than underwriting discounts and commissions, if any, and counsel fees and
expenses in excess of $5,000, if any). The Company was required, pursuant to the
Registration Rights Agreement, to prepare and file with the Commission the
Registration Statement of which this Prospectus forms a part, pursuant to Rule
415 under the Act, with respect to all of the shares of Class A Common Stock
covered by this Prospectus and owned by Mansdorf and Burstein. Pursuant to the
Mansdorf/Burstein Agreement, the Company agreed to maintain the effectiveness of
the Registration Statement for a maximum of 24 months following the issuance of
the Shares which are the subject of such registration, or, if sooner, the date
following the date that all Registrable Securities covered by such registration
have been sold pursuant to the provisions of Rule 144.
Pursuant to both of the Registration Rights Agreements described above, the
Company has agreed to indemnify Infinity, Seacrest, Mansdorf and Burstein
against certain liabilities, including liabilities under the Act. In addition,
each of Infinity, Seacrest, Mansdorf and Burstein has agreed to indemnify the
Company against certain liabilities, including liabilities under the Act. Such
Registration Rights Agreements, also provide for rights of contribution if such
indemnification is not available.
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Choate, Hall & Stewart, Boston, Massachusetts.
EXPERTS
The financial statements of PHC, Inc. as of June 30, 1997 and 1996 and for
the years ended June 30, 1997 and 1996 appearing in this Registration Statement
have been audited by Richard A. Eisner & Company, LLP, independent auditors, as
set forth in their report thereon, and are included herein and therein in
reliance upon such report and upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Act with respect to the shares offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the shares, reference is hereby made to the Registration
Statement, exhibits and schedules which may be inspected without charge at the
public reference facilities maintained at the principal office of the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
Commission's regional offices at 7 World Trade Center, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained upon written request
from the public reference section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Reference is made to the copies of
any contracts or other documents filed or incorporated by reference as exhibits
to the Registration Statement.
<PAGE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 20,000,000 shares of Class A
Common Stock, $.01 par value, 2,000,000 shares of Class B Common Stock, $.01 par
value, 200,000 shares of Class C Common Stock, $.01 par value, and 1,000,000
shares of Preferred Stock, $.01 par value. As of October 31, 1997, the Company
had 109 record holders of its Class A Common Stock and 321 record holders of its
Class B Common Stock the only classes of equity securities outstanding as of
such date.
Common Stock
The Company has authorized three classes of Common Stock, the Class A
Common Stock, the Class B Common Stock and the Class C Common Stock. Subject to
any preferential rights in favor of the holders of the Preferred Stock, the
holders of the Common Stock are entitled to dividends when, as and if declared
by the Company's Board of Directors. Holders of the Class A Common Stock, the
Class B Common Stock and the Class C Common Stock are entitled to share equally
in such dividends, except that stock dividends (which shall be at the same rate)
shall be payable only in Class A Common Stock to holders of Class A Common
Stock, only in Class B Common Stock to holders of Class B Common Stock and only
in Class C Common Stock to holders of Class C Common Stock.
On liquidation of the Company, after there shall have been set aside for
the holders of Preferred Stock, if any, the full preferential amount to which
they may be entitled, the net assets of the Company remaining available for
distribution to stockholders shall be distributed equally to each share of Class
A Common Stock, Class B Common Stock and Class C Common Stock.
Subject to all the rights which may be granted to holders of the Company's
Preferred Stock, if any, and as otherwise required by Massachusetts law, a
description of the preferences, voting powers, qualifications and special or
relative rights and privileges of the Class A Common Stock, the Class B Common
Stock and the Class C Common Stock is set forth below. Except as otherwise
stated below and as otherwise required by Massachusetts law, each share of Class
A Common Stock, Class B Common Stock and Class C Common Stock has identical
powers, preferences and rights.
Class A Common Stock
The Class A Common Stock is entitled to one vote per share with respect to
all matters on which shareholders are entitled to vote, except as otherwise
required by law and except that the holders of the Class A Common Stock are
entitled to elect two members to the Company's Board of Directors.
The Class A Common Stock is non-redeemable and non-convertible and has no
pre-emptive rights. The shares of Class A Common Stock offered hereby will be
fully paid and non-assessable.
Class B Common Stock
The Class B Common Stock is entitled to five votes per share with respect
to all matters on which shareholders are entitled to vote, except as otherwise
required by law. The holders of the Class B Common Stock are also entitled to
elect all of the remaining members of the Board of Directors in excess of the
two directors elected by the holders of Class A Common Stock.
The Class B Common Stock is non-redeemable and has no pre-emptive rights.
Each share of Class B Common Stock is convertible, at the option of its
holder, into a share of Class A Common Stock. In addition, each share of Class B
Common Stock is automatically convertible into one fully-paid and non-assessable
share of Class A Common Stock (i) upon its sale, gift or transfer to a person
who is not an affiliate of the initial holder thereof or (ii) if transferred to
such an affiliate, upon its subsequent sale, gift or other transfer to a person
who is not an affiliate of the initial holder. Shares of Class B Common Stock
that are converted into Class A Common Stock will be retired and canceled and
shall not be reissued.
All of the outstanding shares of Class B Common Stock are fully paid and
nonassessable.
Class C Common Stock
The Class C Common Stock is non-voting except as otherwise required by law.
The Class C Common Stock is non-redeemable and has no pre-emptive rights. Since
the Company failed to meet earnings targets as specified in its March 3, 1994
Prospectus, all outstanding Class C Common Stock was cancelled as of September
28, 1997.
Preferred Stock
The Board of Directors is authorized, subject to the limitations prescribed
by law and the Company's Articles of Organization, to issue the Preferred Stock
in one or more classes or series and to determine, with respect to any series so
established, the preferences, voting powers, qualifications and special or
relative rights of the established class or series. The Board of Directors may
make this determination and issue shares of Preferred Stock without any prior
consent or approval from the holders of the Company's Common Stock for up to the
1,000,000 shares of Preferred Stock which are currently authorized. No shares of
the Company's Preferred Stock are currently outstanding.
Massachusetts Law and Certain Charter Provisions
Anti-Takeover Measures
In addition to the directors' ability to issue shares of Preferred Stock in
series, the Company's Restated Articles of Organization and By-Laws contain
several other provisions that are commonly considered to have an anti-takeover
effect. The Company's Restated Articles of Organization include a provision
prohibiting shareholder action by written consent except as otherwise provided
by law. Under Massachusetts law, action taken by shareholders without a meeting
requires their unanimous written consent. Additionally, under the Company's
By-Laws, the directors may enlarge the size of the Board and fill any vacancies
on the Board.
Under Massachusetts law, any corporation which has a class of voting
securities registered under the Exchange Act is required to classify its board
of directors, with respect to the time for which they severally hold office,
into three classes, unless the board of directors of such corporation or the
stockholders by a vote of two-thirds of the shares outstanding, adopts a vote
providing that the corporation shall be exempt from the foregoing provision. A
provision classifying the Board of Directors is commonly considered to have an
anti-takeover effect. The Company's Board of Directors has voted to exempt the
Company from this provision.
The Company, as a Massachusetts corporation, is subject to the
Massachusetts Business Combination statute and to the Massachusetts Control
Share Acquisition statute. Under the Massachusetts Business Combination statute,
a person (other than certain excluded persons) who acquires 5% or more of the
stock of a Massachusetts corporation without the approval of the Board of
Directors (an "Interested Shareholder"), may not engage in certain transactions
with the corporation for a period of three years. There are certain exceptions
to this prohibition; for example, if the Board of Directors approves the
acquisition of stock or the transaction prior to the time that the person became
an Interested Shareholder, or if the Interested Shareholder acquires 90% of the
voting stock of the corporation (excluding voting stock owned by directors who
are also officers and stock held by certain employee stock plans) in one
transaction, or if the transaction is approved by the Board of Directors and by
the affirmative vote of two-thirds of the outstanding voting stock which is not
owned by the Interested Shareholder.
Under the Massachusetts Control Share Acquisition statute, a person (the
"Acquiror") who makes a bona fide offer to acquire, or acquires, shares of a
corporation's common stock that when combined with shares already owned, would
increase the Acquiror's ownership to at least 20%, 33 1/3%, or a majority of the
voting stock of such corporation, must obtain the approval of a majority of
shares held by all shareholders except the Acquiror and the officers and inside
directors of the corporation in order to vote the shares acquired. The statute
does not require the Acquiror to consummate the purchase before the shareholder
vote is taken.
The foregoing provisions of Massachusetts law and the Company's Restated
Articles of Organization and By-Laws could have the effect of discouraging
others from attempting unsolicited takeovers of the Company and, as a
consequence, they may also inhibit temporary fluctuations in the market price of
the Company's Common Stock that might result from actual or rumored unsolicited
takeover attempts. Such provisions may also have the effect of preventing
changes in the management of the Company. It is possible that such provisions
could make it more difficult to accomplish transactions which shareholders may
otherwise deem to be in their best interests.
Transfer Agent and Registrar
American Stock Transfer & Trust Company, New York, New York, serves as the
Company's Transfer Agent.
NASDAQ System Quotation
Application has been made to approve the shares being offered hereby for
quotation on NASDAQ under the trading symbol PIHC.
INDEMNIFICATION FOR SECURITIES ACT VIOLATIONS
Section 6 of the Company's Restated Articles of Organization provides, in
part, that the Company shall indemnify its directors, trustees, officers,
employees and agents against all liabilities, costs and expenses, including but
not limited to amounts paid in satisfaction of judgments, in settlement or as
fines and penalties, and counsel fees, reasonably incurred by such person in
connection with the defense or disposition of or otherwise in connection with or
resulting from any action, suit or proceeding in which such person may be
involved or with which he or she may be threatened, while in office or
thereafter, by reason of his or her actions or omissions in connection with
services rendered directly or indirectly to the Company during his or her term
of office, such indemnification to include prompt payment of expenses in advance
of the final disposition of any such action, suit or proceeding.
In addition, the Restated Articles of Organization of the Company, under
authority of the Business Corporation Law of the Commonwealth of Massachusetts,
contain a provision eliminating the personal liability of a director to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, or (iii) for any transaction from which the director derived an improper
personal benefit. The foregoing provision also is inapplicable to situations
wherein a director has voted for, or assented to, the declaration of a dividend,
repurchase of shares, distribution or the making of a loan to an officer or
director, in each case where the same occurs in violation of applicable law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE>
PHC, INC. AND SUBSIDIARIES
Contents
Consolidated Financial Statements
Independent auditors' report 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
Consolidated notes to financial statements F-7
F-1
<PAGE>
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
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, June 30, June 30,
(unaudited)
1997 1997 1996
ASSETS (Notes C and D) _____________ _________ _________
Current assets:
Cash and cash equivalents $144,645 $905,692 $293,515
Accounts receivable, net of allowance
for bad debts of $3,219,992 at Sept.
30, 1997, $2,982,138 at June 30, 1997
and $1,492,983 at June 30, 1996
(Notes A, C and M) 10,266,259 10,650,368 8,866,065
Prepaid expenses 208,276 375,382 259,893
Other receivables and advances 156,878 260,212 66,513
Deferred income tax asset (Note F) 515,300 515,300 515,300
Other receivables, related party
(Note L) 110,000 80,000
___________ __________ _________
Total current assets 11,401,358 12,786,954 10,001,286
Accounts receivable, noncurrent 645,000 605,000 740,000
Loans receivable 118,284 134,284 113,805
Property and equipment, net
(Notes A and B) 8,315,963 8,408,211 7,884,063
Deferred income tax asset (Note F) 154,700 154,700 154,700
Deferred financing costs, net of
amortization 756,006 751,325 772,823
Goodwill, net of accumulated amortization
(Note A) 1,719,629 1,644,252 841,413
Restricted deposits and funded reserves 175,616 170,874
Other assets (Note A) 134,906 222,032 252,445
Net assets of operations held for sale
(Note J) -- -- 56,682
__________ ___________ _________
Other receivables, noncurrent, related
party (Note L) 3,328,062 2,983,177
__________ ___________ __________
26,749,524 $27,860,809 20,817,217
__________ ___________ __________
LIABILITIES
Current liabilities:
Accounts payable 4,149,005 $4,171,334 $3,127,052
Notes payable - related parties
(Note E) 51,600 51,600 56,600
Current maturities of long-term debt
(Note C) 574,278 580,275 403,894
Revolving credit note and secured term
note 1,525,022 1,789,971
Current portion of obligations under
capital leases (Note D) 150,530 139,948 88,052
Accrued payroll, payroll taxes and
benefits 577,365 703,842 715,515
Accrued expenses and other liabilities 480,217 587,024 738,784
__________ ___________ __________
Total current liabilities 7,508,017 8,023,994 5,129,897
__________ ___________ __________
Long-term debt and accounts payable
(Note C) 9,596,305 9,759,601 7,754,262
Obligations under capital leases
(Note D) 1,563,275 1,594,562 1,468,475
Notes payable - related parties(Note E) 15,796 23,696 47,394
Convertible debentures ($3,125,000 less
discount $390,625)(Note C) -- 2,734,375
__________ ___________ __________
Total noncurrent liabilities 11,175,376 14,112,234 9,270,131
__________ ___________ __________
Total liabilities 18,683,393 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, 4,643,280,
2,877,836 and 2,293,568 shares issued and
outstanding Sept. 30, 1997, June 30, 1997
and 1996, respectively 46,433 28,778 22,936
Class B common stock, $.01 par value;
2,000,000 shares authorized, 730,331,
730,360 and 812,237 issued and outstanding
Sept. 30, 1997, June 30, 1997 and 1996,
respectively convertible into one share
of Class A common stock 7,303 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 3,643,167 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) (37,818)
Accumulated deficit (5,592,954) (4,674,316) (1,630,322)
__________ ___________ __________
Total stockholders' equity 8,066,131 5,724,581 6,417,189
__________ ___________ __________
26,749,524 $27,860,809 $20,817,217
__________ ___________ __________
See notes to financial statements F-3
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended
September 30, Year Ended
(Unaudited) June 30,
____________________ _____________________
1997 1996 1997 1996
____ ____ ____ ____
Revenues:
Patient care, net (Note A) $5,903,995 $5,784,856 $26,007,333 $21,569,594
Management fees (Note L) 233,283 -- 597,278
Other 173,477 133,204 629,761 233,164
__________ __________ ____________ __________
Total revenue 6,310,755 5,918,060 27,234,372 21,802,758
__________ __________ ____________ __________
Operating expenses:
Patient care expenses 3,622,231 3,056,894 14,436,784 12,004,383
Cost of management contracts 102,400 69,893 324,440 146,407
Provision for doubtful
accounts 483,778 269,943 3,397,693 1,894,087
Administrative expenses 2,692,035 2,199,501 10,341,973 7,800,715
__________ __________ ____________ __________
Total operating expenses 6,900,444 5,596,231 28,500,890 21,845,592
__________ __________ ____________ __________
Income(Loss)from operations (589,689) 321,829 (1,266,518) (42,834)
Other income (expense):
Interest income 97,676 2,650 201,286 14,486
Other income, net 69,385 81,464 490,327 211,292
Start-up costs (Note A) -- -- -- (128,313)
Interest expense (488,010) (295,344) (2,094,301) (863,484)
Gain from operations held for
sale (Note J) -- (724) 26,853 11,947
__________ __________ ____________ __________
(320,949) (211,954)
Total other expense (910,638) 109,875 (1,375,835) (754,072)
__________ __________ ____________ __________
Income(Loss)before income
taxes (benefit) (2,642,353) (796,906)
Income taxes (benefit) (Note F) 8,000 44,133 197,311 (211,591)
__________ __________ ____________ __________
Net Income (Loss) $(918,638) $ 65,742 $(2,839,664) $(585,315)
__________ __________ ____________ __________
Net Income (loss) per share
(Note A) $(.21) $.02 $(.87) $(.22)
__________ __________ ____________ __________
Weighted average number of
shares outstanding 4,444,706 3,117,915 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>
<S> <C> <C> <C> <C>
Class A Class B Class C Preferred
Common Stock Common Stock Common Stock Stock
________________ ______________ ______________ ____________
Shares Amount Shares Amount Shares Amount Share Amount
_______ _______ ______ ______ ______ ______ ______ _______
</TABLE>
<TABLE>
<CAPTION>
<S> <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
warrants 21,493 215
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
Costs related to
private placements
Conversion of Debt 1,331,696 13,317
Conversion of
preferred stock 246,305 2,463 (500) (5)
Issuance of shares 15,000 150
with acquisition
Issuance Private
Placement shares 172,414 1,724
Conversion of Shares 29 1 (29) (1)
Cancel Class C (199,816) (1,998)
Common Stock
Issue warrants for
services
Balance - September 4,643,280 $46,433 730,331 $7,303 0 $0 0 $0
30, 1997 (Unaudited)
See notes to financial statements
</TABLE>
<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
Capital, Notes Treasury Shares
Common Receivable Shares Accumulated
Stock for Stock 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 (442,395) (442,395)
private placement
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 (141,295) (141,295)
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
stock purchase
plan shares 30,530 30,624
Issuance of shares
in connection
with consulting 79,800 80,000
agreement
Issuance of warrants
with convertible
debentures 125,000 125,000
Cancellation of
notes receivable 37,818 8,656 $(37,818) -0-
Payment of notes 25,448 25,448
receivable
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) $5,724,581
__________ ___________ ________________ ____________ __________
Costs related to
private placements (97,894) (97,894)
Conversion of Debt 2,767,101 2,780,418
Conversion of
preferred stock (2,458) -0-
Issuance of shares
with acquisition 31,233 31,383
Issuance Private
Placement shares 498,276 500,000
Conversion of Shares -0-
Cancel Class C
Common Stock 1,998 -0-
Issue warrants for
services 46,281 46,281
Net Loss, quarter
ended Sept 30, 1997 (918,638) (918,638)
Balance - September
30, 1997
(Unaudited) $13,643,167 $ -0- 8,656 $(37,818) $ (5,592,954) 8.066.131
__________ ___________ ________________ ____________ __________
See notes to financial statements F-5
</TABLE>
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Year Ended
September 30, June 30,
(Unaudited)
1997 1996 1997 1996
__________ _________ ___________ ____________
Cash flows from operating activities:
Net loss $(918,638) $65,742 $(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 161,975 138,872 679,248 554,025
Beneficial conversion feature of -- -- 130,284
convertible debt
Compensatory stock options and stock
and warrants issued for obligations 46,131 205,000 39,250
Changes in:
Accounts receivable 88,558 (1,446,109) (1,649,303) (2,985,052)
Prepaid expenses and other current 167,106 (147,887) (309,188) (69,978)
assets
Other assets 11,456 124,945 113,419 (107,711)
Net assets of operations held for -- (1,185) 56,682 106,886
sale
Accounts payable (163,555) (93,288) 1,044,282 1,414,089
Accrued expenses and other
liabilities (92,058) (301,609) (167,763) 295,475
Net cash used in operating
activities (699,025)(1,660,519) (2,737,003) (1,756,468)
__________ __________ __________ ___________
Cash flows from investing activities:
Acquisition of property and equipment (47,474) (569,009) (895,914) (1,557,419)
and intangibles
Loan receivable
-- -- (3,063,177) (17,462)
Net cash used in investing
activities (47,474) (569,009) (3,959,091) (1,574,881)
Cash flows from financing activities:
Revolving debt, net (322,644) 486,613 1,789,981
Proceeds from borrowings -- 1,640,450 2,749,505 2,043,748
Payments on debt (145,203) (239,050) (696,886) (402,828)
Deferred financing costs 21,498 (711,960)
Issuance of capital stock 448,299 54,547 944,173 2,109,166
Convertible debt 2,500,000
__________ __________ __________ ___________
Net cash provided by financing
activities (14,548) 1,942,560 7,308,271 3,038,126
__________ __________ __________ ___________
Net increase (decrease) in cash and cash
equivalents (761,047) (286,968) 612,177 (293,223)
Beginning balance of cash and cash
equivalents 905,692 293,515 293,515 586,738
__________ __________ __________ ___________
Ending balance of cash and cash equivalents 144,645 6,547 $905,692 $293,515
__________ __________ __________ ___________
Supplemental cash flow information:
Cash paid during the year for:
Interest 415,583 285,093 $ 1,933,133 $779,898
Income taxes 8,000 19,400 $86,414 $187,120
Supplemental disclosures of noncash
investing and financing activities:
Stock issued for acquisitions of
equipment and services $ 31,383 $75,600 $840,819 $393,548
Note payable due for litigation
settlement $225,000
Capital leases $284,048 $94,699
Conversion of preferred stock $ 584,587 -- $500,000
Beneficial conversion feature of $200,000
preferred stock
Conversion of Debt to Common Stock $2,734,375
</TABLE>
See notes to financial statements F-6
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996 (Unaudited with respect to the three months ended
September 30, 1997 and September 30, 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:
Fe 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 ma4rket value of net assets
acquired are being amortized on a straightlineine basis 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 ACCOUNTING 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.
Unaudited Interim Financial Statements
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included for the three months ended September 30, 1997 and 1996. Operating
results for the three months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending June 30,
1998.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised as follows:
June 30,
1997 1996
Land $ 302,35 $ 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
amortization (501,732) (400,768)
___________ ___________
$1,461,072 $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 Real
June 30, 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 4,641,348 4,641,348
_____________ ____________ __________
Total future
minimum lease
payments 436,896 5,937,992 6,374,888
Less amount
representing
interest 83,804 4,556,574 4,640,378
_____________ ____________ __________
Present value
of future
minimum leasee
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:
Year Ended
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:
Year Ended
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 100,000
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 11,500 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. common stock at
fair market value, vesting 25% immediately and 25% on each of the first
three anniversaries of the grant.
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)
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 $(0.87) $ (0.22)
share 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:
Exercise
Number of 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 not 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>
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 6 of the Registrant's Restated Articles of Organization provides, in
part, that the Registrant shall indemnify its directors, trustees, officers,
employees and agents against all liabilities, costs and expenses, including but
not limited to amounts paid in satisfaction of judgments, in settlement or as
fines and penalties, and counsel fees, reasonably incurred by such persons in
connection with the defense or disposition of or otherwise in connection with or
resulting from any action, suit or proceeding in which such person may be
involved or with which he or she may be threatened, while in office or
thereafter, by reason of his or her actions or omissions in connection with
services rendered directly or indirectly to the Registrant during his or her
term in office, such indemnification to include prompt payment of expenses in
advance of the final disposition of any such action, suit or proceeding.
In addition, the Restated Articles of Organization of the Registrant, under
authority of the Business Corporation Law of the Commonwealth of Massachusetts,
contain a provision eliminating the personal liability of a director to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, or (iii) for any transaction from which the director derived an improper
personal benefit. The foregoing provision also is inapplicable to situations
wherein a director has voted for, or assented to, the declaration of a dividend,
repurchase of shares, distribution, or the making of a loan to an officer or
director, in each case where the same occurs in violation of applicable law.
Item 25. Other Expenses of Issuance and Distribution
It is estimated that the following expenses will be incurred in connection with
the proposed offering hereunder:
SEC Registration Fee ...............$ 2,420
NASDAQ Listing Fees ................$ 7,500
Legal Fees and Expenses ...............53,000
Accounting Fees and Expenses ..........12,000
Miscellaneous ....................... 1,080
Total.................. $76,000
The Registrant will bear all expenses shown above.
Item 26. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement, the
Registrant has issued the following securities without registering such
securities under the Securities Act.
On June 21, 1994 the Company issued 15,000 shares of Class A Common Stock
to Edwin Brown in exchange for the acquisition by the Company of Mr. Brown's
interest in Highland Ridge Hospital.
On July 7, 1995 the Company issued a warrant for the purchase of up to
1,600 shares of Class A Common Stock at an exercise price of $5.47 to Westergard
Publishing in payment for investor relations services.
On November 1, 1995 the Company issued 75,000 shares of Class A Common
Stock to Norton A. Roitman in exchange for the acquisition by the Company of Dr.
Roitman's interest in Harmony Healthcare.
On February 8, 1996 the Company issued 79 units, each of which consisted of
6,250 shares of Class A Common Stock, and 9,375 warrants, each of which is
exercisable for one share of Class A Common Stock at an exercise price of $4.00
per share to 11 investors in a private placement, which resulted in net proceeds
to the Company of approximately $1,524,800.
On March 15, 1996 the Company issued 12,000 shares of Class A Common Stock
to Ronald J. Dreier in exchange for the acquisition by the Company of Mr.
Dreier's interest in Total Concept.
On April 15, 1996 the Company issued a warrant to purchase up to 2,500
shares of Class A Common Stock at an exercise price of $5.50 to Peter Mintz as
payment for investor relations services.
On April 23, 1996 the Company issued a warrant to purchase up to 2,500
shares of Class A Common Stock at an exercise price of $5.50 to Barrow Street
Research as payment for investor relations services.
On September 30, 1996 the Company issued 6,000 shares of Class A Common
Stock to Leon Rubenfair and 9,000 shares of Class A Common Stock to Alan
Rickfelder in exchange for the acquisition by the Company of their interest in
NPP.
On November 1, 1996 the Company issued 114,375 shares of Class A Common
Stock to Dr. Irwin Mansdorf and 35,625 shares of Class A Common Stock to Dr.
Yakov Burstein in exchange for the acquisition by the Company of Drs. Mansdorf's
and Burstein's interest in BSC.
On January 13, 1997 the Company issued 32,250 shares of Class A Common
Stock to each of Dr. Himanshu Patel and Dr. Mukesh P. Patel in exchange for the
acquisition by the Company of their interest in PCV.
On November 11, 1996 the Company issued a warrant to purchase up to 25,000
shares of Class A Common Stock at an exercise price of $6.88 per share to Alpine
Capital Partners as payment for consulting services.
On February 18, 1997, the Company issued a warrant to purchase up to 3,000
shares of Class A Common Stock at an exercise price of $2.50 per share to Barrow
Street Research as payment for investor relation services.
On December 6, 1996 the Company issued 7% Convertible Debentures due
December 31, 1998 in the aggregate face amount of $3,125,000 (the "Debentures")
to Infinity Investors Ltd. ("Infinity") and Seacrest Capital Limited
("Seacrest") resulting in $2,500,000 of proceeds to the Company.
On March 31, 1997 the Company issued a warrant to purchase up to 90,000
shares of Class A Common Stock to Infinity and a warrant to purchase up to
60,000 shares of Class A Common Stock to Seacrest at an exercise price of $2.00
per share in consideration of Infinity and Seacrest waiving certain liquidated
damages payable to them pursuant to the Debentures.
On March 3, 1997 the Company issued a warrant to purchase up to 160,000
shares of Class A Common Stock at an exercise price of $2.62 per share to
C.C.R.I. Corporation as payment for consultant services.
On March 4, 1997 the Company issued 100 shares of Class A Common Stock to
Charles E. Hauff a former employee in consideration of past employment services.
On October 2, 1997 the Company also issued 172,414 shares of the Company's
Class A Common Stock to ProFutures Special Equities Fund, L.P. in a private
placement finalized in September 1997 resulting in net proceeds to the Company
of
approximately $445,000.
On October 2, 1997 the Company also issued 26,024 shares of the Company's
Class A Common Stock to Counseling Associates of Southwest Virginia, Inc. in
connection with the acquisition of the assets of Counseling Associates of
Southwest Virginia, Inc.
In September 1997 the Company issued a warrant to purchase up to 150,000
shares of Class A Common Stock at an exercise price of $2.50 per share to Brean
Murray and Company, Inc. in exchange for $100.00 and services rendered.
None of the sales of securities described above involved an underwriter.
Each sale was made in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act on the basis that such sales by the
Registrant did not involve a public offering. Additionally, the February 8, 1996
private placement was made in reliance upon Regulation D of the Securities Act
of 1933 pursuant to which the Registrant filed a Form D on January 25, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Peabody, State of Massachusetts, on December 4, 1997.
PHC, INC.
By: *
_____________________________
Bruce A. Shear, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
_________ _________ ______
By: * President and Chief December 4, 1997
Bruce A. Shear Executive
Officer and Director
(principal
executive officer)
By: * Controller, Assistant December 4, 1997
Paula C. Wurts Treasurer
and Assistant Clerk
(principal
financial officer)
By: * Clerk and Director December 4, 1997
Gerald M. Perlow
By: * Treasurer and Director December 4, 1997
Donald E. Robar
By: * Director December 4, 1997
Howard W. Phillips
By: * Director December 4, 1997
William F. Grieco
*By: /s/ Bruce A. Shear
as attorney-in-fact
<PAGE>
Item 27. Exhibits
Exhibits Index
<PAGE>
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.
@ 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. dated 07/31/97 (See 10.125).
####4.24 Form of 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.
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.
+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.
+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.
**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.
****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.
x****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.
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. (Relates 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 06/01/97.
####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-Freement dated August, 1997.
####10.128 Employment by and between Pioneer Counseling of Virginia, Inc.
and Dianne Jones-Freement 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.
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
Commission 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 33-71418).
## 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.
#### Filed as an exhibit to the Company's report on Form 10-KSB,
filed with the Securities and Exchange Commission (Commission
file number 0-23524on October 14, 1997.
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
333-25231).
<PAGE>
Item 28. Undertakings
Undertakings Required by Regulation S-B, Item 512(a).
The undersigned Registrant hereby undertakes
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the Registration
Statement; and
(iii) include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Undertakings Required by Regulation S-B, Item 512(e).
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any arrangement, provision or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Undertakings Required by Regulation S-B, Item 512(f).
The undersigned Registrant hereby undertakes to:
(1) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of the
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective; and
(2) For the purpose of determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
<PAGE>
EXHIBIT INDEX
Exhibit 23.1 Consent of Independent Auditors
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Post-Effective Amendment on Form SB-2
of our report dated December 4, 1997 on our audit of the consolidated financial
statements of PHC. Inc., as at June 30, 1997 and June 30, 1996 and for each of
the years then ended. We also consent to the reference to our firm under the
captions "Selected Consolidated Financial Data" and "Experts".
Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
December 4, 1997
<PAGE>
Exhibit 99.1
CAUTIONARY STATEMENT FOR PURPOSES
OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE LITIGATION REFORM ACT OF 1995
PHC, Inc. (the "Company") desires to take advantage of the new "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is including this Exhibit 99.1 in its Form 10-KSB in order to do so.
The Company wishes to caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
consolidated results for the Company's current quarter and beyond, to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, the Company.
During its last fiscal year and in certain other fiscal years of its
operation, the Company has generated losses and there can be no assurance
that future losses will not occur.
The Company has experienced a significant increase in accounts
receivable in recent years and there can be no assurance that this trend will
not continue, and that if it does, that it will not have a material adverse
effect on the Company's cash flow and financial performance.
The Company historically experiences and expects to continue to
experience a decline in revenue in its fiscal quarters ending December 31 due
to a seasonality decline in revenue from the Company's substance abuse
facilities during such period.
Payment for the company's substance abuse treatment is provided by
private insurance carriers and managed care organizations; payment for
long-term and subacute care is provided by private insurance carriers,
managed care organizations and the Medicare and Medicaid programs; payment
for psychiatric services is provided by private insurance carriers, managed
care organizations and the Medicare and Medicaid programs. In general,
revenues derived from the Medicare and Medicaid programs in connection with
the long-term and subacute care services provided by the Company have been
less profitable to the Company than revenues derived from private insurers
and managed care organizations in connection with the substance abuse
treatment provided by the Company and changes in the sources of the Company's
revenues could significantly alter the Company's profitability.
Additionally, the Company experiences greater delays in the collection of
amounts reimbursable by the Medicare and Medicaid programs than in the
collection of amounts reimbursable by private insurers and managed care
organizations. Accordingly, a change in the Company's service mix from
substance abuse to long-term care could have a materially adverse effect on
the Company as would an increase in the percentage of the Company's patients
who are insured by Medicare or Medicaid.
Cost containment pressures from private insurers in the Medicare and
Medicaid programs may begin to restrict the amount that the Company can
charge for its services.
There can be no assurance that the Company's existing facilities will
continue to meet, or that proposed facilities will meet, the requirements for
reimbursement by third party or government payors.
The Company has substantial receivables from Medicare and Medicaid
which constitute a concentration of credit risk should these agencies defer
or be unable to make reimbursement payments as due.
The Company often experiences significant delays in the collection of
amounts reimbursable by third-party payors. Although the Company believes it
maintains an adequate allowance for doubtful accounts, if the amount of
receivables which eventually becomes uncollectible exceeds such allowance,
the Company could be materially adversely affected.
If a growing number of managed care organizations and insurance
companies adopt policies which limit the length of stay for substance abuse
treatment, the Company's business would be materially adversely affected.
There can be no assurance that occupancy rates at the Company's
facilities will continue at present levels. Similarly, there can be no
assurance that the patient census will not decrease in the future.
There can be no assurance that the Company will be successful in
identifying appropriate acquisition opportunities, or if it does, that the
Company will be successful in acquiring such facilities or that such acquired
facilities will be profitable. The failure of the company to implement its
acquisition strategy could have a materially adverse effect an the Company's
financial performance. Moreover, the inherent risks of expansion could also
have a material adverse effect on the Company's business.
Additionally, the company's acquisition program will be directed by the
President and Chief Executive officer of the Company and the Company does not
intend to seek stockholder approval or any such acquisitions unless required
by applicable law or regulations. Accordingly, investors will be
substantially dependent upon the business judgment of management in making
such acquisitions. Furthermore, the company's acquisition strategy is highly
dependent on access to capital, of which there can be no assurance.
The Company and the healthcare industry in general are subject to
extensive federal, state and local regulation with respect to liicensure and
conduct of operations. There can be no assurance that the Company will be
able to obtain new licenses to affect its acquisition strategy or maintain
its existing licenses and reimbursement program participation approvals.
It is not possible to accurately predict the content or impact of
future legislation and regulations affecting the healthcare industry. In
addition, both the Medicare and Medicaid programs are subject to statutory
and regulatory changes and there can be no assurances that payments under
those programs to the Company will, in the future, remain at a level
comparable to the present level or be sufficient to cover the cost allocable
to such patients.
Bruce A. Shear the President and Chief Executive officer of the Company
together with his affiliates is able to control all matters requiring
approval of the stockholders, including the election of a majority of the
directors, as a result of his ownership of the Company's stock.
There can be no assurance that the Company will be successful in hiring
or retaining the personnel it requires for continued growth, or that the
Company will be able to continue to attract and retain highly qualified
personnel, particularly skilled healthcare personnel.
The healthcare business is highly competitive and subject to excess
capacity.
The Company has entered into relationships with large employers,
healthcare institutions, labor unions and other key clients to provide
treatment for chemical dependency and substance abuse as well as other
services and the loss of any of these key clients would require the Company
to expend considerable effort to replace patient referrals and would result
in revenue losses to the Company and attendant loss in income.
Existing environmental contamination at certain of the Company's
facilities and potential future environmental contamination at facilities
acquired by the company could have a materially adverse effect on the
Company's operations.
<PAGE>
On October 31, 1994, the Company was served with a summons for a Civil
Action in the Superior Court Department of the Trial Court of the
Commonwealth of Massachusetts by NovaCare, Inc. ("NovaCare"), an entity which
contracted with the Company in 1992 to provide rehabilitation therapy and
related administrative services to the Company's long-term care facility (the
"Action"). The complaint alleged that the Company owed NovaCare contractual
damages in the amount of approximately $587,000, plus interest, attorney
fees, costs of collection, and double or triple damages pursuant to a
Massachusetts statute prohibiting unfair and deceptive trade practices. The
Company filed a counterclaim alleging that NovaCare breached the contract in
question and that the Company may be owed damages in excess of the amount
sought by NovaCare.
On February 13, 1996, the company settled the Action by agreeing to pay
NovaCare an amount less than its claim. The Company is not paying NovaCare
accrued interest, attorney's fees, costs of collection, or multiple damages. A
portion of the settlement amount has already been paid. The balance of the
settlement amount is payable over twelve (12) months with interest on the unpaid
balance at 9.5%. In the event that the Company defaults an its obligation to pay
the settlement amount, it has agreed to entry of judgment against it in the
amount of $457, 637.46 (the "Judgment"). The Judgment represents the full unpaid
balance of NovaCare's claim against the Company, including interest, attorney's
fees, and costs of collection. Any amounts paid by the Company to NovaCare after
February 9, 1996 shall be deducted from the Judgment. Until the settlement
amount is paid, NovaCare will continue to hold a mortgage on a day care property
owned by the Company in Saugus, Massachusetts. As of Fiscal Year Ended June 30,
1997, this obligation has been paid in full.
Interruption by fire, earthquakes or other catastrophic events, power
failures, work stoppages, regulatory actions or other causes to any of the
Company's operations could have a materially adverse impact on the Company.
The company has and in the future may enter into transactions in which
it acquires businesses or obtains financing for a consideration that includes
the issuance of stock, warrants, options or convertible debt at a price less
than the value at which the Company's stock may then be trading in the public
markets or which are convertible into or exercisable for Common Stock at a
conversion rate or exercise price less than such value. Such transactions
may result in significant dilution to the existing holders of the Company's
stock.
The Company has authorized 1,000,000 shares of Preferred Stock, the
terms of which may be fixed and which may be issued by the Company's Board of
Directors, without stockholder approval. The issuance of the Preferred Stock
could have the affect of making it more difficult for a third party to
acquire the Company and may result in the issuance of stock that dilutes the
existing stockholders and has liquidation, redemption, dividend and other
preferences superior to the Company's outstanding Class A Common Stock.
NOTE:
THIS DOES NOT DISCUSS PREFERRED STOCK, REDEMPTION OF WARRANTS, THE EFFECTS
OF DE-LISTING FROM NASDAQ, PENNY STOCK RULES OR THIN FLOAT. THOSE SUBJECTS ARE,
HOWEVER, INCLUDED IN THE RISK-FACTOR SECTION OF THE 06/97 S-3.
<PAGE>
December 4, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: PHC, Inc. (the "Company");
Post-Effective Amendment #2 to Registration Statement
on Form SB-2 (No.333-25231)
Ladies and Gentlemen:
Post-Effective Amendment #2 to the above-captioned Registration
statement is being filed concurrently herewith. The primary purposes of the
amendment are to include audited financial statements and related disclosure
for the quarter ended September 30, 1997.
The Company currently intends to seek acceleration of the effectiveness
of the Registration Statement for 9:30 a.m. on December 8, 1997, or as soon
thereafter as is practicable.
Sincerely,
/s/ Paula C. Wurts
Paula C. Wurts
cc: Bruce A. Shear
Willie J. Washington
