As filed with the Securities and Exchange Commission on November 5, 1997
Registration No. [33-71418]
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(POST-EFFECTIVE AMENDMENT #1)
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 Amount of
to be Registered to be Maximum Maximum Registration
Registered Offering Aggregate Fee
(1) Price Offering
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 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 November 5, 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
<PAGE>
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 $71,000.
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 October 27, 1997, the closing bid price of the Class A Common
Stock was $2.5625.
AN INVESTMENT IN THESE SECURITIES INVOLVES A 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.................. $ 2.5625 $ 2.5625
Total................... $5,458,125 $5,458,125
(1) Estimated on the basis of the average of the bid and asked prices of
the Class A Common Stock on October 27, 1997, as reported on the Nasdaq
<PAGE>
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 October 27, 1997:
Class A Common Stock 4,689,304
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
Year Ended June 30,
___________________
1997 1996
____ ____
Statements of Operations
Data:
Revenue.................. $27,234,372 $21,802,758
Operating expenses....... 28,500,890 21,845,592
Income (loss) from (1,266,518) (42,834)
operations...............
Other expense............ 1,375,835 754,072
Net income (loss)........ (2,839,664) (585,315)
Net income (loss) per (.87) (.22)
share
As of June 30,1997
___________________
Balance Sheet Data:
Total assets...................... $27,860,809
Working capital................... $ 4,762,960
Long-term obligations............. $14,112,234
Stockholders' equity.............. $ 5,724,581
<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
$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
June 30, 1997 the Company had an accumulated deficit of $4,674,316. The Company
experienced a significant increase in accounts receivable from $9,606,065, as of
June 30, 1996 to $14,318,545 as of June 30, 1997. Primarily as a result of the
losses noted above 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
<PAGE>
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.
<PAGE>
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 $14,318,545 at June 30, 1997,
compared with $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. 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 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. 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. 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, psychiatric facilities and/or
long-term care 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, 298 shares of the Company's Class B Common Stock and 9,946
shares of the Company's Class C 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 72,453 shares of the Company's Class A and
Class C Common Stock or 2.8% 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.
Potential Dilution Resulting from the Conversion of the Debentures Issued
to Selling Security Holders. The number of shares of Class A Common Stock into
which the Debentures are convertible depends upon the price of Class A Common
Stock on the date of conversion. The conversion price is equal to 98% of the
average closing bid price of the Class A Common Stock as reported by NASDAQ for
the 5 trading days immediately preceding the date of conversion. This percentage
drops 2% per month on the first day of each 30 day period following April 15,
1997 during which the Company does not have a Registration Statement declared
effective by the Securities and Exchange Commission covering such shares. For
the purposes of this Prospectus, the number of shares of Class A Common Stock
into which the debenture is convertible has been determined by assuming a
conversion price of $2.00. However, if the price of the Class A Stock declines,
the Company will be obligated to issue significantly more shares which could
result in significant dilution to the Company's current stockholders. At June
30, 1997 none of the Debentures had been converted; however, as of the date of
this Prospectus all of the Debentures have been converted resulting in the
issuance of 1,331,696 shares of Class A Common Stock.
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 October 27, 1997 the closing price of
the Company's stock as reported on Nasdaq was $2.5625. 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 September 30, 1997 was 507,598
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 October $ 3 $ 2 9/16
27, 1997)
On October 27, 1997, the last reported sale price of the Class A Common
Stock on the Nasdaq SmallCap Market was $2.75. As of October 27, 1997, there
were 109 holders of record of the Company's Class A Common Stock, 321 holders
of record of the Company's Class B Common Stock.
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
June 30, 1997. This table should be read in conjunction with the
Consolidated Financial Statements and related notes appearing elsewhere in
this Prospectus.
As of
June 30, 1997
Actual
_______________
Short-term debt......................................... $2,561,794
Long-term debt.......................................... 14,112,234
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; 500 shares issued and outstanding June
30, 1997............................................ 5
Class A Common Stock; $.01 par value; 20,000,000
shares authorized; 2,877,836 shares issued(1),
2,869,180 Outstanding (8,656 Treasury shares)....... 28,778
Class B Common Stock, $.01 par value; 2,000,000
shares authorized; 730,360 shares issued............ 7,304
Class C Common Stock, $.01 par value; 200,000 shares
authorized; 199,816 shares issued.................. 1,998
Additional paid-in capital............................ 10,398,630
Treasury Stock and at cost............................ (37,818)
Accumulated deficit................................... (4,674,316)
____________
Total stockholders' equity......................... 5,724,581
____________
Total capitalization.................................... $22,398,609
____________
(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) 1,331,696
shares which were issued upon the conversion of the Company's 7% Convertible
Debentures in the first quarter of 1998 ; (ix) 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; (x) 25,000 shares issuable upon the exercise of a warrant issued
to Alpine Capital Partners; (xi) 3,093 shares issuable upon the exercise of a
warrant issued to Barrow Street Research, Inc.; or (xii) up to 160,000 shares
issuable upon the exercise of a warrant issued to CCRI, Corporation; (xiii)
50,000 shares issuable upon the exercise of a warrant issued to ProFutures
Special Equities Fund, L.P. in conjunction with the issurance of Preferred
Stock. 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.
Year Ended
June 30,
__________________
1997 1996
_________ _________
Statements of
Operations Data:
Revenue................ $27,234,372 $21,802,758
Operating expenses..... 28,500,890 21,845,592
Income (loss) from (1,266,518) (42,834)
operations.............
Other expense.......... 1,375,835 754,072
Net income (loss)...... (2,839,664) (585,315)
Net income (loss) per
share $ (.87) $ (.22)
As of June 30, 1997,
____________________
Balance Sheet Data:
Total assets............ $27,860,809
Working capital......... $ 4,762,960
Long-term obligations... $14,112,234
Stockholders' equity.... $ 5,724,581
<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 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
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.
Pioneer continuously looks for strategic alternatives for Franvale which is
not a part of the Company's core business but has not formed any definitive
plans at this time.
The environment the Company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the Company has recorded an increase in its accounts
receivable reserve and has adopted a more stringent reserve policy going
forward as well as instituting a more aggressive collection policy. 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 commencing 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 June 30, 1997 the Company had approximately $905,700 in cash and
cash equivalents, working capital of approximately $4,763,000 and a working
capital ratio of approximately 1.6 to 1. management believes that the
Company has adequate resources to fund operations for the foreseeable
future. However, the Company is constantly seeking less expensive
alternative financing to insure that it will have the necessary capital to
fund expansion of its existing business and to pursue acquisition
opportunities as they arise.
The Company has made significant progress toward the accomplishment of
its acquisition and expansion strategy during the fiscal year by completing
the acquisition of its out patient psychiatric operations in Michigan (North
Point-Pioneer, Inc.) and its first psychiatric practice ownership in Salem,
Virginia. These acquisitions are key components in the culmination of the
Company's vision to provide a fully integrated delivery system in psychiatric
care.
Through merger the Company acquired a psychiatric management operation
in New York (BSC-NY, Inc.) which manages psychotherapy and psychological
practices in New York. Also in connection with the merger another entity was
formed, Perlow Physicians, P.C. ("Perlow"), to acquire the assets of the
medical practices now serviced by BSC. The Company advanced Perlow the funds
to acquire those assets and at June 30, 1997 Perlow owed the Company
$3,063,177 which includes, in addition to acquisition costs, management fees
of approximately $511,000 and interest on the advances of approximately
$176,000. It is expected that the obligations will be paid over the next
several years and, accordingly, most of these amounts have been classified as
long term. 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, Pioneer continuously looks for the best strategic
alternative for Franvale but no specific plans have been formulated at this
time.
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%.
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.
Year Ended June 30,
___________________________________
1997 1996 1995
____ ____ ____
Inpatient
Net patient service revenues $13,557,703 $ 13,000,822 $ 9,871,623
Net revenues per patient
day(1) $ 414 $ 385 $ 358
Average occupancy rate(2) 58.8% 63.4% 65.3%
Total number of licensed
beds at end of period 172 172 172
Source of Revenues:
Private(3) 91.6% 90.0% 89.8%
Government(4) 8.4% 10.0% 10.2%
Partial Hospitalization and
Outpatient
Net Revenues:
Individual $ 5,629,760 $ 3,021,486 $ 2,228,210
Contract $ 1,459,580 $ 503,365
Sources of revenues:
Private 98.4% 93.9% 94.6%
Government 1.6% 6.1% 5.4%
Other Psychiatric
services
PDSS(5) $ 629,761 $ 233,164 $ 128,157
Practice Management(6) $ 650,852
(1) Net revenues per patient day equals net patient service revenues divided
by total patient days.
(2) Average occupancy rates were obtained by dividing the total number of
patient days in each period by the number of beds vailable 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.
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 Franvale's
ability to admit patients were lifted.
The Company replaced the management team at Franvale and expended
significant sums for staffing and programmatic improvements in order to bring
the facility into substantial compliance at the earliest possible date. The
Company engaged Oasis Management Company ("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. Pioneer continuously
looks for the best strategic alternative for Franvale although no specific
plans have been formulated at this time.
.
<PAGE>
Operating Statistics
The following table reflects selected financial and statistical information
for Franvale:
Year ended June 30,
____________________
1997 1996 1995
____ ____ ____
Net patient service revenues $5,306,717 $5,043,922 $4,180,471
Net revenues per patient
day(1)...................... $ 135 $ 137 $ 135
Average occupancy rate(2)... 84.1% 87.1% 92.7%
Total number of licensed beds
at end of period............ 128 128 91
Source of revenues:
Private(3)............. 12.5% 8% 8%
Government(4).......... 87.5% 92% 92%
(1) Net revenues per patient day equals net patient service revenues
divided by total patient days.
(2) Average occupancy rates were obtained by dividing the number of patient
days in each period by the number of beds available in such period.
(3) Private pay percentage is the percentage of total patient days derived
from all payors other than Medicare and Medicaid.
(4) Government pay percentage is the percentage of total patient days
derived from the Medicare and Medicaid programs.
Business strategy
The Company's objective is to become a leading national provider of
treatment services, specializing in substance abuse and psychiatric care.
The Company focuses its marketing efforts on "safety-sensitive"
industries. This focus results in customized outcome oriented programs that
the Company believes produce overall cost savings to the patients and/or
client organizations. The Company intends to leverage experience gained from
providing services to customers in certain industries which it believes will
enhance its selling efforts within these certain industries.
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 Company that receive reimbursement
under any state Medicaid program are Franvale and Harbor Oaks. A portion
of Medicaid costs are paid by states under the Medicaid program and the
federal matching payments are not made unless the state's portion is made.
Accordingly, the timely receipt of Medicaid payments by a facility may be
affected by the financial condition of the relevant state.
Harbor Oaks is a participant in the Medicaid program administered by the
State of Michigan. Reimbursement is received on a per diem basis,
inclusive of ancillary costs. The rate is determined by the state and is
adjusted annually based on cost reports filed by the Company.
The Franvale facility participates in the Medicaid program administered by
the Commonwealth of Massachusetts. For 1996 and 1995, Massachusetts Medicaid
continued to reimburse skilled nursing facilities on an acuity based
prospective system. The 1996 and 1995 rates are based on costs reported and
acuity data for 1993 and are adjusted by inflation factors. Under the rate
formula established for 1997, Massachusetts nursing facilities received an
average increase in their Medicaid rates of approximately 2.4%.
Actual reimbursement of long-term care costs under the Massachusetts
Medicaid program is based in part upon the acuity levels of individual
patients. Any changes by the Commonwealth to the methods used to determine
patient acuity will therefore affect Medicaid reimbursement to providers of
long-term care. At this time the Company cannot predict the impact of future
year rate changes on its operations.
Payment to Medicaid providers in Massachusetts may be delayed or reduced
due to budgetary constraints or limited availability of revenues due to
general economic conditions affecting the Commonwealth. Such delays and
reductions have occurred in the past and no assurance can be given that
future reductions will not be made in the scope of covered services or the
rate of increase in reimbursement rates, or that future reimbursement will be
adequate to cover the provider's cost of providing service. The effect of
such limitations or reductions will be to require management to carefully
manage costs so that they will come within available reimbursement revenues,
if possible.
Fraud and Abuse Laws
Various federal and state laws regulate the business relationships and
payment arrangements between providers and suppliers of health care services,
including employment or service contracts, and investment relationships.
These laws include the fraud and abuse provisions of the Medicare and
Medicaid statutes as well as similar state statutes (collectively, the "Fraud
and Abuse Laws"), which prohibit the payment, receipt, solicitation or
offering of any direct or indirect remuneration intended to induce the
referral of patients, 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 September 15, 1997, the Company had 523 employees, of which 10
were dedicated to Marketing , 152 (31 part time) to finance and
administration and 361 (166 part time) to patient care. Of the Company's
523 employees, 389 are leased from Allied Resource Management of Florida,
Inc. ("ARMFCO"), a wholly owned subsidiary of HRC ARMCO, Inc. (formerly known
as Alliance Employee Leasing Corporation), a national employee leasing firm.
The Company has elected to lease a substantial portion of its employees to
provide more favorable employee health benefits at lower cost than would
be available to the Company as a single employer and to eliminate certain
administrative tasks which otherwise would be imposed on the management of
the Company. The agreement provides that ARMFCO will administer payroll,
provide for compliance with workers' compensation laws, including procurement
of workers' compensation insurance and administering claims, and procure and
provide designated employee benefits. The Company retains the right to
reject the services of any leased employee and ARMFCO has the right to
increase its fees at any time upon thirty days' written notice or
immediately upon any increase in payroll taxes, workers' compensation
insurance premiums or the cost of employee benefits provided to the leased
employees.
The Company believes that it has been successful in attracting skilled and
experienced personnel; competition for such employees is intense, however,
and there can be no assurance that the Company will be able to attract and
retain necessary qualified employees in the future. None of the Company's
employees are covered by a collective bargaining agreement. The Company
believes that its relationships with its employees are good.
Insurance
Each of the Company's facilities maintains separate professional liability
insurance policies. Mount Regis, Harbor Oaks, Harmony Healthcare, Total
Concept, NPP, BSC and PCV have coverage of $1,000,000 per claim and
$3,000,000 in the aggregate. Highland Ridge has limits of $1,000,000 per
claim and $6,000,000 in the aggregate. Good Hope has coverage of $2,000,000
per claim and $6,000,000 in the aggregate. In addition, these entities
maintain general liability insurance coverage in similar amounts. The
Company's long-term care facility maintains general and professional
liability coverage of $2,000,000, with a limit of $1,000,000 per claim and an
aggregate of $5,000,000 excess coverage. PCV's two doctors are currently
covered by their own malpractice policies
The Company maintains $1,000,000 of directors and officers liability
insurance coverage and $1,000,000 of general liability insurance coverage.
The Company believes, based on its experience, that its insurance coverage is
adequate for its business and that it will continue to be able to obtain
adequate coverage.
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) 59 Director and Clerk
Donald E. Robar (1)(2)............ 60 Director and Treasurer
Howard W. Phillips................ 67 Director
William F. Grieco................. 44 Director
____________
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
All of the directors hold office until the annual meeting of stockholders
next following their election, or until their successors are elected and
qualified. 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 $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 1997, 1996 and 1995:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
_______________________ ____________
(a) (b) (c) (d) (e) (g) (i)
Name and Other Securities All Other
Principal Year Salary Bonus Annual Underlying Compensation
Position ($) ($) Compensatio Options/SARs ($)
($) (#)
Bruce A. Shear..... 1997 $294,167 -- $12,633(1) -- --
President and 1996 $294,063 -- $10,818(2) -- --
Chief Executive 1995 $237,500 -- $ 8,412(3) -- --
Officer
Robert H. Boswell.. 1997 $92,750 -- $ 6,000(4) 5,000 $ 6,821
Executive Vice 1996 $80,667 $1,000 $23,750(5) 5,000 $11,250
President 1995 $69,750 -- $ 6,000(4) 15,000 $28,050
(1) This amount represents (i) $2,687 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii)
$6,769 in premiums paid by the Company with respect to life insurance for
the benefit of Mr. Shear, and (iii) $3,177 personal use of Company car
held by Mr. Shear.
(2) This amount represents (i) $2,650 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii)
$5,146 in premiums paid by the Company with respect to life insurance
for the benefit of Mr. Shear, and (iii) $3,022 for the personal use of
a Company car held by Mr. Shear.
(3) This amount represents (i) $2,450 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii)
$1,195 in premiums paid by the Company for club memberships used by Mr.
Shear for personal activities and (iii) $4,767 in premiums paid by the
Company with respect to life insurance for the benefit of Mr. Shear.
(4) This amount represents (i) an automobile allowance
(5) This amount represents (i) $3,750 automobile allowance, and (ii)$20,000 net
gain from the exercise of options and subsequent sale of stock.
Compensation of Directors
Directors who are 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.
<PAGE>
The Company anticipates that the Board of Directors will approve a proposal
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.
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.
The Company anticipates that the Board of Directors will approve a proposal
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.
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 $3.50
per share. As of March 31, 1997, none of these options had been exercised.
The Company anticipates that the Board of Directors will approve a proposal
to amend the Director Plan to increase the number of shares of Class A Common
Stock available for issuance thereunder from 30,000 shares to 50,000 shares.
<PAGE>
The following table provides information about options granted to the
named executive officers during fiscal 1997 under the Company's Stock Plan,
Employee Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
_________________
(a) (b) (c) (d) (e)
Number of % of
Securities Total
Underlying Options/SAR's Exercise
Options/SARs Granted or Base Expiration
Name Granted (#) to Employees Price Date
in Fiscal ($/Share)
Year
____________ _____________ _____________ ___________ ____________
Bruce A. Shear... -- -- -- --
Robert H. Boswell 5,000 9.7% $3.50 2/18/2002
The following table provides information about options exercised by the
named executive officers during fiscal 1997 and the number and value of
options held at the end of fiscal 1997.
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Shares Underlying In-the-Money
Acquired Value Unexercised Options/SARs at
Name on Realized Options/SARs FY-End ($)
Exercise (#) ($) at FY-End (#) 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
October 27, 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 Percent of
Title of Class of Beneficial Nature Class (11)
Owner of Beneficial
Owner
_______________ _________________ ______________ _____________
Class A Common Stock ... Gerald M. Perlow *
c/o PHC, Inc.
200 Lake Street 16,000(1)
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)
_________________________
* 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 holders of the Class A Common Stock are entitled to elect two
members of the Company's Board of Directors and holders of the Class B
Common Stock are entitled to elect all the remaining members of the
Company's Board of Directors).
Based on the number of shares listed under the column headed "Amount and
Nature of Beneficial Ownership," the following persons or groups held the
following percentages of voting rights for all shares of common stock
combined as of October 27, 1997:
Bruce A. Shear .........................................40.45%
J. Owen Todd..............................................0.7%
William F. Grieco.........................................0.7%
All Directors and Officers as a Group (7 persons) 42.50%
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 889,079 889,079(1) 0
Ltd.
- - -------------------------------------------------------------------------------
Seacrest Capital 592,617 592,617(2) 0
Limited.
------------------------------------------------------------------------------
Alpine Capital 25,000 25,000(3) 0
Partners, Inc.
- - ------------------------------------------------------------------------------
Barrow Street 3,000 3,000(4) 0
Research, Inc.
- - -------------------------------------------------------------------------------
Leon Rubenfaer, 6,000 6,000(5) 0
M.D.
- - -------------------------------------------------------------------------------
<PAGE>
Alan Rickfelder, 9,000 9,000(6) 0
Ph.D.
- - -------------------------------------------------------------------------------
Mukesh Patel, M.D. 32,250 32,250(7) 0
- - -------------------------------------------------------------------------------
Himanshu Patel, 32,250 32,250(7) 0
M.D.
- - -------------------------------------------------------------------------------
Irwin Mansdorf, 120,375 114,375(8) 6,000
Ph.D.
- - ------------------------------------------------------------------------------
Yakov Burstein, 45,625 35,625(9) 10,000
Ph.D.
- - -------------------------------------------------------------------------------
C.C.R.I. Coporation 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 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 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.
<PAGE>
(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>
DESCRIPTION OF SECURITIES
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.
<PAGE>
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 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>
Item 22 - Financial Statements
PHC, INC. AND SUBSIDIARIES
Contents
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheets as of June 30, 1997 and 1996 F-3
Statements of operations for the years ended
June 30, 1997 and 1996 F-4
Statements of changes in stockholders' equity for the
years ended June 30, 1997 and 1996 F-5
Statements of cash flows for the years ended June 30, F-6
1997 and 1996
Notes to financial statements F-7
F-1
<PAGE>
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 June 30,
_________________
1997 1996
_____________________________
Current assets:
Cash and cash equivalents $ 905,692 $ 293,515
Accounts receivable, net of allowance for
bad debts of $2,982,138 at June 30, 1997 and
$1,492,983 at June 30, 1996
(Notes A, C and M) 10,650,368 8,866,065
Prepaid expenses 375,382 259,893
Other receivables and advances 260,212 66,513
Deferred income tax asset (Note F) 515,300 515,300
Other receivables, related party (Note L) 80,000
____________ ____________
Total current assets 12,786,954 10,001,286
Accounts receivable, noncurrent 605,000 740,000
Loans receivable 134,284 113,805
Property and equipment, net (Notes A and B) 8,408,211 7,884,063
Deferred income tax asset (Note F) 154,700 154,700
Deferred financing costs, net of amortization 751,325 772,823
Goodwill, net of accumulated amortization (Note A) 1,644,252 841,413
Restricted deposits and funded reserves 170,874
Other assets (Note A) 222,032 252,445
Net assets of operations held for sale (Note J) 56,682
Other receivables, noncurrent, related party
(Note L) 2,983,177
____________ ____________
$27,860,809 $20,817,217
____________ ____________
LIABILITIES
Current liabilities:
Accounts payable $ 4,171,334 $ 3,127,052
Notes payable - related parties (Note E) 51,600 56,600
Current maturities of long-term debt (Note C) 580,275 403,894
Revolving credit note and secured term note 1,789,971
Current portion of obligations under capital
leases (Note D) 139,948 88,052
Accrued payroll, payroll taxes and benefits 703,842 715,515
Accrued expenses and other liabilities 587,024 738,784
____________ ____________
Total current liabilities 8,023,994 5,129,897
____________ ____________
Long-term debt and accounts payable (Note C) 9,759,601 7,754,262
Obligations under capital leases (Note D) 1,594,562 1,468,475
Notes payable - related parties (Note E) 23,696 47,394
Convertible debentures ($3,125,000 less discount
$390,625)(Note C) 2,734,375
____________ ____________
Total noncurrent liabilities 14,112,234 9,270,131
____________ _____________
Total liabilities 22,136,228 14,400,028
____________ _____________
Commitments and contingent liabilities
Notes A, G, H, K, L and M)
STOCKHOLDERS' EQUITY (Notes H and K)
Preferred stock, $.01 par value; 1,000,000
shares authorized, 500 shares issued and
outstanding in 1997 (liquidation preference
$504,333) 5
Class A common stock, $.01 par value; 20,000,000
shares authorized, 2,877,836 and 2,293,568 shares
issued and outstanding in 1997 and 1996,
respectively 28,778 22,936
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 730,360 and 812,237 issued and
outstanding in 1997 and 1996, respectively .
convertible into one share of Class A common stock 7,304 8,122
Class C common stock, $.01 par value; 200,000 shares
authorized, 199,816 shares issued and outstanding
in 1997 and 1996 1,998 1,998
Additional paid-in capital 10,398,630 8,078,383
Notes receivable related to purchase of 31,000
shares of Class A common stock (63,928)
Treasury stock, 8,656 shares at cost (37,818)
Accumulated deficit (4,674,316) (1,630,322)
____________ ____________
Total stockholders' equity 5,724,581 6,417,189
____________ ____________
$27,860,809 $20,817,217
____________ ____________
See notes to financial statements F-3
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended
June 30,
_______________________
1997 1996
_______________________
Revenues:
Patient care, net (Note A) $26,007,333 $21,569,594
Management fees (Note L) 597,278
Other 629,761 233,164
___________ ___________
Total revenue 27,234,372 21,802,758
___________ ___________
Operating expenses:
Patient care expenses 14,436,784 12,004,383
Cost of management contracts 324,440 146,407
Provision for doubtful accounts 3,397,693 1,894,087
Administrative expenses 10,341,973 7,800,715
___________ ___________
Total operating expenses 28,500,890 21,845,592
___________ ___________
Loss from operations (1,266,518) (42,834)
__________ __________
Other income (expense):
Interest income 201,286 14,486
Other income, net 490,327 211,292
Start-up costs (Note A) (128,313)
Interest expense (2,094,301) (863,484)
Gain from operations held for Sale (Note J) 26,853 11,947
___________ ___________
Total other expense (1,375,835) (754,072)
___________ ___________
Loss before income taxes (benefit) (2,642,353) (796,906)
Income taxes (benefit) (Note F) 197,311 (211,591)
___________ ___________
Net Loss $(2,839,664) $(585,315)
___________ ___________
Net loss per share (Note A) $(.87) $(.22)
___________ ___________
Weighted average number of shares outstanding 3,270,175 2,709,504
___________ ___________
See notes to financial statements
F-4
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity
Class A Class B Class C
Common Stock Common Stock Common Stock
Shares Amount Shares Amount Shares Amount
Balance - June 30,
1995 1,504,662 $15,047 898,795 $8,988 199,966 $2,000
Payment of notes
receivable
Conversion of shares 86,554 866 (86,558) (866) (150) (2)
Exercise of options 22,500 225
Issuance of stock
for obligations in
lieu of cash 6,600 66
Exercise of bridge
loan warrants 33,509 335
Sale of stock in
connection with
private placement 493,750 4,937
Costs related to
private placement
Exercise of IPO 21,493 215
warrants
Issuance of shares
with acquisitions 87,000 870
Exercise of private
placement warrants 37,500 375
Amount paid for
options, not yet
issued
Compensatory stock
options
Net loss, year ended ________ ________ _______ _______ _______ _______ _______
June 30, 1996
Balance - June 30,
1996 2,293,568 22,936 812,237 8,122 199,816 1,998
Costs related to
private placements
Issuance of shares
with acquisitions 229,500 2,295
Exercise of options 13,475 135
Payment of notes
receivable
Conversion of shares 81,877 818 (81,877) (818)
Issuance of employee
stock purchase plan
shares ` 9,452 94
Issuance of shares
in connection with
consulting agreement 20,000 200
Issuance of warrants
with convertible
debentures
Cancellation of
notes receivable
Payment of notes
receivable
Issuance of
preferred stock
Adjustment related
to beneficial
conversion
Conversion of
preferred stock 229,964 2,300
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
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity (con't)
Preferred Stock
Shares Amount
Balance - June 30,
1995
Payment of notes
receivable
Conversion of shares
Exercise of options
Issuance of stock
for obligations in
lieu of cash
Exercise of bridge
loan warrants
Sale of stock in
connection with
private placement
Costs related to
private placement
Exercise of IPO
warrants
Issuance of shares
with acquisitions
Exercise of private
placement warrants
Amount paid for
options, not yet
issued
Compensatory stock
options
Net loss, year ended
June 30, 1996
Balance - June 30,
1996
Costs related to
private placements
Issuance of shares
with acquisitions
Exercise of options
Payment of notes
receivable
Conversion of shares
Issuance of employee
stock purchase plan
shares `
Issuance of shares
in connection with
consulting agreement
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 (500) (5)
Dividend on
preferred stock
Net loss, year ended _______ ________
June 30, 1997
Balance - June 30,
1997 500 $ 5
See notes to financial statements
<PAGE>
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity
Additional
Paid-in Notes
Capital, Receivable Treasury Shares Accumulated
Common Stock for Stock Shares Amount Deficit
____________ _________ ________ ______ ___________
Balance - June 30,
1995 $5,554,874 $(75,362) $(1,045,007)
Payment of notes
receivable 11,434
Conversion of shares 2
Exercise of options 113,575
Issuance of stock
for obligations in
lieu of cash 36,184
Exercise of bridge
loan warrants 153,617
Sale of stock in
connection with
private placement 1,970,063
Costs related to
private placement (442,395)
Exercise of IPO
warrants 137,785
Issuance of shares
with acquisitions 392,678
Exercise of private
placement warrants 149,625
Amount paid for
options, not yet
issued 9,375
Compensatory stock
options 3,000
Net loss, year ended
June 30, 1996 (585,315)
_________ _______ _______ _________ ___________
Balance - June 30,
1996 8,078,383 (63,928) (1,630,322)
Costs related to
private placements (141,295)
Issuance of shares
with acquisitions 838,524
Exercise of options 59,709
Payment of notes
receivable 662
Conversion of shares
Issuance of employee
shares stock
purchase plan 30,530
Issuance of shares
in connection with
consulting agreement 79,800
Issuance of warrants
with convertible
debentures 125,000
Cancellation of
notes receivable 37,818 8,656 $(37,818)
Payment of notes
receivable 25,448
Issuance of
preferred stock 999,990
Adjustment related
to beneficial
conversion
feature of
convertible preferred
stock
and convertible
debentures 330,284 (200,000)
Conversion of
preferred stock (2,295)
Dividend on
preferred stock (4,330)
Net loss, year ended
June 30, 1997 (2,839,664)
____________ _________ _______ _________ ___________
Balance - June 30,
1997 $10,398,630 -0- 8,656 $(37,818) $(4,674,316)
See notes to financial statements
<PAGE>
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity
Total
____________
Balance - June 30,
1995 $4,460,540
Payment of notes
receivable 11,434
Conversion of shares -0-
Exercise of options 113,800
Issuance of stock
for obligations in
lieu of cash 36,250
Exercise of bridge
loan warrants 153,952
Sale of stock in
connection with
private placement 1,975,000
Costs related to
private placement (442,395)
Exercise of IPO
warrants 138,000
Issuance of shares
with acquisitions 393,548
Exercise of private
placement warrants 150,000
Amount paid for
options, not yet
issued 9,375
Compensatory stock
options 3,000
Net loss, year ended
June 30, 1996 (585,315)
_________
Balance - June 30,
1996 6,417,189
Costs related to
private placements (141,295)
Issuance of shares
with acquisitio 840,819
Exercise of options 59,844
Payment of notes
receivable 662
Conversion of shares -0-
Issuance of employee
shares stock
purchase plan 30,624
Issuance of shares
in connection with
consulting agreement 80,000
Issuance of warrants
with convertible
debentures 125,000
Cancellation of
notes receivable -0-
Payment of notes
receivable 25,448
Issuance of
preferred stock 1,000,000
Adjustment related
to beneficial
conversion
feature of
convertible preferred
stock
and convertible
debentures 130,284
Conversion of
preferred stock -0-
Dividend on
preferred stock (4,330)
Net loss, year ended
June 30, 1997 (2,839,664)
____________
Balance - June 30,
1997 $5,724,518
See notes to financial statements F-5
<PAGE>
PHC, INC. AND SUBSIDIARIES Year Ended
June 30,
____________
1997 1996
__________________________
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net loss $ (2,839,664) $ (585,315)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred tax benefit (418,137)
Depreciation and amortization 679,248 554,025
Beneficial conversion feature of
convertible debt 130,284
Compensatory stock options and stock and warrants
issued for obligations 205,000 39,250
Changes in:
Accounts receivable (1,649,303) (2,985,052)
Prepaid expenses and other current assets (309,188) (69,978)
Other assets 113,419 (107,711)
Net assets of operations held for sale 56,682 106,886
Accounts payable 1,044,282 1,414,089
Accrued expenses and other liabilities (167,763) 295,475
___________ ___________
Net cash used in operating activities (2,737,003) (1,756,468)
___________ ___________
Cash flows from investing activities:
Acquisition of property and equipment
and intangibles (895,914) (1,557,419)
Loan receivable (3,063,177) (17,462)
Net cash used in investing activities (3,959,091) (1,574,881)
Cash flows from financing activities:
Revolving debt, net 1,789,981
Proceeds from borrowings 2,749,505 2,043,748
Payments on debt (696,886) (402,828)
Deferred financing costs 21,498 (711,960)
Issuance of capital stock 944,173 2,109,166
Convertible debt 2,500,000
_________ __________
Net cash provided by financing activities 7,308,271 3,038,126
_________ __________
Net increase (decrease) in cash and cash
equivalents 612,177 (293,223)
Beginning balance of cash and cash equivalents 293,515 586,738
Ending balance of cash and cash equivalents $ 905,692 $ 293,515
___________ ___________
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 1,933,133 $ 779,898
Income taxes $ 86,414 $ 187,120
Supplemental disclosures of noncash investing
and financing activities:
Stock issued for acquisitions of equipment
and services $ 840,819 $ 393,548
Note payable due for litigation
settlement $ 225,000
Capital leases $ 284,048 $ 94,699
Conversion of preferred stock $ 500,000
Beneficial conversion feature of preferred
stock $ 200,000
See notes to financial statements F-6
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation:
PHC, Inc. ("PHC") operates substance abuse treatment centers in several
locations in the United States, a nursing home in Massachusetts, a
psychiatric hospital in Michigan and psychiatric outpatient facilities in
Nevada, Kansas and Michigan. PHC, Inc. also manages a psychiatric practice
in New York, operates an outpatient facility through a physicians practice,
and operates behavioral health centers through its newest acquisitions. PHC
of Utah, Inc. ("PHU"), PHC of Virginia, Inc. ("PHV") and PHC of Rhode Island,
Inc. ("PHR") provide treatment of addictive disorders and chemical
dependency. PHC of Michigan, Inc. ("PHM") provides inpatient and outpatient
psychiatric care. PHC of Nevada, Inc. ("PHN") and PHC of Kansas, Inc.
("PHK") provide psychiatric treatment on an outpatient basis. North
Point-Pioneer, Inc. ("NPP") operates six outpatient behavioral health centers
under the name of Pioneer Counseling Centers. Behavioral Stress Centers,
Inc. ("BSC") provides management and administrative services to psychotherapy
and psychological practices (see Note L). Pioneer Counseling of Virginia,
Inc. ("PCV'), an 80% owned subsidiary provides outpatient services through a
physicians practice (see Note L). Quality Care Centers of Massachusetts,
Inc. ("Quality Care") operates a long-term care facility known as the
Franvale Nursing and Rehabilitation Center. STL, Inc. ("STL") operated day
care centers (see Note J). The consolidated financial statements include PHC
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
For the year ended June 30, 1996, the Company incurred start-up costs related
to an addition at Quality Care prior to obtaining a license to admit
patients. These costs, amounting to $128,313, are included in other expense
in the accompanying statement of operations under the caption "Start-up
Costs".
During the year ended June 30, 1997, the Company recorded an increase in its
accounts receivable reserve, a substantial portion of the increase was
recorded in the fourth fiscal quarter. The Company is currently reviewing
these adjustments to determine if some of these adjustments should have been
made in prior fiscal quarters.
Revenues and accounts receivable:
Patient care revenues are recorded at established billing rates or at the
amount realizable under agreements with third-party payors, including
Medicaid and Medicare. Revenues under third-party payor agreements are
subject to examination and adjustment, and amounts realizable may change due
to periodic changes in the regulatory environment. Provisions for estimated
third party payor settlements are provided in the period the related services
are rendered. Differences between the amounts accrued and subsequent
settlements are recorded in operations in the year of settlement.
A substantial portion of the Company's revenue at the Franvale Nursing and
Rehabilitation Center is derived from patients under the Medicaid and
Medicare programs. There have been, and the Company expects that there will
continue to be, a number of proposals to limit Medicare and Medicaid
reimbursement, as well as reimbursement from certain private payor sources
for both Franvale and substance abuse treatment center services. The Company
cannot predict at this time whether any of these proposals will be adopted
or, if adopted and implemented, what effect such proposals would have on the
Company.
Medicaid reimbursements are currently based on established rates depending on
the level of care provided and are adjusted prospectively at the beginning of
each calendar year. Medicare reimbursements are currently based on
provisional rates that are adjusted retroactively based on annual calendar
cost reports filed by the Company with Medicare. The Company's calendar year
cost reports to Medicare are routinely audited on an annual basis. The
Company periodically reviews its provisional billing rates and provides for
estimated Medicare adjustments. The Company believes that adequate provision
has been made in the financial statements for any adjustments that might
result from the outcome of Medicare audits.
F-7
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenues and accounts receivable: (continued)
The Company has $1,787,000 receivables, from Medicaid and Medicare, at June
30, 1997, which constitutes a concentration of credit risk should Medicaid
and Medicare defer or be unable to make reimbursement payments as due.
Charity care amounted to approximately $725,000 and $865,000 at June 30, 1997
and 1996, respectively and is classified as patient care revenue and an equal
amount of cost is charged to patient care expenses in the statements of
operations.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:
Estimated
Assets Useful Life
_______ __________________
Buildings 20 through 39 years
Furniture and equipment 3 through 10 years
Motor vehicles 5 years
Leasehold improvements Term of lease
Other assets:
Other assets represent deposits, deferred expenses and covenants not to
compete. Covenants not to compete are amortized over the life of the
underlying agreement using the straight line method.
Goodwill, net of accumulated amortization:
The excess of the purchase price over the fair market value of net assets
acquired are being amortized on a straightline basis over their estimated
useful lives, generally twenty years.
Loss per share:
Net loss per share is based on the weighted average number of shares of
common stock outstanding during each period excluding Class C common shares
held in escrow. Common stock equivalents have been excluded since they are
antidilutive.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE A-THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTIN POLICIES (CONTINUED)
Cash equivalents:
Cash equivalents are short-term highly liquid investments with original
maturities of less than three months.
Fair value of financial instruments:
The carrying amounts of cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value.
Impairment of long-lived assets:
During the year ended June 30, 1997 the Company wrote-off the carrying
value of the goodwill for one of its subsidiaries in the amount of approximately
$50,000.
Stock-based compensation:
The Company accounts for its employee stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based
method of accounting for stock-based compensation plans. The Company adopted the
disclosure only alternative in fiscal year 1997 which requires disclosure of the
pro forma effects on loss and loss per share as if SFAS No. 123 had been
adopted, as well as certain other information.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised as follows:
June 30,
________
1997 1996
_____________________
Land $ 302,359 $ 251,759
Buildings 7,854,419 7,338,838
Furniture and equipment 1,760,359 1,404,716
Motor vehicles 50,889 50,889
Leasehold improvements 385,543 301,067
__________ __________
10,353,569 9,347,269
Less accumulated depreciation
and amortization 1,945,358 1,463,206
__________ __________
$8,408,211 $7,884,063
__________ __________
NOTE C - LONG-TERM DEBT
At June 30, 1996, the Company had substantially completed an addition and
renovation to the Quality Care facility in which 37 new beds were added. The
Company financed this addition and renovation through the United States
Department of Housing and Urban Development ("HUD"). At June 30, 1997 and June
30, 1996 unamortized deferred financing costs related to the construction note
payable totalled $690,750 and $711,960, respectively, and are being amortized
over the life of the note. Interest costs capitalized in conjunction with the
construction approximated $65,250.
F-9
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, l997 and 1996
NOTE C - LONG-TERM DEBT (CONTINUED)
Long-term debt is summarized as follows:
June, 30,
1997 1996
______________________
Note payable with interest at 9% requiring monthly
payments of $1,150 through May 2001 $44,816 $58,154
Note payable due in monthly installments of $2,000
including imputed interest at 8% through April 1,
1999 40,574 60,163
9% mortgage note due in monthly installments of $4,850
through July 1, 2012, when the remaining principal
balance is payable 492,996 505,485
Note payable due in monthly installments of $21,506
including interest at 10.5% through November 1, 1999,
collateralized by all assets of PHN and certain
receivables 547,092 735,213
Construction obligations:
Construction note payable collateralized by real
estate and insured by HUD due in monthly installments
of $53,635, including interest at 9.25%, through
December 2035 6,757,422 6,301,986
Other construction obligations to be added to note
payable 344,802
Note payable to a former vendor, payable in monthly
installments of $19,728 including interest at 9.5% 152,353
Note payable due in monthly installments of $26,131
including interest at 11.5% through June 2000 when
the remaining principal balance is payable,
collateralized by all assets of NPP (see Note L) 818,371
Note payable due in monthly installments of $5,558
including interest at 9.25% through May 2012 when
the remaining principal balance is payable,
collateralized by the real estate 538,605
Term mortgage note payable with interest only payments
through March 1998 principal due in monthly
installments of $9,167 beginning April 1998 through
February 2001, a balloon payment of approximately
$780,000 plus interest is due March 2001, interest
at prime plus 5% (13.5% at June 30, 1997)
collateralized by all assets of PHM 1,100,000
__________ __________
10,339,876 8,158,156
Less current maturities 580,275 403,894
__________ __________
Noncurrent maturities $9,759,601 $7,754,262
__________ __________
F-10
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE C - LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows as of June 30, 1997:
Year Ending
June 30, Amount
___________ ___________
1998 $580,275
1999 692,681
2000 583,450
2001 1,388,742
2002 48,624
Thereafter 7,046,104
$10,339,876
In 1997, the Company issued 7% convertible debentures due December 31, 1998
in the aggregate principal amount of $3,125,000. The number of shares of Class A
common stock into which the debentures may be converted is determined by
dividing the principal amount to be converted by the conversion price. The
conversion price is equal to 94% of the average closing bid price of the Class A
common stock as reported by NASDAQ for the five trading days immediately
preceding the date of conversion. The beneficial conversion feature, valued at
$130,284, was recorded as additional interest. In addition, on March 31, 1997
the Company issued warrants to the debenture holders as compensation for
amending the debenture agreement to allow for a later filing of the Registration
Statement which was originally required to be filed in December 1996. The
warrants provide for the purchase of 150,000 shares of Class A common stock at
$2.00 per share and expire in 2003. The warrants were valued at $125,000.
Subsequent to June 30, 1997, all of the convertible debentures were converted
into 1,331,696 shares of Class A common stock.
The Company has entered into a revolving credit note and a secured note
with maximum advances of $1,500,000 and $1,000,000, respectively. Advances are
made based on a percentage of accounts receivable and principal is payable upon
receipt of proceeds of the accounts receivable. Interest is payable monthly at
prime plus 2.25% (10.75% at June 30, 1997). These agreements expire on February
1999 and July 1998, respectively, automatically renewable for one-year periods
thereafter unless terminated by either party. Upon expiration, all remaining
principal and interest is due. The notes are collateralized by substantially all
of the assets of the Company's subsidiaries.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 1997, the Company is obligated under various capital leases for
equipment and real estate providing for monthly payments of approximately
$31,000 for fiscal 1998 and terms expiring from December 1997 through February
2014. The carrying value of assets under capital leases is as follows:
June 30,
1997 1996
_______________________
Building $1,477,800 $1,477,800
Equipment and improvements 485,004 214,754
Less accumulated depreciation and (501,732) (400,768)
amortization
$ 1,461,07 1,291,786
__________ __________
F-11
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
Future minimum lease payments under the terms of the capital lease
agreements are as follows at June 30, 1997:
Year Ending
June 30, Real
Equipment Property Total
____________ __________ __________ __________
1998 $140,307 $ 231,000 $371,307
1999 117,083 239,000 356,083
2000 95,121 259,248 354,369
2001 70,828 272,208 343,036
2002 13,557 295,188 308,745
Thereafter 4,641,341 4,641,348
__________ __________ __________
Total future minimum lease 436,896 5,937,992 6,374,888
payments
Less amount representing
interest 83,804 4,556,574 4,640,378
__________ __________ __________
Present value of future
minimum lease payments 353,092 1,381,418 1,734,510
Less current portion 102,632 37,316 139,948
__________ __________ __________
Long-term obligations under
capital lease $250,460 $1,344,102 $1,594,562
__________ __________ __________
The Company has an irrevocable option to purchase the real property noted
above for $1,150,000 on March 1, 1998 or $1,100,000 on March 1, 1999 or any
subsequent March 1 through the end of the lease.
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows:
June 30,
1997 1996
_______________________
Note payable, President and principal stockholder,
interest at 8%, due in installments through 1998 $55,296 $ 78,996
Notes payable, other related parties, interest at
12% and payable on demand 20,000 24,998
________ ________
75,296 103,994
Less current maturities 51,600 56,600
________ ________
$23,696 47,394
________ ________
Maturities of related party debt are as follows at June 30, 1997:
Year Ending
June 30, Amount
___________ ___________
1998 $51,600
1999 23,696
__________
$75,296
__________
Related party interest on notes receivable related to the purchase of Class
A common stock approximated $1,699 and $4,295 for the years ended June 30, 1997
and 1996, respectively.
F-12
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the
accompanying balance sheets:
Year Ended
June 30,
____________
1997 1996
___________ ________
Temporary differences attributable to:
Allowance for doubtful accounts $1,007,000 $ 510,000
Depreciation 147,000 154,700
Other 3,000 5,300
Operating loss carryforward 340,000
___________ ________
Total deferred tax asset 1,497,000 670,000
Less:
Valuation allowance (827,000)
Current portion (515,300) (515,300)
___________ ________
Long-term portion $154,700 $154,700
___________ ________
The Company had no deferred tax liabilities at June 30, 1997 and 1996.
Income tax expense (benefit) is as follows:
YearEnded
June 30,
____________
1997 1996
__________ _________
Deferred income taxes benefit $(418,137)
Current income taxes $197,311 206,546
__________ _________
$197,311 $(211,591)
__________ _________
Reconciliations of the statutory U.S. Federal income taxes based on a rate
of 34% to actual income taxes is as follows:
YearEnded
June 30,
____________
1997 1996
__________ _________
Income tax benefit at statutory rate $(898,400) $(271,000)
Increase in valuation allowance 827,000
Increase due to nondeductible items, primarily
penalties and travel and entertainment
expenses 12,000 12,100
Other 59,400 (33,541)
__________ _________
$ 197,311 $(211,591)
__________ _________
The Company has a net operating loss carryforward amounting to
approximately $994,000 which expires at various dates through 2012.
Subsequent to June 30, 1997, the Company may be subject to Internal Revenue
Code provisions which limit the loss carryforward available for use in any given
year.
F-13
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
Operating leases:
The Company leases office and treatment facilities and furniture and
equipment under operating leases expiring on various dates through January 2003.
Rent expense for the years ended June 30, 1997 and 1996 was approximately
$752,000 and $450,000, respectively. Minimum future rental payments under
noncancelable operating leases, having remaining terms in excess of one year as
of June 30, 1997 are as follows:
Year Ending
June 30, Amount
_____________ __________
1998 $ 688,105
1999 441,833
2000 297,780
2001 202,876
2002 93,450
Thereafter 136,864
____________
$1,860,908
____________
Litigation:
The Company is involved in litigation related to the use of its trademark
name, PIONEER HEALTHCARE, in an action pending before a federal court. If the
Company were required to discontinue using the PIONEER HEALTHCARE mark, the
costs and/or monetary damages related to the litigation involved could have an
adverse effect on the Company's financial performance.
NOTE H - STOCK PLANS
[1] Stock plans:
The Company has three stock plans: a stock option plan, an employee stock
purchase plan and a nonemployee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
has the authority to select the optionees and determine the terms of the options
including: (i) the number of shares, (ii) option exercise terms, (iii) the
exercise or purchase price (which in the case of an incentive stock option will
not be less than the market price of the Class A common stock as of the date of
grant), (iv) type and duration of transfer or other restrictions and (v) the
time and form of payment for restricted stock upon exercise of options.
The employee stock purchase plan provides for the purchase of Class A
common stock at 85 percent of the fair market value at specific dates, to
encourage stock ownership by all eligible employees. A maximum of 1 00,000
shares may be issued under this plan.
Also in October 1995, the Company adopted a nonemployee directors' stock
option plan that provides for the grant of nonstatutory stock options
automatically at the time of each annual meeting of the Board. Through June 30,
1997, options for 1 1,500 shares were granted under this plan. A maximum of
30,000 shares may be issued under this plan. Each outside director shall be
granted an option to purchase 2,000 shares of Class A
F-14
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30,1997 and 1996
NOTE H - STOCK PLANS (CONTINUED)
[1] Stock plans: (continued)
common stock at fair market value, vesting 25% immediately and 25% on each
of the first three anniversaries of the grant.
In February 1997, all 95,375 shares underlying the then outstanding
employee stock options were repriced to the current market price, using the
existing exercise
durations.
Under the above plans 179,198 shares are available for future grant or
purchase.
The Company had the following activity in its stock option plans for fiscal
1997 and 1996:
Number Weighted-Average
of Exercise Price
Shares Per Share
_________ ________________
Option plans:
Balance - June 30, 1995 92,000 $5.10
Granted 46,500 $6.20
Cancelled (1,250) $5.00
Exercised (22,500) $5.06
_________
Balance - June 30, 1996 114,750 $5.56
Granted 125,500 $4.56
Repriced options:
Original (95,375) $5.99
Repriced 95,375 $3.50
Cancelled (21,400) $6.05
Exercised (13,475) $5.16
_________
Balance - June 30, 1997 205,375 $4.27
_________
Options for 89,250 shares are exercisable as of June 30, 1997 at exercise
prices ranging from $2.87 to $6.63 and a weighted-average exercise price of
approximately $3.71 per share, with a weighted-average remaining contractual
life of approximately three years.
The exercise prices of options outstanding at June 30, 1997 range from
$2.87 to $6.63 per share and have a weighted-average exercise price of
approximately $3.07 per share, with a weighted-average remaining contractual
life of approximately four years.
(2) Stock-based compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. There was no compensation expense recognized in
1997 or 1996. If the Company had elected to recognize compensation cost for the
plans based on the fair value at the grant date for awards granted, consistent
with the method prescribed by SFAS No. 123, net loss per share would have been
changed to the pro forma amounts indicated below:
Year Ended
June 30,
___________
1997 1996
______________________________
Net loss As reported $(2,839,664) $(585,315)
Pro forma (2,893,272) (610,497)
Net loss per As reported
share $(0.87) $(0.22)
Pro forma (0.88) (0.23)
F-15
<PAGE>
PHC, INC.AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE H - STOCK PLANS (CONTINUED)
[2] Stock-based compensation: (continued)
The fair value of the Company's stock options used to compute pro forma net
loss and net loss per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1997 and 1996: dividend yield of 0%; expected
volatility of 30%; a risk-free interest rate of between 5% and 7%; and an
expected holding period of five years.
The per share weighed-average grant-date fair value of options granted
during the years ended June 30, 1997 and 1996 was $3.44 and $2.07, respectively.
NOTE I - SEGMENT INFORMATION
The Company's continuing operations are classified into two primary
business segments: substance abuse/psychiatric services and long-term care.
Year Ended
June 30,
_____________
1997 1996
___________________________
Revenue:
Substance abuse/psychiatric
services $20,700,616 $16,525,672
Long-term care 5,306,717 5,043,922
Other 629,761 233,164
Management fees 597,278
____________ ____________
$27,234,372 $21,802,758
____________ ____________
Income (loss) from operations:
Substance abuse/psychiatric
services $ 627,341 $1,024,245
Long-term care (1,447,468) (826,463)
Other (PDSS) 305,321 86,757
General corporate (427,272) (180,966)
Interest and other income expense,
net (1,700,275) (900,479)
____________ ____________
Loss before income taxes $(2,642,353) $ (796,906)
____________ ____________
Depreciation and amortization:
Substance abuse/psychiatric
services $ 449,641 $ 349,437
Long-term care 210,130 176,450
____________ ____________
General corporate 19,477 28,138
$ 679,248 $ 554,025
____________ ____________
Capital expenditures:
Substance abuse/psychiatric
services $ 729,661 $ 233,466
Long-term care 213,489 982,978
General corporate 63,150 16,583
____________ ____________
$1,006,300 $ 1,233,027
____________ ____________
Identifiable assets:
Substance abuse/psychiatric
services $18,352,342 $10,877,197
Long-term care 7,437,633 8,619,133
General corporate 2,070,834 1,264,205
Net assets of operations held
for sale 56,682
____________ ____________
27,860,809 $20,817,217
____________ ____________
F-16
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE J - OPERATIONS HELD FOR SALE
The Company has systematically phased out its day care center operations
(STL). At June 30, 1996, the Company had net assets relating to its day care
centers amounting to approximately $57,000, which primarily represented the
depreciated cost of one remaining real estate parcel. The parcel was sold in
October 1996 at a gain of approximately $38,000.
NOTE K - CERTAIN CAPITAL TRANSACTIONS
In addition to the outstanding options under the Company's stock plans
(Note H), the Company has the following options and warrants outstanding at June
30, 1997:
Number of Exercise Expiration
Description Units/Shares Price Date
_____________________________________________________________________________
Bridge warrants 5,024 units $4.38 per unit September 1998
Unit purchase option 148,171 units $5.91 per unit March 1999
IPO warrants 1,681,832 shares $6.29 per share March 1999
Private placement warrants 715,682 shares $3.93 per share January 1999
Bridge warrants 34,710 shares $7.39 per share March 1999
Warrant for services 25,000 shares $6.88 per share October 2001
Warrant for services 3,093 shares $3.39 per share February 2002
Consultant warrant
(see below) 160,000 shares $2.62 per share March 2002
Convertible debenture warrants
(Note C) 150,000 shares $2.00 per share March 2002
Preferred stock warrant 50,000 shares $2.75 per share June 2000
Each unit consists of one share of Class A common stock and a warrant to
purchase one share of Class A common stock at $7.50 per share.
In June 1997, the Company received $1,000,000 in exchange for the issuance
of Series A convertible preferred stock and warrants to purchase 50,000 shares
of Class A common stock. The warrants are exercisable at $2.75 per share and
expire in 2000. The warrants were valued at $30,000. The number of shares of
Class A common stock into which the preferred stock may be converted is equal to
80% of the closing bid price of the Class A common stock as reported by NASDAQ
for the five trading days immediately preceding the conversion. The beneficial
conversion feature, due to the 80% discount above, valued at $200,000 was
recorded as additional dividends. In June 1997, 500 shares of preferred stock
were converted into 229,640 shares of Class A common stock. Subsequent to
year-end the 500 remaining shares of preferred stock were converted into 246,305
shares of Class A common stock. The issuance of these securities will result in
the issuance of some additional Class A common shares under existing dilution
agreements with other stockholders.
Cumulative preferred dividends are at the rate of $60 per share per year,
payable quarterly. Dividends are payable in cash or in shares of preferred stock
at $1,000 per share. At June 30, 1997, accrued dividends amounted to $4,330.
Certain Consultant Warrants may be canceled if certain stock prices, as
defined in the agreement, are not achieved by March 3, 1998.
In February 1996, the Company issued, in a private placement, units
comprised of 6,250 shares of Class A common stock and warrants to purchase 9,375
shares of Class A common stock. A total of 79 units, representing 493,750 shares
of Class A common stock and 740,625 warrants were issued in the offering at a
gross purchase price of $1,975,000. Fees and expenses payable in connection with
the offering total $442,395. Subject to the terms and conditions of the
applicable warrant agreement, each warrant is exercisable for one share of Class
A common stock at an exercise price of $4.00, subject to adjustment upon certain
events. The warrants expire in January 1999. Upon the issuance of the units
described above, certain additional shares of Class A common stock or securities
exercisable therefor become issuable under the antidilution provisions of
certain outstanding securities of the Company.
F-17
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE K - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Subsequent to June 30, 1997, the Class C common stock was canceled and
retired because of restrictions on the release of the stock, due to earnings
targets which were not achieved.
Subsequent to June 30, 1997, the Company issued a warrant for the purchase
of 150,000 shares of common stock in exchange for services. The exercise price
of the warrant is $2.50 per share and the warrant expires May 2002.
NOTE L - ACQUISITIONS
On November 1, 1995, the Company purchased an outpatient facility located
in Nevada ("PHN") which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of $631,000 in cash and 75,000 shares of
Class A common stock of PHC, Inc. which were valued at $323,000. The purchase
price was allocated as follows:
Accounts receivable $231,509
Equipment and other assets 54,397
Covenant not to compete 10,500
Goodwill 671,359
Accrued benefits payable (13,765)
_____________
$954,000
_____________
On March 29, 1996 PHN entered into a lease agreement for the real estate.
The lease payments, which increase annually, are due in equal monthly
installments over a
period of four years.
On March 16, 1996, the Company purchased an outpatient facility located in
Kansas ("PHK'') which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of 12,000 shares of Class A common stock
of PHC, Inc., valued at $70,548. The purchase price was allocated as follows:
Equipment and other assets $20,000
Covenant not to compete 10,000
Goodwill 40,548
_____________
$70,548
_____________
In connection with the acquisition, PHK entered into a lease agreement for
the real estate. The lease payments, which increase annually, are due in equal
monthly installments over a period of three years.
In September 1996, the Company purchased the assets of seven outpatient
behavioral health centers located in Michigan ("NPP"). The centers were
purchased for $532,559 and 15,000 shares of Class A common stock of PHC, Inc.
valued at $5.04 per share. The Company borrowed $900,000 (see Note C) to finance
the purchase and to provide working capital for the centers. The purchase price
was allocated as follows:
Office equipment $ 18,000
Covenants note-to-compete 20,000
Goodwill 597,746
Deposits 15,072
Liabilities assumed (42,659)
_____________
$608,159
_____________
F-18
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE L - ACQUISITIONS (CONTINUED)
Concurrent with the asset purchase agreement, NPP entered into an
employment agreement with a former owner which requires an annual salary of
$150,000 and an annual bonus. The agreement is effective for four years and is
automatically extended for successive one year terms unless terminated. The
salary and bonus are subject to adjustment based on collected billings.
NPP also entered into a management agreement whereby $1,500 per month would
be paid for five years to the former owners.
Subsequent to year-end, under the employment agreement, the Company issued
15,000 unregistered shares of Class A common stock.
On November 1, 1996, BSC-NY, Inc. ("BSC"), merged with Behavioral Stress
Centers, Inc., a provider of management and administrative services to
psychotherapy and psychological practices in the greater New York City
Metropolitan Area. In connection with the merger, the Company issued 150,000
shares of PHC, Inc. Class A common stock to the former owners of Behavioral
Stress Centers, Inc. Also, in connection with the merger, another entity was
formed, Perlow Physicians, P.C. ("Perlow"), to acquire the assets of the medical
practices theretofore serviced by BSC. The Company advanced Perlow the funds to
acquire those assets and at June 30, 1997 Perlow owed the Company $3,063,177
which includes in addition to acquisition costs, management fees of
approximately $511,000 and interest on the advances of approximately $176,000.
It is expected that the obligations will be paid over the next several years and
accordingly, most of these amounts have been classified as noncurrent. The
Company has no ownership interest in Perlow.
The purchase price of BSC was allocated as follows:
Goodwill $63,600
Equipment and other assets 20,000
________
$83,600
________
The merger agreement requires additional purchase price to be paid by BSC
to the former owners of Behavioral Stress Centers, Inc. for the three years
following the merger date. The additional purchase price is based on the income
of BSC before taxes and is to be paid in PHC stock, at market value up to
$200,000 and the balance, if any, in cash.
BSC also entered into a management agreement with Perlow. The agreement
requires Perlow to pay 25% of its practice expenses to BSC on a monthly basis
over a five-year period with an automatic renewal for an additional five-year
period.
On November 1, 1996, BSC entered into a lease agreement for its facilities.
The lease payments are due in equal monthly installments over a three year
period with an option to extend annually for three additional years. The lease
is to be paid by Perlow in accordance with the management agreement.
On January 17, 1997, with an effective date of January 1, 1997, the Company
entered into a Stock Exchange Agreement with a Virginia corporation owned by two
individuals to whom the Company has an outstanding note payable. The corporation
consists of private practices of psychiatry. The Stock Exchange Agreement
provided that in exchange for $50,000 in cash and 64,500 shares of restricted
Class A common stock, the Company received an 80% ownership interest in the
Virginia corporation. The Company also paid $80,444 in legal fees in connection
with the Agreement. Concurrent with the Stock Exchange Agreement the two owners
of the Virginia corporation each executed Employment Agreements with the
Virginia corporation to provide professional
F-19
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997 and 1996
NOTE L - ACQUISITIONS (CONTINUED)
services and each was granted an option to purchase 15,000 shares of Class
A common stock at an exercise price of $4.87 per share. The options expire on
April 1, 2002. Each agreement requires an annual salary of $200,000 and expires
in five years. Further, a Plan and Agreement of Merger was executed whereby the
Virginia corporation was merged into PCV.
On January 17, 1997 PCV entered into a purchase and sale agreement with an
unrelated general partnership, to purchase real estate with buildings and
improvements utilized by the Virginia Corporation for approximately $600,000 of
which $540,000 was paid through the issuance of a note (Note C).
In accordance with the above agreements the purchase price was allocated as
follows:
Land $ 50,600
Building 540,000
Covenant not-to-compete 50,000
Goodwill 285,038
_____________
$925,638
_____________
In accordance with the agreement the two owners will be paid a finders fee
for all subsequently acquired medical practices within a 200 mile radius of PCV
and those medical practices identified by the owners wherever the location. The
finders fee is payable in Class A common stock and in cash.
Information is not available to present pro forma financial information
relating to the 1997 acquisitions. The Company has so advised the Securities and
Exchange Commission and has received a no action letter with respect to this
matter. Had the acquisitions made during the fiscal years ended June 30, 1996,
been made as of July 1, 1995, the pro forma effect on the Company's results of
operations is immaterial.
NOTE M - SALE OF RECEIVABLES
The Company has entered into a sale and purchase agreement whereby
third-party receivables are sold at a discount with recourse. The interest rate
is calculated at 5.5% plus the six-month LIBOR rate which is 11.5% and 11.3% at
June 30, 1997 and 1996, respectively. The amount of receivables subject to
recourse at June 30, 1997 totaled approximately $577,000 and the agreement
states that total sales of such outstanding receivables are not to exceed
$4,000,000. Proceeds from the sale of these receivables totalled approximately
$3,000,000 and $3,500,000 for the years ended June 30, 1997 and 1996,
respectively. The purchase fees related to the agreement amount to approximately
$127,000 and $73,720 for the years ended June 30, 1997 and 1996, respectively,
and are included in interest expense in the accompanying consolidated statement
of operations. The agreement expires December 31, 1997.
NOTE N - SUBSEQUENT FINANCING
In September 1997, the Company received $500,000 in exchange for the
issuance of 170,414 shares of unregistered Class A common stock.
Also, subsequent to June 30, 1997, the Company purchased the assets of an
outpatient clinic in Virginia for 26,024 shares of Class A common stock and
$50,000 in cash. The clinic's operations will be included in PCV.
F-20
<PAGE>
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.
<PAGE>
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
sares 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
November 5, 1997.
PHC, INC.
By: /s/ Bruce A. Shear
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: /s/ Bruce A. Shear President and Chief November 5, 1997
Bruce A. Shear Executive
Officer and Director
(principal
executive officer)
By: /s/ Paula C. Wurts Controller, Assistant November 5, 1997
Paula C. Wurts Treasurer
and Assistant Clerk
(principal
financial officer)
By: /s/ Gerald M. Perlow Clerk and Director November 5, 1997
Gerald M. Perlow
By: /s/ Donald E. Robar Treasurer and Director November 5, 1997
Donald E. Robar
By: /s/ Howard W. Phillips Director November 5, 1997
Howard W. Phillips
By: /s/ William F. Grieco Director November 5, 1997
William F. Grieco
<PAGE>
10/21/97
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).
Duplicate of 4.9
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.
<PAGE>
Exhibit No. Description
@ 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 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.
<PAGE>
+10.14 Lease Agreement between Palmer-Wells Enterprises and AIHS, Inc.
and Edwin G. Brown, dated September 23, 1983, with Addendum
dated March 23, 1989, and Renewal of Addendum dated April 7,
1992; Tenant Acceptance Letter to The Mutual Benefit Life
Insurance Company and Palmer-Wells Enterprises, executed by PHC,
Inc. and Edwin G. Brown, dated June 6, 1989.
+10.15 Sample Equipment Lease with Trans National Leasing Corp.
+10.16 Note of PHC, Inc. in favor of Tot Care, Inc., dated January 1,
1991, in the amount of $55,000.
+10.17 Note of PHC, Inc. in favor of Humpty Dumpty School, Inc., dated
March 1, 1991, in the amount of $25,000.
<PAGE>
Exhibit No. Description
+10.18 Note of PHC, Inc. in favor of Bruce A. Shear, dated April 1,
1993, in the amount of $152,500; Subordination letter from
Aquarius Realty to Malden Trust Company as to $50,000 of debt,
dated 1983, regarding debt of PHC, Inc.; Subordination letter
from Bruce A. Shear and Steven J. Shear, individually, to Malden
Trust Company as to $80,000 of debt, dated 1983, regarding debt
of PHC, Inc.
+10.19 Note of PHC, Inc. in favor of Steven J. Shear, dated April 1,
1993, in the amount of $25,000.
+10.20 Note of PHC, Inc. in favor of Gertrude Shear, dated April 15,
1993, in the amount of $27,700.
+10.21 Note of PHC, Inc. in favor of Mark S. Cowell and Karen K. Cowell,
dated May 5, 1993, in the amount of $10,000.
+10.22 Note of PHC, Inc. in favor of Trans National Leasing Corp., dated
May 17, 1993, in the amount of $50,000.
+10.26 Advance Funding Agreement by and among Quality Care Centers of
Massachusetts, Inc., Kelspride Nursing Homes, Inc. and
Continental Medical Systems, Inc., dated June 30, 1988, and
amendment thereto dated June 30, 1992; Note of Quality Care
Centers of Massachusetts, Inc. in favor of Continental Medical
Systems, Inc., dated June 30, 1992, in the amount of $240,084;
Mortgage, Security Agreement and Assignment by PHC, Inc. to
Continental Medical Systems, Inc., dated June 30, 1988, and
amendment thereto dated June 30, 1992; Security Agreement by
Quality Care Centers of Massachusetts, Inc. to Continental
Medical Systems, Inc., dated June 30, 1988, and amendment thereto
dated June 30, 1992; Guaranty of PHC, Inc. in favor of
Continental Medical Systems, Inc. dated June 30, 1988, and
amendment thereto dated June 30, 1992; Guaranty of Bruce A.
Shear, individually, dated June 30, 1988, and amendment thereto
dated June 30, 1992 and Guaranty Fee , Inc. in favor of Bruce A.
Shear in consideration of June 30, 1988, Guaranty on behalf of
PHC, Inc.; Waiver and Agreement by and among PHC, Inc., Quality
Care Centers of Massachusetts, Inc., Continental Medical Systems,
Inc. and CMS Capital Ventures, Inc., dated October 13, 1993.
+10.28 Purchase and Sale Agreement by and between Alternative Counseling
Services, Inc. and PHC of Virginia, Inc., dated March 22, 1993;
Note of PHC of Virginia, Inc. in favor of Alternative Counseling
Services, Inc., dated April 1, 1993, in the amount of $30,000;
Note of PHC of Virginia, Inc. in favor of Alternative Counseling
Services, Inc., dated April 1, 1993, in the amount of $15,485
with Changes Clinic Collections on Purchased Receivables, April
1, 1993 - September 7, 1993.
***10.29 Note of PHC of Virginia, Inc. in favor of Himanshu S. Patel and
Anna H. Patel, dated April 1, 1995, in the amount of $10,000.
+10.30 Note of PHC of Virginia, Inc. in favor of Mukesh P. Patel and
Falguni M. Patel, dated April 1, 1993, in the amount of $10,000.
+10.31 Mount Regis Center, Limited Partnership Agreement and Certificate
of Limited Partnership, dated July 24, 1987, by and among PHC of
Virginia, Inc. and limited partners; Form of Letter Agreement of
limited partners dated October 18, 1993, with List of Selling
Limited Partners and Units to be sold.
+10.32 Contract for Purchase and Sale of Real Estate by and between
Douglas M. Roberts, PHC of Virginia, Inc. and PHC, Inc. dated
March 31, 1987, with amendment dated July 28, 1987.
+10.33 Deed of Trust Note of Mount Regis Center Limited Partnership in
favor of Douglas M. Roberts, dated July 28, 1987, in the amount
of $560,000, guaranteed by PHC, Inc., with Deed of Trust executed
by Mount Regis Center, Limited Partnership of even date.
+10.34 Security Agreement Note of PHC of Virginia, Inc. in favor of
Mount Regis Center, Inc., dated July 28, 1987, in the amount of
$90,000, guaranteed by PHC, Inc., with Security Agreement, dated
July 1987.
+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.
<PAGE>
Exhibit No. Description
10.38 Exhibit intentionally omitted.
+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.
<PAGE>
Exhibit No. Description
**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 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.
<PAGE>
Exhibit No. Description
##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 amoun
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. an
Irwin Mansdorf dated November 1, 1996.
++++10.101 Option Agreement by and between Pioneer Healthcare and Gerald
M. Perlow M.D., dated November 15, 1996.
xx****10.102 Asset Purchase Agreement by and among Norton A. Roitman, M.D.,
Clinical Services of Nevada, Inc., Harmony Healthcare
Services, Inc. and the Company dated October 28, 1995.
10.103 Secured Bridge Note in the principal amount of $400,000 by and
between PHC of Michigan, Inc. and HealthCare Financial Partners,
Inc. dated January 13, 1996.
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.
<PAGE>
Exhibit No. Description
10.108 Plan of Merger by and between Pioneer Counseling of Virginia,
Inc. and Psychiatric & Counseling Associates of Roanoke, Inc.
10.109 Sales Agreement by and between Dillon & Dillon Associates and
Pioneer Counseling of Virginia Inc. for building and land
located at 400 East Burwell St., Salem Virginia in the amount
of $600,000.
10.110 Loan and Security Agreement by and between PHC of Michigan, Inc.
and HCFP Funding Inc., in the amount of $1,500,000.
++++10.111 Revolving Credit Agreement by and between HCFP and PHC of
Michigan, Inc. in the amount of $1,500.000.
+++++10.112 Unconditional Guaranty of Payment and Performance by and between
PHC, Inc. in favor of HCFP.
+++++10.113 Amendment number 1 to Loan and Security Agreement dated May 21,
1996 by and between PHC, of Utah, Inc. and HCFP Funding providing
collateral for the PHC of Michigan, Inc. Loan and Security
Agreement.
@ 10.114 Employment Agreement by and between Perlow Physicians P.C. and
Nissan Shliselberg, M.D dated March, 1997.
@ 10.115 Option and Indemnity Agreement by and between PHC, Inc. and
Nissan Shliselberg, M.D dated February, 1997.
@ 10.116 Secured Term Note by and between PHC of Michigan, Inc. and
Healthcare Financial Partners - Funding II, L.P. in the amount of
$1,100.000 dated March, 1997.
@ 10.117 Mortgage between PHC of Michigan, Inc. and Healthcare Financial
Partners - Funding II, L.P. in the amount of $1,100.000.00
dated March, 1997 for Secured Term Note.
@ 10.118 Mortgage between PHC of Michigan, Inc. and HCPF Funding in the
amount of $1,500.000.00 dated March, 1997 for Revolving Credit
Note.
@ 10.119 Submission of Lease between PHC, Inc. and Conestoga Corporation
dated 11/09/95 for space at 200 Lake Street, Suite 101b, Peabody,
MA 01960.
@ 10.120 Agreement by and between PHC of Michigan, Inc. and New Life
Treatment Centers, Inc. dated July 1, 1996 to provide treatment
and care.
@ 10.121 Lease Line of Credit Agreement by and between PHC, Inc. and LINC
Capital Partners dated March 18, 1997 in the amount of $200,000.
10.122 Agreement between Family Independence Agency and Harbor Oaks
Hospital effective January 1, 1997.
10.123 Master Contract by and between Family Independence Agency and
Harbor Oaks Hospital effective January 1, 1997.
10.124 Deed, Deed of Trust and Deed Trust Note in the amount of $540,000
by and between Dillon and Dillon Associates and Pioneer
Counseling of Virginia, Inc. (Related to Exhibit 10.109).
10.125 Financial Advisory Agreement, Indemnification Agreement and Form
of Warrant by and between Brean Murray & Company and PHC, Inc.
dated 06/10/97.
10.126 Employment Agreement by and between Harbor Oaks Hospital and
Sudhir Lingnurkar, and Pioneer Counseling Center and Sudhir
Lingnurkar dated August 1, 1997.
10.127 Asset Purchasing Agreement, Restrictive Covenants Agreement and
Lease with Option to Purchase by and between Pioneer Counseling
of Virginia, Inc. and Dianne Jones-Freeman dated August , 1997.
10.128 Employment Agreement by and between Pioneer Counseling of
Virginia, Inc. and Dianne Jones-Freeman dated August, 1997.
10.129 Amendment dated October 1, 1997 to Agreement
##16.1 Letter on Change in Independent Public Accountants.
****21.1 List of Subsidiaries.
23.1 Consent of Independent Auditors.
<PAGE>
Exhibit No. Description
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
Coommission file number 0-23524) on October 2, 1995.
**** Filed as an exhibit to the Company's Post-Effective Amendment
No. 2 on Form S-3 to Registration Statement on Form SB-2
under the Securities Act of 1933 dated November 13, 1995
(Commission file number 33-71418).
***** Filed as an exhibit to the Company's Post-Effective Amendment No.
2 on Form S-3 to Registration Statement on Form SB-2 under the
Securities Act of 1933 dated November 13, 1995 (Commission file
number 33-71418).
# Filed as an exhibit to the Company's Registration Statement on
Form 3 dated March 12, 1996 (Commission file number 33-714418).
## Filed as an exhibit to the Company's report on Form 10-KSB, filed
with the Securities and Exchange Commission on September 28,
1994.
### Filed as an exhibit to the Company's Current Report on Form 8-K,
filed with the Securities and Exchange Commission
(Commission file number 0-23524) on November 5, 1996.
#### Filed as an exhibit to the Company's Current Report on Form 10-KSB,
filed with the Securities and Exchange Commission (Commission file
number 0-23524) on 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 333-71418).
<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.
<PAGE>
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 September 19, 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
November 4, 1997
