<PAGE>
As filed with the Securities and Exchange Commission on June 11, 1997
Registration No. 333-71418
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(PRE-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
(508) 536-2777
(Address and telephone number of principal executive offices)
200 Lake Street
Suite 102
Peabody, MA 01960
(508) 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
(508) 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 Amount Proposed Proposed Amount of
Securities to be Registeredto be Maximum Maximum Registration Fee
Registered Offering Aggregate (3)
(1) Price Per Offering
Share (2) Price (2)
Class A Common Stock 2,740,000 $3.75/2.66 $9,610,100 $2,420/$492
(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, the Barrow
Street Warrant, the ProFutures Warrant and the Series A Convertible Preferred
Stock.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a). An additional 610,000 shares are being included in this
amendment to this registration statement at a price per share of $2.66
calculated in accordance with Rule 457(a).
(3) $2,420 was paid in connection with the original filing of this
registration statement and $492 is being paid in connection with the filing of
this amendment to this registration statement because of an additional 610,000
shares being included with this amendment. ______________________
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 2,740,000
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").
50,000 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
ProFutures Special Equities Fund, L.P. (the "ProFutures Warrant"). 560,000
shares of Class A Common Stock offered pursuant to this Prospectus are
issuable upon conversion of 1,000 shares of the Company's Series A
Convertible Preferred Stock (the "Convertible Shares") assuming a conversion
price of $2.00 per share and no payments of cumulative dividends in respect
of the Series A Convertible Preferred Stock before June 4, 1999. The
Debentures, the Infinity/Seacrest Warrants, the Alpine Warrant, the Barrow
Street Warrant, the CCRI Warrant, the Acquisition Shares, the ProFutures
Warrant and the Convertible 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.
0==============================================================================
Subject to Completion, dated June 11, 1997
===============================================================================
PROSPECTUS
2,740,000 Shares of Class A Common Stock of
PHC, INC.
PIONEER HEALTHCARE (Registewred Trademark)
This Prospectus relates to the public offering that may be made from time
to time of up to 2,740,000 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"). 50,000 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 ProFutures Special
Equities Fund, L.P. (the "ProFutures Warrant"). 560,000 shares of Class A
Common Stock offered pursuant to this Prospectus are issuable upon conversion
of 1,000 shares of the Company's Series A Convertible Preferred Stock (the
"Convertible Shares") assuming a conversion price of $2.00 per share and no
payments of cumulative dividends in respect of the Series A Convertible
Preferred Stock before June 4, 1999. The Debentures, the Alpine Warrant, the
Barrow Street Warrant, the CCRI Warrant, the Acquisition Shares, the
ProFutures Warrant and the Convertible Shares were issued by the Company in
transactions exempt from registration under the Securities Act of 1933, as
amended (the "Act"), and applicable state securities laws.
The shares offered pursuant to this Prospectus may be sold from time to
time by the Selling Security Holders or their transferees. No underwriting
arrangements have been entered into by the Selling Security Holders as of the
date hereof. The distribution of the shares offered pursuant to this
Prospectus by the Selling Security Holders may be effected in one or more
transactions that may take place in the over-the-counter market, including
ordinary broker's transactions, privately negotiated transactions, or through
sales to one or more dealers for resale of such shares as principals, at
prevailing market prices at the time of sale, prices related to such
prevailing market prices, or negotiated prices. Underwriting discounts and
usual and customary or specifically negotiated brokerage fees or commissions
will be paid by the Selling Security Holders in connection with sales of such
shares. See "Plan of Distribution."
The Company will not receive any proceeds from the sale of the shares
offered pursuant to this Prospectus. By agreement with the Selling Security
Holders, the Company will pay all of the expenses incident to the
registration of such shares under the Act (other than agent's or
underwriter's commissions and discounts), estimated to be approximately
$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 Company
also has outstanding a class of nonvoting Class C Common Stock, par value
$.01 per share (the "Class C Common Stock;" the Class A Common Stock, the
Class B Common Stock and the Class C Common Stock are sometimes collectively
referred to herein as the "Common Stock.") Except as otherwise required by
law, the Class C Common Stock has no voting rights. The Class C Common Stock
will automatically convert into shares of Class B Common Stock if certain
earnings targets are achieved by the Company. If such earnings targets are
not achieved, the Class C Common Stock will automatically be canceled and
retired. The Company does not expect the earning targets to be achieved.
See "Description of Securities." The Series A Convertible Preferred Stock,
$.01 par value, is nonvoting and is convertible into Class A Common Stock at
a formula based on 50% of the fair market value of the Class A Common Stock
on the date of conversion. See "Description of Securities". As of the date
of this Prospectus, and without giving effect to the exercise of any options
or warrants or the conversion of the Series A Convertible Preferred Stock,
the holders of Class A Common Stock own approximately 73.97% of the
outstanding common stock and hold approximately 41.98% of the total voting
power, and the holders of Class B Common Stock and Class C Common Stock
together own approximately 26.02% of the outstanding Common Stock and hold
approximately 58.01% of the total voting power. Bruce A. Shear, the
President and Chief Executive Officer and a Director of the Company owns
approximately 18.90% of the outstanding Common Stock and holds approximately
53.32% of the total voting power. If the Class C Common Stock is converted
into Class B Common Stock the total voting power of the holders of the Class
A Common Stock will decrease to 36.24%, and the total voting power of the
holders of the Class B Common Stock will increase to approximately 63.75% and
the total voting power of Bruce A. Shear will increase to approximately
56.74%.
The Class A Common Stock is traded on the Nasdaq SmallCap Market under the
symbol PIHC. On June 4, 1997, the closing bid price of the Class A Common
Stock was $2.66.
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.................. $2.66 $2.66
Total................... $7,288,400 $7,288,400
(1) Estimated on the basis of the average of the bid and asked prices of
the Class A Common Stock on June 4, 1997, as reported on the Nasdaq SmallCap
Market.
The date of this Prospectus is June 11, 1997
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, (xv) shares issuable
upon the exercise of the CCRI warrant, (xvi) shares issuable upon the
exercise of the ProFutures Warrant and (xvii) shares issuable upon conversion
of the Company's Series A Convertible Preferred Stock.
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 (508) 536-2777.
<PAGE>
The Offering
Securities Offered:... 2,740,000 shares of Class A Common Stock. See
"Description of Securities."
Securities Outstanding:
Class A Common Stock 2,646,884
Class B Common Stock 731,348
Class C Common Stock 199,816
Convertible Preferred Stock 1,000
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
Nine Months Ended Year Ended June
March 31, 30,
1997 1996 1996 1995
Statements of Operations $ $ $ $
Data:
Revenue.................. $20,278,568 $16,100,814 $21,802,758 $16,536,618
Operating expenses....... 19,203,771 15,576,391 21,845,592 15,621,449
Income (loss) from 1,074,797 524,423 (42,834) 915,169
operations...............
Other expense............ 962,016 586,951 754,072 405,390
Net income (loss)........
82,781 (62,528) (585,315) 268,671
Net income (loss) per share $0.03 $(0.02) $(.22) $0.11
As of March 31, 1997
Balance Sheet Data:
Total assets...................... $28,056,913
Working capital................... $7,912,739
Long-term obligations............. $13,238,985
Stockholders' equity.............. $7,652,717
<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
$585,315 during fiscal year 1996 and income before extraordinary item of
$268,671 during fiscal year 1995. The Company generated income of
$82,781 during the nine months ended March 31, 1997 and a loss of $62,528
during the nine months ended March 31, 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 March 31, 1997 the Company had an
accumulated deficit of $1,547,541. The Company experienced a significant
increase in accounts receivable from $9,090,625 as of March 31, 1996 to
$12,352,515 as of March 31, 1997. Primarily as a result of the increase in
accounts receivable, the Company has had negative cash flow from operations
in recent periods. Although the Company has entered into accounts receivable
funding facilities with LINC Finance Corporation VIII and Healthcare
Financial Partners (HCFP) (see the Consolidated Financial Statements and
notes related thereto included herein or incorporated herein by reference),
there can be no assurance that the Company will be able to obtain any
additional required financing on terms acceptable to the Company. The
Company intends to expand its operations through the acquisition or
establishment of additional facilities, and may seek to obtain additional
financing from various sources including banks. The inability to obtain
needed financing could have a material adverse effect on the Company's
financial condition, operations and business prospects and there can be no
assurance that the Company will be able to attain or maintain profitability
in the future. See Consolidated Financial Statements and notes related
thereto included herein or incorporated herein by reference.
Lack of Access to Capital to Achieve Acquisition Strategy. The Company's
plan to acquire additional facilities in the future is highly dependent upon
its access to capital, of which there can be no assurance. See "Negative
Cash Flow; Need for Additional Financing; Significant and Increasing Amounts
of Accounts Receivable." If the Company is unable to secure the necessary
access to capital it will be unable to acquire additional facilities which,
in turn, will limit the Company's growth.
Reimbursement by Third-Party Payors; Significant and Increasing Accounts
Receivable; Concentration of a Receivable; Change in Service Mix. Payment
for substance abuse treatment is provided by private insurance carriers and
managed care organizations; payment for long-term and subacute care is
provided by private insurance carriers, managed care organizations and the
Medicare and the Medicaid programs; payment for psychiatric services is
provided by private insurance carriers, managed care organizations and the
Medicare and the Medicaid programs. Changes in the sources of the Company's
revenues could significantly alter the profitability of the Company's
operations. In general, revenues derived from the Medicare and Medicaid
programs in connection with the long-term and subacute care services provided
by the Company have been less profitable to the Company than revenues derived
from private insurers and managed care organizations. In addition, the
Company experiences greater delays in the collection of amounts reimbursable
by the Medicare and the Medicaid programs than in the collection of amounts
reimbursable by private insurers and managed care organizations.
Accordingly, a change in the Company's service mix from substance abuse and
psychiatric to long-term care could have a material adverse effect on the
Company as would an increase in the percentage of the Company's patients who
are insured by Medicare or Medicaid. In addition, cost containment pressures
from private insurers and the Medicare and the Medicaid programs have begun
to restrict the amount that the Company can charge for its services. If a
substantial number of private insurers and managed care organizations were to
adopt more restrictive reimbursement schedules and if such schedules did not
permit the Company to profitably provide substance abuse treatment and
long-term and subacute health care, the Company's business would be
materially adversely affected. In addition, there can be no assurance that
the Company's existing facilities will continue to meet, or that proposed
facilities will meet, the requirements for reimbursement by third-party or
governmental payors.
The Company had substantial receivables from Medicaid and Medicare of
approximately $3,070,000 at March 31, 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 $12,352,515 at
March 31, 1997, compared with $8,866,065 at June 30, 1996. Those changes are
due primarily to an increase in patient census in connection with
acquisitions 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. Although the Company believes it maintains an adequate allowance
for doubtful accounts, 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. If the Company does not appeal the imposition of the
fines and the deficiency notice, the penalties could be reduced by 35%. 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
quarter ended March 31, 1997 and anticipates the possibility of continued
adverse financial impacts in future quarters.
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 Company's patient census with respect to
its substance abuse facilities decreased from 66% to 63% occupancy from
fiscal year 1995 to fiscal year 1996 based on available beds. The patient
census at the Company's long-term care facility declined from 92.7% to 87.1%
from fiscal year 1995 to fiscal year 1996. The patient census at the
Company's psychiatric facilities increased from 52.2 % to 64.4 % from fiscal
year 1995 to fiscal year 1996. 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, will reach maximum capacity now that construction has been
completed. 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.
<PAGE>
Dilutive Impact of Series A Convertible Preferred Stock. The Company's
Series A Convertible Preferred Stock is convertible into Class A Common Stock
at 80% of the fair market value of the Class A Common Stock on the date of
conversion. The issuance of the Series A Convertible Preferred Stock may
trigger dilution adjustments to certain existing securities of the Company,
including the IPO Warrants, the Unit Purchase Options, the Bridge Warrants
and the Debentures which may result in the issuance of additional Class A
Common Stock to the holders of such securities at the time of their
conversion or exercise. Other securities, including the Class A Common Stock
do not have the benefit of dilution protection. The extent of any such
dilution adjustments will fluctuate on a continuing basis as the market price
of the Company's Class A Common Stock changes.
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,
Convertible 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 and Class C Common Stock
beneficially own 26% of the Company's Common Stock, but have 58% of the total
voting power. Bruce A. Shear and his affiliates own and control 18.9% of the
Common Stock, but hold 53.3% of the total voting power. If the Company's
Class C Common Stock is converted into Class B Common Stock, the total voting
power held by the holders of the Class B Common Stock will increase to
63.8%. As a result of this ownership, Bruce A. Shear and his affiliates will
be able to control all matters requiring approval of the stockholders,
including the election of a majority of the directors.
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.
<PAGE>
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.
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 96%
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 May 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.
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 April 10, 1997 the closing price of the
Company's stock as reported on Nasdaq was $3.75. 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 of which 1,000 shares of Series A Convertible
Preferred Stock have been authorized and issued. 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 has no present plans to issue
additional shares of Preferred Stock.
Thin Float. The average weekly trading volume of the Company's Class A
Common Stock for the period from January 1, 1997 to May 31, 1997 was 166,776
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>
Significant Future Charges to Net Income. The Company's Class C Common
Stock will automatically be converted into Class B Common Stock if the
Company achieves certain earnings targets. If such conversion occurs, the
Company will concurrently record a charge to its earnings equal to the
product obtained by multiplying the number of shares converted by the then
fair market value of the converted shares. The conversion will not affect
the total shareholder's equity of the Company, but may have a subsequent
adverse effect on the market price for the Company's securities. The Company
does not expect the earnings targets to be achieved.
<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 (through May 31, 1997) $ 4 3/8 $ 2 1/8
On May 30, 1997, the last reported sale price of the Class A Common Stock
on the Nasdaq SmallCap Market was $2.81. As of March 31, 1997, there were 73
holders of record of the Company's Class A Common Stock, 325 holders of
record of the Company's Class B Common Stock and 342 holders of record of the
Company's Class C 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
March 31, 1997. This table should be read in conjunction with the
Consolidated Financial Statements and related notes appearing elsewhere in
this Prospectus.
As of
March 31, 1997
Actual
Short-term debt......................................... $2,062,411
Long-term debt.......................................... 13,238,985
Stockholders' equity:
Convertible Preferred Stock, $.01 par value;
1,000,000 shares authorized; ---
no shares issued..................................
Class A Common Stock; $.01 par value; 20,000,000
shares authorized;
2,646,884 shares issued(1), 2,638,228 Outstanding 26,468
(8,656 Treasury shares)..........
Class B Common Stock, $.01 par value; 2,000,000
shares authorized; 731,348 7,314
shares issued.....................................
Class C Common Stock, $.01 par value; 200,000 shares
authorized; 1,998
199,816 shares issued.............................
Additional paid-in capital....................... 9,202,296
Less 8,656 Class A Common Treasury Shares, at (37,818)
cost...............................................
Accumulated deficit.............................. (1,547,541)
Total stockholders' equity.......................... 7,652,717
Total capitalization.................................... $22,954,113
(1) Does not include: (i) 1,657,821 shares reserved for issuance
upon exercise of the IPO Warrants; (ii) 146,078 shares included in the
Units which may be sold pursuant to the Unit Purchase Option and 146,078
shares reserved for issuance upon the exercise of the Warrants included in
the Unit Purchase Option; (iii) 162,375 shares which may be issued upon
the exercise of outstanding stock options; (iv) 167,625 shares which may
be issued upon the exercise of options available for grant under the
Company's Stock Plans; or (v) up to 4,814 shares included in the Bridge
Units which may be sold pursuant to the Bridge Warrants; (vi) up to 38,510
shares reserved for issuance upon the exercise of the Warrants included in
the Bridge Units; and (vii) up to 703,125 shares reserved for issuance
upon the exercise of the Private Placement Warrants; (viii) 1,562,500
shares which may be issued upon the conversion of the Company's 7%
Convertible Debentures due December 31, 1998 in the aggregate principal
amount of $3,125,000 assuming a conversion price of $2.00 per share; (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) 3,000 shares issuable upon the exercise of a warrant issued to Barrow
Street Research, Inc., (xii) up to 160,000 shares issuable upon the
exercise of a warrant issued to CCRI, Corporation, (xiii) up to 560,000
shares issuable upon conversion of 1,000 shares of the Company's Series A
Convertible Preferred Stock; or (xiv) 50,000 shares issuable upon the
exercise of a warrant issued to ProFutures Special Equity Fund, L.P. 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, 1996 and 1995 have been derived from the Company's
consolidated financial statements, which have been audited by Richard A.
Eisner & Company, LLP, independent auditors. The financial data as of March
31, 1997 and for the nine months ended March 31, 1997 and 1996 are derived
from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting only of normal recurring accruals, which
the Company considers necessary for a fair presentation of the information
presented. Results of operations for the nine months ended March 31, 1997
may not be indicative of results of operations for the full fiscal year. 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.
Nine Months Ended Year Ended June 30,
March 31,
1997 1996 1996 1995
Statements of
Operations Data:
Revenue................ $20,278,568 $16,100,814 $21,802,758 $16,536,618
Operating expenses..... 19,203,771 15,576,931 21,845,592 15,621,449
Income (loss) from 1,074,797 524,423 (42,834) 915,169
operations.............
Other expense.......... 962,016 586,951 754,072 405,390
Net income (loss)......
82,781 (62,528) (585,315) 268,671
Net income (loss) per
share............. $.03 $(.02) $(.22) $.11
As of March 31, 1997
Balance Sheet Data:
Total assets...................... $28,056,913
Working capital................... $ 7,912,739
Long-term obligations............. $13,238,985
Stockholders' equity.............. $ 7,652,717
<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 nine months ended March 31, 1997 and 1996
and for the two years ended June 30, 1996. 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
Nine Months ended March 31, 1996 Compared to Nine Months ended March 31, 1997
Net patient care revenue increased 25.9% to $20,278,568 for the nine
months ended March 31, 1997 from $16,100,814 for the nine months ended March
31, 1996. This increase in revenue is due primarily to the acquisition of
Pioneer Counseling Centers in September 1996, the inclusion of nine full
months of operations of Harmony Healthcare and an increased census at the
long-term care facility as a result of an increase in available beds.
Net patient care revenue for the psychiatric and substance abuse
facilities increased to $14,978,849 for the nine months ended March 31, 1997
from $13,114,763 for the same period in 1996. This increase in revenue is
due primarily to the newly acquired psychiatric treatment facilities in
Nevada, Kansas and Michigan. This does not include the management fees of
$314,597 payable to BSC from the management services agreement with a
physicians practice. Net patient care revenue for the long-term care
facility increased to $4,493,597 for the nine months ended March 31, 1997
from $4,109,438 for the same period in 1996 due to an increase in net revenue
per patient day and the number of available and occupied beds.
Year ended June 30, 1995 Compared to Year ended June 30, 1996
The Company experienced a loss for fiscal year ended June 30, 1996
primarily as a result of the increased expenses related to the Franvale
expansion. Census levels at Franvale did not increase as soon as
anticipated to cover the fixed costs involved in the expanded facility.
Marketing efforts have begun to produce expected patient census and mix.
Also contributing to the loss in fiscal 1996 was a decline in referrals
from the Department of Child, Youth and Family Services (DCYF) to Good Hope
Center pursuant to a contract funded by the State of Rhode Island. This
created a sharp decline in adolescent census. The Company is currently
reviewing its operations at Good Hope and in connection with such review has
closed two outpatient centers, eliminated several positions, combined certain
programs and added new management. The new management team is focusing on
reducing expenses and increasing revenue. In addition, Good Hope has
established new contracts which the Company believes will increase both its
adolescent and adult censuses.
Net operating revenue from all facilities increased 32% to $21,802,758
for the year ended June 30, 1996 from $16,536,618 for the year ended June 30,
1995. Net patient care revenue for the psychiatric hospital, Harbor Oaks
Hospital, was $6,218,410 for the fiscal year ended June 30, 1996 compared to
$3,204,857 for June 30, 1995. Net patient care revenue at the Company's
substance abuse treatment centers increased 24.9% to $9,155,595 from
$8,932,864 over the same period in the prior year. Net patient revenue at
the Company's long-term care facility increased to $5,043,922 for fiscal 1996
from $4,180,471 in fiscal 1995 which is attributable to the increase in
census resulting from the addition of 37 available beds.
Total patient care expenses for all facilities increased 29.8% to
$12,004,383 for the year ended June 30, 1996 from $9,248,317 for the year
ended June 30, 1995. Patient care expenses for the psychiatric hospital,
Harbor Oaks, were $3,098,664 for the fiscal year ended June 30, 1996 compared
to $1,941,528 for fiscal year ended June 30, 1995. Patient care expenses at
the Company's substance abuse treatment centers decreased to $4,350,423 from
$4,453,212 for the same period in the prior year (approximately 2.3%).
Patient care expenses at the Company's long-term care facility increased to
$4,029,572 for fiscal 1996 from $2,884,425 in fiscal 1995 (approximately
39.7%). The percentage increase in patient care expenses at the long-term
care facility is due to a number of factors, including, but not limited to:
increased census and acuity of patient mix, fixed cost increases, interest,
and salaries related to the addition of the new beds. The census increase
related to the new beds took longer than anticipated creating a loss for the
fiscal year ended June, 1996. Census is now at the expected level and rate
increases have been implemented effective September 1, 1996 to offset the
higher costs.
Liquidity and Capital Resources
During the third fiscal quarter of 1996, the Company completed a private
placement of 493,700 shares of Class A Common Stock with Warrants to purchase
additional shares of Class A Common Stock at $4.00 a share. This resulted in
net proceeds to the Company of approximately $1,524,800.
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 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.
During the fourth fiscal quarter of 1997, the Company completed a private
placement of 1,000 shares of its Series A Convertible Preferred Stock
together with a warrant entitling the purchaser to purchase 50,000 shares of
the Company's Class A Common Stock at $2.75 per share resulting in net
proceeds to the Company of approximately $900,000. The Warrant expires in
three years.
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.
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 net of allowance for bad debts increased 36% to approximately $13,093,000
at March 31, 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). Without this sale, the March 31, 1997 and June 30, 1996
ending accounts receivable balance would have been approximately $412,598 and
$796,000 higher respectively and would have reflected an increase of
approximately 30%. This significant increase in receivables is primarily due to
an increase in revenues from new acquisitions and increased beds at Franvale.
The Company continues to closely monitor its accounts receivable balances and
implement procedures to manage this receivables growth and keep it consistent
with growth in revenues.
<PAGE>
During the fiscal year ended 1995, PHC of Rhode Island, Inc. and LINC
entered into Sale and Purchase Agreements, pursuant to which LINC will
provide funding of up to $950,000 to this subsidiary. Also, during the
fiscal year ended 1995, PHC of Virginia, Inc. entered into an agreement with
LINC on the same terms. There can be no assurance that the other
subsidiaries will enter into similar agreements or satisfy the conditions
necessary to receive funding if pursued.
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 March 31, 1997 the Company had approximately $60,000 in cash and cash
equivalents, working capital of approximately $7,910,000 and a working
capital ratio of approximately 2.1 to 1. As a result of the fourth quarter
1997 private placement, management believes that the Company has adequate
cash resources to fund operations for the foreseeable future, however, the
Company has experienced negative cash flow in recent periods. The Company is
currently seeking bank lending relationships to insure that the Company will
have the necessary capital to fund expansion of its existing businesses in
the future and to pursue acquisition opportunities as they arise, but there
can be no assurance that the Company will be successful in procuring such
funds.
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.
<PAGE>
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 and railroad industries. 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 physician' practice
specializing in the treatment of addictive behavior 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.
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,
long-term care 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.
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 substance
abuse and governmental regulation which requires certain employers to provide
information to employees about, among other things, available drug counseling
and employee assistance programs.
To contain costs associated with behavioral health issues, in the 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.
As a general rule, the Company attempts not to accept patients who do not
have either insurance coverage or adequate financial resources to pay for
treatment. Each of the Company's substance abuse facilities does, however,
provide treatment free of charge to a small number of patients each year who
are unable to pay for treatment but who meet certain clinical criteria and
who are believed by the Company to have the requisite degree of motivation
for treatment to be successful. In addition, the Company provides follow-up
treatment free of charge to relapse patients who satisfy certain criteria.
The number of patient days attributable to all patients who receive treatment
free of charge in any given fiscal year is less than 5%.
The Company believes that it has benefited from an increased awareness of
the need to make substance abuse treatment services accessible to the
nation's workforce. For example, subchapter D of the Anti-Drug Abuse Act of
1988 (commonly known as The Drug Free Workplace Act) (the "Drug Free
Workplace Act"), requires employers who are Federal contractors or Federal
grant recipients to establish drug free awareness programs to inform
employees about available drug counseling, rehabilitation and employee
assistance programs and the consequences of drug abuse violations. In
response to the Drug Free Workplace Act, many companies, including many major
national corporations and transportation companies, have adopted policies
that provide for treatment options prior to termination of employment.
Although the Company does not provide federally approved mandated drug
testing, the Company treats employees who have been referred to the Company
as a result of compliance with the Drug Free Workplace Act, particularly from
companies that are part of 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.
The patient population of Highland Ridge typically is between the ages of
18 and 70. Approximately 21% of the clients are female and 11% are minority
group members. Approximately 60% of Highland Ridge's patients reside in Utah
and surrounding western 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 and other corporations.
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, 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 was the first private for-profit hospital in the State of
Utah to address specifically the special needs of chemically dependent
women. Approximately 80 women have been treated at no charge since the
program's inception in 1988. In addition, Highland Ridge has contracted with
Salt Lake County to provide medical detoxification services for women. The
hospital also operates a specialized continuing care support group to address
the unique needs of women and minorities with an emphasis on the needs of
Native Americans.
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.
Mount Regis Center
Mount Regis is a 25-bed, free-standing alcohol and drug treatment center
located in Salem, Virginia, near Roanoke. The business, which was acquired
in 1987, is the oldest program of its kind in the Roanoke Valley. Mount
Regis is accredited by the JCAHO, and licensed by the Department of Mental
Health, Mental Retardation and Substance Abuse Services of the Commonwealth
of Virginia.
Mount Regis' patient population typically ranges in age from 18 to 70. In
the June 30, 1996 fiscal year, approximately 36% of Mount Regis' clients were
minority group members and 19% were females. Approximately 101 women have
been treated in an inpatient setting at no charge since the program's
inception. The programs at Mount Regis are designed to be sensitive to the
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.
Mount Regis also operates a free-standing outpatient clinic in Salem
called Changes ("Changes"). 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 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. Changes is currently located
in the PCV facility. The Company believes that these premises are adequate for
its current and anticipated
needs.
Good Hope Center
On March 16, 1994, the Company completed the purchase of the operating
assets of Good Hope, a 49-bed substance abuse treatment facility located in
West Greenwich, Rhode Island, together with related outpatient programs. In
addition to the West Greenwich facility, Good Hope has a satellite location
in North Smithfield, Rhode Island. The West Greenwich facility is located on
an approximately 70-acre site three hours from New York City and one hour
from Boston. Good Hope has both adult and adolescent programs which are
located in separate buildings. Outpatient and day treatment programs are
also located at this site. The satellite site operates both outpatient and
day treatment substance abuse programs.
Good Hope concentrates on providing services to insurers, managed care
networks and health maintenance organizations (HMO's). Good Hope provides
the same quality of individualized treatment provided by the Company's other
facilities by working closely with the managed care staff. The Company
recognizes that not all clients are in need of, nor are appropriate
recipients of, acute care alcohol and drug treatment services. Good Hope
also utilizes its outpatient programs to provide a continuum of care to local
patients. The day treatment license permits treatment of substance abuse,
which encompasses primary diagnoses of both alcohol abuse and drug abuse.
Good Hope's substance abuse treatment program for adolescents has filled a
need of the Company's other facilities for a reliable referral for
adolescents. Most of the patients treated at Good Hope are from the New
England area and approximately 30% are minorities.
Good Hope 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 stabilize the patient census.
The Company leases the West Greenwich property. The lease runs for twenty
years and is currently in its fourth year. The rent is $13,000 through June,
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.
<PAGE>
Operating Statistics
The following table reflects selected financial and statistical
information for the operating companies offering substance abuse treatment:
Nine Months
ended Year Ended June 30,
March 31,
1997 1996 1995
Net patient service revenues.......... $6,098,119 $10,307,262 $8,894,976
PDS2 Revenues(1)...................... $ 441,525 $ 233,164 $ 128,157
Net revenues per patient day(2)....... $ 414 $ 380 $ 397
Average occupancy rate(3)............. 59% 63% 66%
Total number of licensed beds at end of
period................................ 108 108 108
______________
(1) PDS2 is Pioneer Development and Support Services located in the
Company's Highland Ridge facility in Salt Lake City, Utah. It provides
clinical support, referrals, management and professional services for a
number of the Company's national contracts.
(2) Net revenues per patient day is net patient service revenues
divided by total patient days.
(3) Average occupancy rates were obtained by dividing the total
number of patient days in each period by the number of beds available in such
period. The total beds available include only 47 days for Marin Grove in
1995 due to its closing. In calculating average occupancy rates, the total
number of patient days includes patient days attributed to scholarship
patients as well as patient days attributed to relapse patients for whom
treatment is provided by the Company without charge. In each of the fiscal
years ended June 30, 1995 and 1996 and the nine months ended March 31, 1997,
these patient days accounted for less than 5% of the total number of patient
days for the same period.
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.
<PAGE>
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 has a term of two years
commencing on July 25, 1995. 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.
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.
<PAGE>
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.
PCV purchased a 7,500 square foot building in Salem, Virginia. The
building is subject to a mortgage in the amount of $540,000.
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 Harbor Oaks and all outpatient facilities.
Nine Months
Ended Year Ended June 30,
March 31,
1997 1996 1995
Inpatient
Net patient service revenues $ 4,942,249 $ 5,296,874 $ 2,755,642
Net revenues per patient $ 621 $ 548 $ 533
day(1)
Average occupancy rate(2) 56 % 64.4% 52.2%
Total number of licensed 64 64 64
beds at end of period
Source of Revenues:
Private(3) 77.7% 75.5% 63.6%
Government(4) 22.3% 24.5% 36.4%
Partial Hospitalization
Net patient service revenues $ 504,700 $ 921,537 $ 449,215
Net revenues per patient $ 287 $ 261 $ 176
day(1)
Outpatient
Net Revenues:
Individual $ 2,596,869 $ 648,302
Contract $ 703,502 $ 503,365
Sources of revenues:
Private 99% 89%
Government 1% 11%
(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.
Additional beds were placed in service during February 1997.
(3) Private pay percentage is the percentage of total patient days
derived from all payors other than Medicare and Medicaid.
(4) Government pay percentage is the percentage of total patient
days derived from the Medicare and Medicaid programs. Government total for
1996 reflects increase in higher acuity Medicare patients and Medicaid
patients.
Long-Term Care Facility
Industry Background
The fastest growing market in the health care industry is the segment
which provides services for people 65 years of age and older. Demographers
predict that this segment of the population will increase dramatically in the
next 20 years. The Company believes that there is a current shortage of
long-term care facilities which provide subacute and skilled nursing care and
that such shortage will be exacerbated by this population trend.
Franvale
The Company owns and operates a 128-bed, multi-level, long-term care
facility in Braintree, Massachusetts. For the fiscal year ended June 30,
1996, Franvale operated at 87.1% of capacity.
In September, 1994, the Company received approval from the Commonwealth of
Massachusetts for a 25-bed addition to the Franvale facility. Under a
one-time regulatory exemption, the Company added an additional 12 beds to
Franvale, for a total of 37 new beds, and renovated the existing facility
during the 1995 and 1996 fiscal years. To finance this addition and
renovation, the Company applied for and received Section 232 Mortgage
Financing in an amount of $6,822,700 from HUD. Approximately $2.9 million of
that amount was used for the new construction and renovation, which began
September 13, 1994, and approximately $2,327,230 was used to repay all
indebtedness, plus accrued interest, relating to Franvale, including $497,500
of indebtedness owing to the FDIC. The construction was completed in
September 1995. The Company began operation of the new addition on September
29, 1995. The final amount of the mortgage was $6,822,700 as determined by
the HUD process of cost certification on July 9, 1996. The monthly debt
service is approximately $54,000.
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. 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. If the Company does not appeal
the imposition of the fines and the deficiency notice, the penalties could be
reduced by 35%. 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.
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
provide management services to Franvale and is negotiating a permanent
contract with Oasis which has not yet been finalized. The Company currently
pays Oasis $6,250 per month for its services. 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.
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, could have lost its
certification under the Medicare and Medicaid programs, which would have
materially affected the number of residents at the facility and would have
called into question its ability to operate, and could have resulted in the
loss of its licensure altogether.
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.
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 for
the quarter ended March 31, 1997 and anticipates the possibility of continued
adverse financial impacts in future quarters.
<PAGE>
Operating Statistics
The following table reflects selected financial and statistical
information for Franvale:
Nine Months Year ended June 30,
ended
March 31,
1997 1996 1995
Net patient service revenues $4,493,597 $5,043,922 $4,180,471
Net revenues per patient $ 142 $ 137 $ 135
day(1)......................
Average occupancy rate(2)
89.7% 87.1% 92.7%
Total number of licensed
beds at end of period....... 128 128 91
Source of revenues:
Private(3)............. 29% 8% 8%
Government(4).......... 71% 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.
Marketing
Each of the Company's substance abuse facilities conducts its own
marketing efforts. Mount Regis has two individuals on staff who are
responsible for the marketing of that facility's services. Highland Ridge
has three individuals on staff, and Good Hope has two individuals on staff
who are dedicated to marketing the services of those facilities. Each of the
Company's psychiatric facilities conducts its own marketing efforts both
locally and nationally. Harbor Oaks has three individuals on staff and
Harmony Healthcare has two individuals on staff who are dedicated to
marketing the services of those facilities. Total Concept, BSC and PCV each
have an individual on staff whose duties include clinical, administrative and
marketing responsibilities. NPP's marketing efforts are run by the Harbor
Oaks staff. Franvale, the Company's long-term care facility, also conducts
its own local and national/regional marketing and has one individual on staff
dedicated to marketing. The Company's national marketing efforts are
coordinated by its National Marketing Director who reports to the Company's
Executive Vice President.
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 markets its substance abuse, inpatient psychiatric and
outpatient mental health services both locally and nationally. With respect
to substance abuse and psychiatric care, the Company intends to continue its
marketing strategy focusing on referral resources in safety sensitive
industries, such as transportation, oil and gas exploration, heavy machinery
and equipment, manufacturing and health services. The Company has also seen
significant growth in the gaming industry both in Nevada and nationally.
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, 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.
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'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
signifkcant 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.
Growth Strategy
The Company plans 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 it currently services.
The Company has established certain criteria to be applied in pursuing
growth opportunities. Ideally, substance abuse and psychiatric acquisition
targets would be easily accessible to transportation, would be relatively
small and located in areas perceived by the Company to be generally
underserved by the services the Company would provide.
Long-term care facilities generally serve patients within a limited
geographical area. The Company's initial acquisition focus in the long-term
care market will be in New England. The company anticipates that in
evaluating acquisition candidates in the long-term care market, it will
concentrate on facilities that are configured to provide the specialized,
subacute services which are provided at Franvale.
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.
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 Company's substance abuse facilities do not receive
reimbursement under the Medicare program for services rendered. The Franvale
and Harbor Oaks facilities do, however, rely upon such reimbursement as
presumably will other long-term care and psychiatric facilities which may be
acquired or established by the Company. The Medicare program reimburses
long-term care facilities for routine operating costs, capital costs and
ancillary costs. Routine operating costs are subject to a routine cost
limitation set for each location. Such routine cost limitations are not
applicable for the first three years of the facility's operations. Owing to
its high acuity patient population, Franvale has received an exception to
this routine cost limit for calendar years 1993, 1994, 1995 and 1996.
Capital costs include interest expenses, property taxes, lease payments and
depreciation expense. Interest and depreciation are calculated based upon
the original owner's historical cost (plus the cost of subsequent capital
improvements) when changes in ownership 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 Company's substance abuse facilities do not receive
reimbursement under any state Medicaid program. The Franvale and Harbor Oaks
facilities do, however, rely upon Medicaid reimbursement, as presumably will
other long-term care facilities which may be acquired or established by the
Company. A portion of Medicaid costs are paid by states under the Medicaid
program and the federal matching payments are not made unless the state's
portion is made. Accordingly, the timely receipt of Medicaid payments by a
facility may be affected by the financial condition of the relevant state.
Harbor Oaks, the Company's psychiatric facility, is a participant in the
Medicaid program administered by the State of Michigan. The great majority
of patients reimbursed under this program are adolescents. Harbor Oaks
receives reimbursement from the State of Michigan Medicaid program on a per
diem basis, inclusive of ancillary costs. The rate is determined by the
state and is adjusted annually based on cost reports filed by the Company.
The Franvale facility participates in the Medicaid program administered by
the Commonwealth of Massachusetts. 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 March 15, 1997 the Company had 522 employees, of which 18 (17 full
time) were employed through the Company's headquarters, 67 (44 full time) at
Highland Ridge, 41 (29 full time) at Mount Regis, 51 (25 full time) at Good
Hope, 140 (97 full time) at Franvale, 143 (91 full time) at Harbor Oaks, 14
(13 full time) at Harmony Healthcare, 5 (2 full time) at Total Concept, 6 (5
full time) at BSC, 34 (22 full time) at NPP and 3 (3 full time) at PCV. Of
the Company's 522 employees, 382 are leased from Allied Resource Management
of Florida, Inc. ("ARMFCO"), a wholly owned subsidiary of HRC ARMCO, Inc.
(formerly known as Alliance Employee Leasing Corporation), a national
employee leasing firm.
The Company has elected to lease a substantial portion of its employees to
provide more favorable employee health benefits at lower cost than would be
available to the Company as a single employer and to eliminate certain
administrative tasks which otherwise would be imposed on the management of
the Company. The Company does not lease employees for its long-term care
facility. The arrangements with ARMFCO are implemented through separate
leases with the Company relating to each facility, other than Franvale, and
are terminable by either party on 30 days' written notice. The agreements
with ARMFCO provide that for all leased employees, ARMFCO will administer
payroll (including withholding of state and federal payroll taxes), provide
for compliance with workers' compensation laws, including procurement of
workers' compensation insurance and administering claims, and procure and
provide designated employee benefits. The Company retains the right to
reject the services of any leased employee and ARMFCO has the right to
increase its fees at any time upon thirty days' written notice or immediately
upon any increase in payroll taxes, workers' compensation insurance premiums
or the cost of employee benefits provided to the leased employees.
The Company believes that it has been successful in attracting skilled and
experienced personnel; competition for such employees is intense, however,
and there can be no assurance that the Company will be able to attract and
retain necessary qualified employees in the future. None of the Company's
employees are covered by a collective bargaining agreement. The Company
believes that its relationships with its employees are good.
<PAGE>
Insurance
Each of the Company's facilities maintains separate professional liability
insurance policies. Mount Regis, Harbor Oaks, Harmony Healthcare, Total
Concept, NPP and BSC 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 identical amounts. The Company's
long-term care facility maintains general and professional liability coverage
of $2,000,000, with a limit of $1,000,000 per claim and an aggregate of
$5,000,000 excess coverage. PCV's two doctors are currently covered by their
own malpractice policies. The Company plans to obtain separate insurance for
PCV as soon as its facility is purchased.
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 litigation has been suspended pending the outcome of the
proceedings described above.
On or about November 25, 1996, the Company was named as a defendant in a
complaint filed by Bentley Associates, L.P. in the Supreme Court of the State
of New York (Civil Action No. 605870/96). The complaint arose out of an
alleged breach of contract between Bentley Associates, L.P. and Behavioral
Stress Center, Inc. for unpaid advisory fees. The complaint sought
compensatory damages and other equitable relief. On January 15, 1997, the
Company filed a motion seeking dismissal from the litigation which was
granted on April 28, 1997 by order of the court.
<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
Gerald M. Perlow, M.D. (1)(2) 58 Director and Clerk
Donald E. Robar (1)(2)............ 59 Director and Treasurer
Paula C. Wurts.................... 48 Controller, Assistant Clerk and
Assistant Treasurer
Howard W. Phillips................ 66 Director
William F. Grieco................. 43 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 was 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.
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 an annual salary of $25,000 in this
position. 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.
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.
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.
Employment Agreements
The Company has not entered into any employment agreements with its
executive officers. The Company has acquired a $1,000,000 key man life
insurance policy on the life of Bruce A. Shear.
Executive Compensation
Two executive officers of the Company received compensation in the 1996
fiscal year which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal years 1994 to 1996:
Summary Compensation Table
Long Term
Compensation
Awards
Annual Compensation
(a) (b) (c) (d) (e) (g) (i)
Name and Other Securities All Other
Principal Year Salary Bonus Annual Underlying Compensation
Position ($) ($) Compensatio Options/SARs ($)
($) (#)
Bruce A. Shear..... 1996 $294,063 -- $10,818(1) -- --
President and 1995 $237,500 -- $8,412(2) -- --
Chief Executive 1994 $245,000 -- $7,850(3) -- --
Officer
Robert H. Boswell.. 1996 $80,667 $1,000 $23,750(4) 5,000 $11,250
Executive Vice 1995 $69,750 -- $6,000(5) 15,000 $28,050
President 1994 $55,083 $5,000 $6,000(5) 14,000 $36,445
___________________________
(1) This amount represents (i) $2,650 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii) $5,146
in premiums paid by the Company with respect to life insurance for the
benefit of Mr. Shear, and (iii) $3,022 for the personal use of a Company car
held by Mr. Shear.
(2) This amount represents (i) $2,450 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii) $1,195
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.
(3) This amount represents (i) $2,483 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii) $600
paid by the Company for club memberships used by Mr. Shear for personal
activities and (iii)$ 4,767 in premiums paid by the Company with respect to
life insurance for the benefit of Mr. Shear.
(4) This amount represents (i) $3,750 automobile allowance, and (ii)
$20,000 net gain from the exercise of options and subsequent sale of stock.
(5) This amount represents an automobile allowance.
Compensation of Directors
Directors who are full time employees of the Company receive no
compensation for services as members of the Board of Directors. Directors
who are not employees of the Company receive a $2,500 stipend per year and
$1,000 for each meeting of the Board of Directors which they attend.
In addition, directors of the Company are entitled to receive certain
stock option grants under the Company's Non-Employee Director Stock Option
Plan (the ""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 March 31, 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. 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.
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 were paid in full as of March 31, 1997. Two
employees were in default. Mark Cowell forfeited 6,925 shares and Joan
Chamberlain forfeited 1,731 shares.
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-seven employees participating in the second offering under
this plan.
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.
<PAGE>
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 $3.50 per share. As of March 31, 1997, none of these options had
been exercised.
The following table provides information about options granted to the
named executive officers during fiscal 1996 under the Company's Stock Plan,
Employee Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
(a) (b) (c) (d) (e)
Number of % of
Securities Total
Underlying Options/SARs Exercise
Options/SARs Granted or Base Expiration
Name Granted (#) to Price Date
Employees ($/Share)
in
Fiscal
Year
Bruce A. Shear...... --- --- --- ---
Robert H. Boswell... 5,000 12.2% $3.50 3/21/01
The following table provides information about options exercised by the
named executive officers during fiscal 1996 and the number and value of
options held at the end of fiscal 1996.
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Shares Underlying In-the-Money
Acquired Value Unexercised Options/SARs at
Name on Realized Options/SARs at FY-End ($)
Exercise ($) FY-End (#) Exercisable/
(#) Exercisable/ Unexercisable
Unexercisable
Bruce A. Shear........ -- -- -- --
Robert H. Boswell..... 5,000 $20,000 25,250/3,730 $6,313/$933
<PAGE>
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 March 31, 1997, the Company owed an aggregate of $75,296 to related
parties.
During the nine months ended March 31, 1997, the Company paid to Mr. Shear
approximately $37,800 in principal and accrued interest under various notes.
No other consideration was paid to related parties. In connection with the
IPO, Mr. Shear contributed to the Company approximately $85,000 of accrued
and unpaid interest payable under various notes and approximately $15,000 of
accrued and unpaid guarantee fees owed to him for 20,000 shares of the
Company's Class B Common Stock. The Company paid Mr. Shear $50,000 out of
the proceeds of the IPO in reduction of the principal amount of the notes for
the payment of certain tax obligations arising from the issuance of the
stock. Upon the consummation of those transactions, Mr. Shear accepted a new
promissory note of the Company in exchange for the notes plus accrued
interest for $110,596. As of March 31, 1997, the Company owed Bruce A. Shear
$78,996 on that promissory note, which is dated March 31, 1994, matures on
December 31, 1998 and bears interest at the rate of 8% per year, payable
quarterly in arrears, and requires repayments of principal quarterly in equal
installments commencing July 1, 1996, until maturity.
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.
For fiscal year 1996, Mr. Boswell and Ms. Wurts each failed to timely file
Form 5.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 31, 1997
regarding the ownership of shares of the Company's Class A Common Stock,
Class B Common Stock and Class C Common Stock (the only classes of capital
stock of the Company outstanding as of March 31, 1997) by (i) each person
known by the Company to beneficially own more than 5% of any class of the
Company's voting securities, (ii) each director of the Company, (iii) each of
the named executive officers as defined in 17 CFR 228.402(a)(2) and (iv) all
directors and officers of the Company as a group. Unless otherwise indicated
below, to the knowledge of the Company, all persons listed below have sole
voting and investment power with respect to their shares of Common Stock,
except to the extent authority is shared by spouses under applicable law. In
preparing the following table, the Company has relied on the information
furnished by the persons listed below:
Name and Address Amount and Nature Percent
Title of Class of Beneficial Owner of Beneficial of
Owner Class
(12)
Class A Common Stock ... Gerald M. Perlow 11,462(1) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 8,750(2) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Bruce A. Shear 5,000(3) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Robert H. Boswell 29,324(4) 1.08%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 35,560(5) 1.3%
P. O. Box 2047
East Hampton, NY
11937
William F. Grieco 59,780(6)(7) 2.2%
115 Marlborough Street
Boston, MA 02116
J. Owen Todd 59,280(7) 2.2%
c/o Todd and Weld
1 Boston Place
Boston, MA 02108
All Directors and 163,301(8) 6.0%
Officers as a Group
(7 persons)
Class B Common Stock (9) Bruce A. Shear 671,259(10) 91.8%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and 671,259 91.8%
Officers as a Group
(7 persons)
<PAGE>
Class C Common Stock.... Bruce A. Shear 156,502(11) 78.3%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
J. Owen Todd 13,173(7) 6.5%
c/o Todd and Weld
1 Boston Place
Boston, MA 02108
William F. Grieco 13,173(7) 6.5%
115 Marlborough Street
Boston, MA 02116
All Directors and 169,675 84.93%
Officers as a Group
(7 persons)
_________________________
* Less than 1%.
(1) Includes 6,000 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days, having
an exercise price range of $3.50 to $6.63 per share.
(2) Includes 7,750 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days, having
an exercise price range of $3.50 to $6.63 per share.
(3) 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 27,750 shares of Class A Common Stock issuable
pursuant to currently exercisable stock options at an exercise price of $3.50
per share.
(5) Includes 35,060 shares issuable upon the exercise of a currently
exercisable Unit Purchase Option for 17,530 Units, at a price per unit of $5.99,
of which each unit consists of one share of Class A Common Stock and one warrant
to purchase an additional share of Class A Common Stock at a price per share of
$7.50 and 500 shares issuable pursuant to currently exercisable stock options
having an exercise price of $3.50 per share.
(6) Includes 500 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price of $3.50 per share
(7) Messrs. Todd and Grieco are the two trustees of the Trusts which
collectively hold 72,453 shares of the Company's outstanding Common Stock.
Gertrude Shear, Bruce A. Shear's mother, is the lifetime beneficiary of the
Trusts. In addition to the shares held by the Trusts, to the best of the
Company's knowledge, Gertrude Shear currently owns less than 1% of the Company's
outstanding Class B Common Stock and 4.97% of the Company's outstanding Class C
Common Stock.
(8) Includes an aggregate of 54,000 shares issuable pursuant to currently
exercisable stock options. Of those options, 2,750 have an exercise price of
$6.63 per share and 51,250 have an exercise price of $3.50 per share.
(9) Each share of Class B Common Stock is convertible into one share of
Class A Common Stock automatically upon any sale or transfer thereof or at any
time at the option of the holder.
(10) Includes 56,369 shares of Class B Common Stock pledged to Steven J.
Shear of 2 Addison Avenue, Lynn, Massachusetts 01902, Bruce A. Shear's brother,
to secure the purchase price obligation of Bruce A. Shear in connection with his
purchase of his brother's stock in the Company in December 1988. In the absence
of any default under this obligation, Bruce A. Shear retains full voting power
with respect to these shares.
(11) Includes 12,526 shares of Class C Common Stock pledged to Steven J.
Shear of 2 Addison Avenue, Lynn, Massachusetts 01902, Bruce A. Shear's brother,
to secure the purchase price obligation of Bruce A. Shear in connection with his
purchase of his brother's stock in the Company in December 1988. In the absence
of any default under this obligation, Bruce A. Shear retains full voting power
with respect to these shares. Excludes an aggregate of 13,173 shares of Class C
Common Stock owned by the Shear Family Trust and the NMI Trust (the "Trusts"),
of which Bruce A. Shear is a remainder beneficiary.
<PAGE>
(12) Represents percentage of equity of class, based on numbers of shares
listed under the column headed "Amount and Nature of Beneficial Ownership". Each
share of Class A Common Stock is entitled to one vote per share and each share
of Class B Common Stock is entitled to five votes per share on all matters on
which stockholders may vote (except that the holders of the Class A Common Stock
are entitled to elect two members of the Company's Board of Directors and
holders of the Class B Common Stock are entitled to elect all the remaining
members of the Company's Board of Directors). The Class C Common Stock is
non-voting.
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 April 10, 1997:
Bruce A. Shear ..........................................52.9%
J. Owen Todd..............................................0.9%
William F. Grieco.........................................0.9%
All Directors and Officers as a Group (7 persons)......55.4%
On June 4, 1997, the Company issued 1,000 shares of its Series A
Convertible Preferred Stock to ProFutures Special Equity Fund. L.P. which
amount represents 100% of the Company's issued and outstanding Series A
Convertible Preferred Stock.
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 1,027,500 1,027,500(1) 0
Investors Ltd..
- - -------------------------------------------------------------------------------
Seacrest Capital 685,000 685,000(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.
- - -------------------------------------------------------------------------------
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. 160,000 160,000(10) 0
Corporation
- - -------------------------------------------------------------------------------
ProFutures 610,000 610,000(11) 0
Special Equity
Fund, L.P.
- - -------------------------------------------------------------------------------
<PAGE>
(1) Consists only of 937,500 shares of Class A Common Stock issuable 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 number of shares of Class A Common Stock into which the debenture
may be converted is determined by dividing the principal amount to be
converted by the conversion price. The conversion price is 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. The
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.
(2) Consists of shares of Class A Common Stock issuable 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 number of shares of Class A Common
Stock into which the debenture may be converted is determined by dividing the
principal amount to be converted by the conversion price. 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.
(3) Consists of shares of Class A Common Stock issuable upon the exercise of
a warrant issued by the Company to Alpine Capital Partners, Inc. for
consulting services at an exercise price of $6.88 per share. The warrant may
be exercised in whole or in part any time prior to October 7, 2001. Alpine
Capital Partners, Inc. may not sell in excess of 5,000 shares of Class A
Common Stock in any thirty day period without the written consent of the
Company.
(4) Consists of shares of Class A Common Stock issuable upon the exercise of
a warrant issued by the Company to Barrow Street Research, Inc. for investor
relation services at an exercise price of $2.50 per share. The warrant may
be exercised in whole or in part at any time prior to February 18, 2002.
(5) Consists of shares of Class A Common Stock issued to Leon Rubenfaer,
M.D. pursuant to Section 3.1 of an Asset Purchase Agreement for NPP dated May
24, 1996 and entered into by and between certain persons and entities,
including Leon Rubenfaer, M.D., Alan Rickfelder, Ph.D. and the Company.
(6) Consists of shares of Class A Common Stock issued to Alan Rickfelder,
Ph.D. pursuant to Section 3.1 of an Asset Purchase Agreement for NPP dated
May 24, 1996 and entered into by and between certain persons and entities,
including Leon Rubenfaer, M.D., Alan Rickfelder, Ph.D. and the Company.
(7) Consists of shares of Class A Common Stock issued to Mukesh Patel, M.D.
and to Himanshu Patel, M.D. by the Company pursuant to Section 2.3 of a Stock
Exchange Agreement for PCV dated January 17, 1997 entered into by and between
Mukesh Patel, M.D., Himanshu Patel, M.D. and the Company.
(8) Consists of 114,375 shares of Class A Common Stock issued to Irwin
Mansdorf by the Company pursuant to an Agreement and Plan of Merger dated
October 31, 1996 and entered into by and between the Company, BSC-NY, Inc.,
Behavioral Stress Center, Inc., Irwin Mansdorf and Yakov Burstein. Pursuant
to a Registration Rights Agreement entered into by and among, Irwin Mansdorf,
Yakov Burstein and the Company, Dr. Mansdorf may not sell in the aggregate in
excess of 5,000 shares of Class A Common Stock during any calendar month.
(9) Consists of 35,625 shares of Class A Common Stock issued to Yakov
Burstein by the Company pursuant to an Agreement and Plan of Merger dated
October 31, 1996 and entered into by and between the Company, BSC-NY, Inc.,
Behavioral Stress Center, Inc., Irwin Mansdorf and Yakov Burstein. Pursuant
to a Registration Rights Agreement entered into by and among, Irwin Mansdorf,
Yakov Burstein and the Company, Dr. Burstein may not sell in the aggregate in
excess of 5,000 shares of Class A Common Stock during any calendar month.
(10) Consists of 160,000 shares of Class A Common Stock issuable upon the
exercise of a warrant issued by the Company to C.C.R.I Corporation at an
exercise price of $2.62 per share. The warrant is exercisable as to 40,000
shares of Class A Common Stock at any time prior to March 3, 2002. The
warrant becomes exercisable as to an additional 40,000 shares of Class A
Common Stock on July 3, 1997 provided that the closing price of the Company's
Class A Common Stock as reported by the Nasdaq SmallCap Market has been in
excess of $5.62 for ten days prior to July 3, 1997. The warrant becomes
exercisable as to an additional 40,000 shares of Class A Common Stock on
October 3, 1997 provided that the closing price of the Company's Class A
Common Stock as reported by the Nasdaq Small Cap Market has been in excess of
$7.62 for 10 days prior to October 3, 1997. The warrant becomes exercisable
as to an additional 40,000 shares of Class A Common Stock on January 3, 1998
provided that the closing price of the Company's Class A Common Stock as
reported by the Nasdaq SmallCap Market has been in excess of $9.62 for 10
days prior to January 3, 1998. In the event that any of the shares do not
become exercisable by their target dates, such shares shall become
exercisable retroactively if the respective target prices of the Company's
Class A Common Stock are achieved by March 3, 1998. All shares which become
exercisable by March 3, 1998 may be exercised at any time prior to March 3,
2002. The warrant shall terminate with respect to such shares which do not
become exercisable by March 3, 1998. C.C.R.I. Corporation may not sell in
excess of 5,000 shares on any single day or 20,000 shares in any single month
without the prior consent of the Company.
(11) Consists of 560,000 shares of Class A Common Stock issuable upon
conversion of 1,000 shares of Series A Convertible Preferred Stock assuming a
conversion price of $2.00 per share and no payment of cumulative dividends in
respect of such shares of Series A Convertible Preferred Stock prior to June
4, 1999. The number of shares of Class A Common Stock into which the Series
A Convertible Preferred Stock may be converted is determined by dividing
1,000,000 by eighty percent (80%) of the average closing price of the Class A
Common Stock as reported by NASDAQ during the five consecutive trading days
proceeding the conversion date; provided, however that in no event may the
conversion price be greater than $4.50 per share or less than $2.00 per
share. In the event the average closing bid price during the five
consecutive trading days proceeding the conversion date is below $2.00 per
share, the Company is obligated to pay to ProFutures Special Equities Fund,
L.P. the difference between such average and $2.00 multiplied by the number
of shares of Class A Common Stock into which the Series A Convertible
Preferred Stock is converted on the conversion date. Consists of 50,000
shares of Class A Common Stock issuable upon the exercise of a warrant issued
to ProFutures Special Equities Fund, L.P. at an exercise price of $2.75 per
share. The warrant may be exercised in whole or in part at any time prior to
June 4, 2000.
<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 a Subscription Agreement between the Company and ProFutures
Special Equities Fund, L.P. ("ProFutures"), the Company will pay all the fees
and expenses incident to the registration of the shares of the Company's Common
Stock issuable upon conversion of Series A Convertible Preferred Stock (the
"Registrable Securities") owned by them and offered by this Prospectus (other
than underwriting, discounts and commissions, if any). The Company was required,
purusant to the Subsctiption 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 Registrable Securities
covered by this Prospectus and owned by ProFutures. Pursuant to the Subscription
Agreement, the Company agreed to maintain the effectiveness of the Registration
Statement for a maximum of 24 months following the issuance of the Registrable
Securities 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 each 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, Burstein and ProFutures has agreed to
indemnify the Company against certain liabilities, including liabilities under
the Act. Such Registration Rights Agreements, also provide for rights of
contribution if such indemnification is not available.
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Choate, Hall & Stewart, Boston, Massachusetts.
EXPERTS
The financial statements of PHC, Inc. as of June 30, 1996 and 1995 and for
the years ended June 30, 1996 and 1995 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 given 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 Convertible Preferred Stock, $.01 par value. As of March
31, 1997, the Company had 73 record holders of its Class A Common Stock, 325
record holders of its Class B Common Stock and 342 record holders of its
Class C 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 Convertible
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 Convertible 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 Convertible Preferred Stock, if any, and as otherwise required by
Massachusetts law, a description of the preferences, voting powers,
qualifications and special or relative rights and privileges of the Class A
Common Stock, the Class B Common Stock and the Class C Common Stock is set
forth below. Except as otherwise stated below and as otherwise required by
Massachusetts law, each share of Class A Common Stock, Class B Common Stock
and Class C Common Stock has identical powers, preferences and rights.
Class A Common Stock
The Class A Common Stock is entitled to one vote per share with respect
to all matters on which shareholders are entitled to vote, except as
otherwise required by law and except that the holders of the Class A Common
Stock are entitled to elect two members to the Company's Board of Directors.
The Class A Common Stock is non-redeemable and non-convertible and has
no pre-emptive rights. The shares of Class A Common Stock offered hereby
will be fully paid and non-assessable.
Class B Common Stock
The Class B Common Stock is entitled to five votes per share with
respect to all matters on which shareholders are entitled to vote, except as
otherwise required by law. The holders of the Class B Common Stock are also
entitled to elect all of the remaining members of the Board of Directors in
excess of the two directors elected by the holders of Class A Common Stock.
The Class B Common Stock is non-redeemable and has no pre-emptive rights.
Each share of Class B Common Stock is convertible, at the option of its
holder, into a share of Class A Common Stock. In addition, each share of
Class B Common Stock is automatically convertible into one fully-paid and
non-assessable share of Class A Common Stock (i) upon its sale, gift or
transfer to a person who is not an affiliate of the initial holder thereof or
(ii) if transferred to such an affiliate, upon its subsequent sale, gift or
other transfer to a person who is not an affiliate of the initial holder.
Shares of Class B Common Stock that are converted into Class A Common Stock
will be retired and canceled and shall not be reissued.
All of the outstanding shares of Class B Common Stock are fully paid and
nonassessable.
Class C Common Stock
The Class C Common Stock is non-voting except as otherwise required by
law. The Class C Common Stock is non-redeemable and has no pre-emptive
rights.
The Class C Common Stock is convertible automatically into Class B
Common Stock, as follows: if the Company's net profit after taxes (but
before any charge is taken with respect to the conversion of the Class C
Common Stock) for the fiscal year ended June 30, 1997 is $4.0 million or
more, any shares of Class C Common Stock which have not theretofore been
converted into shares of Class B Common Stock will be converted automatically
into an equivalent number of shares of Class B Common Stock on the 90th day
following the end of the fiscal year in which the targets described above are
first achieved. If the earnings target is not achieved, all of the shares of
Class C Common Stock outstanding will be canceled and retired without any
action on the part of the shareholders, on the 90th day following the end of
the Company's fiscal year ended June 30, 1997.
If the Class C Common Stock is converted into Class B Common Stock, the
Company will be obligated concurrently to record a charge to its earnings
equal to the product of the number of shares of Class C Common Stock
converted and the fair market value of such stock at the time it is
converted. The charge will not affect the total shareholder' equity of the
Company. The Company believes that it is unlikely that the earnings target
for the fiscal year ended June 30, 1997 will be achieved.
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.
There are currently issued and outstanding 1,000 shares of the Company's
Series A Convertible Preferred Stock. The Series A Convertible Preferred
Stock is non-voting except as otherwise required by law. A $60 annual
cumulative dividend is payable in respect of each share of Series A
Convertible Preferred Stock. The Series A Convertible Preferred Stock has a
liquidation preference over all other classes and series of the Company's
stock in the amount of $1,000 per share plus all accrued but unpaid dividends
(the "Liquidation Preference"). The Series A Convertible Preferred Stock is
redeemable at the option of the Company for 130% of its purchase price on or
before the 150th day following its issuance and for 125% of its purchase
price after the 150th day following its issuance. Each share of Series A
Convertible Preferred Stock is convertible into a number of shares of Class A
Common Stock determined by dividing the Liquidation Preference by eighty
percent (80%) of the average closing bid price of the Class A Common Stock as
reported by NASDAQ during the five consecutive trading days preceding the
conversion date (the "Conversion Price"); provided, however, that in no event
shall the Conversion Price be less than $2.00 or greater than $4.50. In the
event that the Conversion Price would be less than $2.00 (but for the floor
specified in the preceding sentence), the holders of Series A Convertible
Preferred Stock are entitled to payment by the Company of the difference
between the actual Conversion Price and $2.00. Such amount shall be payable
by delivery of a promissory note requiring six equal consecutive monthly
installments of principal bearing interest at the rate of 8% per year. The
Series A Convertible Preferred Stock also has the benefit of certain limited
preemptive rights and has dilution protection entitling it to convert into a
larger number of shares of Class A Common Stock if there are subsequent
issuances of securities by the Company at less than the Conversion Price then
applicable to the Series A Convertible Preferred Stock.
Massachusetts Law and Certain Charter Provisions
Anti-Takeover Measures
In addition to the directors' ability to issue shares of Convertible
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.
<PAGE>
INDEMNIFICATION FOR SECURITIES ACT VIOLATIONS
Section 6 of the Company's Restated Articles of Organization provides,
in part, that the Company shall indemnify its directors, trustees, officers,
employees and agents against all liabilities, costs and expenses, including
but not limited to amounts paid in satisfaction of judgments, in settlement
or as fines and penalties, and counsel fees, reasonably incurred by such
person in connection with the defense or disposition of or otherwise in
connection with or resulting from any action, suit or proceeding in which
such person may be involved or with which he or she may be threatened, while
in office or thereafter, by reason of his or her actions or omissions in
connection with services rendered directly or indirectly to the Company
during his or her term of office, such indemnification to include prompt
payment of expenses in advance of the final disposition of any such action,
suit or proceeding.
In addition, the Restated Articles of Organization of the Company, under
authority of the Business Corporation Law of the Commonwealth of
Massachusetts, contain a provision eliminating the personal liability of a
director to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, or (iii) for any transaction from which the
director derived an improper personal benefit. The foregoing provision also
is inapplicable to situations wherein a director has voted for, or assented
to, the declaration of a dividend, repurchase of shares, distribution or the
making of a loan to an officer or director, in each case where the same
occurs in violation of applicable law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
<PAGE>
PHC, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
REPORT OF INDEPENDENT AUDITORS F-1
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF OPERATIONS F-3
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5
NOTES TO FINANCIAL STATEMENTS F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheets of PHC,
Inc. and subsidiaries as at June 30, 1996 and June 30, 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for each of the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the consolidated financial position
of PHC, Inc. and subsidiaries at June 30, 1996 and June 30, 1995, and the
results of their operations and their cash flows for each of the years then
ended in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
September 6, 1996
F-1
<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
1997 1996 1995
A S S E T S ------------ ---------------
(Notes C and D) (Unaudited)
Current assets:
Cash and cash equivalents . . . . . . . . $ 59,846 $ 293,515 $586,738
Accounts receivable, net of allowance for
bad debts of $1,563,824 at March 31, 1997
$1,492,983 at June 30, 1996
and $815,459 at June 30, 1995 (Notes A
and M) . . . . . . . . . . . ........... 12,352,515 8,866,065 5,964,279
Prepaid expenses. . . . . . . . . . . . . 567,996 259,893 174,539
Other receivables and advances. . . . . . 120,648 66,513 81,889
Deferred income tax asset (Note F). . . . 515,300 515,300 251,863
Other receivables, related party (Note L) 1,461,645
---------- ------------------
Total current assets . . . . . . . 15,077,950 10,001,286 7,059,308
Accounts receivable, noncurrent. . . . . . . 740,000 740,000 656,734
Loans receivable . . . . . . . . . . . . . . 126,305 113,805 96,343
Property and equipment, net (Notes A and B). 7,857,904 7,884,063 7,086,637
Deferred income tax asset (Note F) . . . . . 154,700 154,700
Deferred financing costs, net of 773,936 702,948
amortization. . . . . . . . . . . . . . .
Goodwill, net of accumulated amortization
(Note A) . . . . . . . . . . . ............. 891,690 709,573
Other assets . . . . . . . . . . . . . . . . 972,783 454,160 352,795
Net assets of operations held for sale (Note
J). . . . . . . . . . . . . .. . . . .. . . . 56,682 163,568
Other receivables noncurrent, related party
(Note L) . . . . . . . . . . . . . . . . . . 1,461,645
---------- --------- ---------
T O T A L. . . . . . . . . . . . $28,056,913$20,817,217$15,415,385
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . $ 3,942,029 $3,127,052 $2,282,765
Notes payable - related parties (Note E). 51,600 56,600 46,598
Notes payable - bank. . . . . . . . . . . 100,000
Current maturities of long-term debt 1,892,220 403,894 61,438
(Note C) . . . . . . .
Current portion of obligations under 118,591 88,052 59,212
capital leases (Note D). . . . . .
Accrued payroll, payroll taxes and 712,201 715,515 535,525
benefits . . . . . . . .
Accrued expenses and other liabilities. . 448,570 738,784 567,846
Deferred revenue. . . . . . . . . . . . . 55,453
--------- --------- ---------
Total current liabilities. . . . . 7,165,211 5,129,897 3,708,837
--------- --------- ---------
Long-term debt and accounts payable (Note C) 8,973,081 7,754,262 5,682,036
Obligations under capital lease (Note D) . . 1,585,958 1,468,475 1,474,976
Notes payable - related parties (Note E) . . 23,696 47,394 88,996
7% convertible debentures ($3,125,000 less
discount $468,750) (Note C) . . 2,656,250
--------- --------- ---------
Total noncurrent liabilities . . . 13,238,985 9,270,131 7,246,008
--------- --------- ---------
Total liabilities. . . . . . . . . 20,404,196 14,400,028 10,954,845
Commitents and contingent liabilities
(Notes A, G, H, K, M, N and O)
Stockholders' equity (Notes H and K):
Preferred stock, $.01 par value;
1,000,000 shares authorized, none
issued
Class A common stock, $.01 par value;
20,000,000 shares authorized,
2,646,884 shares issued and outstanding
in March 1997, 2,293,568
and 1,504,662 shares issued and 26,468 22,936 15,047
outstanding in June 1996 and 1995 . .
Class B common stock, $.01 par value;
2,000,000 shares authorized,
731,348 shares outstanding in
March 1997, 812,237 and 898,795 shares
outstanding in June 1996 and 1995 and
convertible into one
share of Class A common stock . . . . . 7,314 8,122 8,988
Class C common stock, $.01 par value;
200,000 shares authorized and
199,816 shares outstanding in
March 1997, 199,816 and 199,966 shares
outstanding in June 1996 and 1995 . . . 1,998 1,998 2,000
Additional paid-in capital. . . . . . . . 9,202,296 8,078,383 5,554,874
Notes receivable related to purchase of
31,000 shares of Class A
common stock. . . . . . . . . . . . . . (63,928) (75,362)
Less 8,656 Class A common treasury (37,818)
shares, at cost. . . . .
Accumulated deficit . . . . . . . . . . . (1,547,541) (1,630,322)(1,045,007)
--------- --------- ---------
Total stockholders' equity . . . . 7,652,717 6,417,189 4,460,540
---------- ---------- ---------
T O T A L. . . . . . . . . . . . $28,056,913 $20,817,217$15,415,385
The accompanying notes are an integral part hereof.
F-2
<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
March 31, Year Ended June 30,
-------------------- --------------------
1997 1996 1996 1995
(Unaudited)
Revenues:
Patient care, net $19,472,446 $15,935,970 $21,569,594 $16,408,461
(Note A).
Other . . . . . . . 806,122 164,844 233,164 128,157
------------- ---------- ---------- -----------
Total revenue. . 20,278,568 16,100,814 21,802,758 16,536,618
------------- ---------- ---------- -----------
Operating expenses:
Patient care 10,492,750 8,893,030 12,004,383 9,248,317
expenses . . .
Cost of management
contracts . . . . 232,098 93,673 146,407 149,317
Administrative
expenses . ........... 8,478,923 6,589,688 9,694,802 6,223,815
------------- ---------- ---------- -----------
Total
operating expenses .. 19,203,771 15,576,391 21,845,592 15,621,449
------------- ---------- ---------- -----------
Income (loss) from
operations. 1,074,797 524,423 (42,834) 915,169
------------- ---------- ---------- -----------
Other income (expense):
Interest income . . 106,788 10,787 14,486 28,870
Other income, net . 332,944 141,744 211,292 80,317
Start-up costs (Note (128,313) (128,313)
A) . .
Financing cost (Note (120,000)
C) . .
Interest expense. . (1,318,226) (629,988) (863,484) (577,544)
Gain on disposal of
center(Note G[2]) . . . 72,756
Gain (loss) from
operations
held for sale
(Note J). . 36,478 18,819 11,947 (9,789)
------------- ---------- ---------- -----------
Total other
income (expense). (962,016) (586,951) (754,072) (405,390)
------------- ---------- ---------- -----------
Income (loss) before
income taxes (benefit) . 112,781 (62,528) (796,906) 509,779
Income taxes (benefit)
(Note F). . . . . . 30,000 (211,591) 241,108
------------- ---------- ---------- ----------
NET INCOME (LOSS). . . $ 82,781 $ (62,528) $(585,315) $268,671
------------- ---------- ---------- ----------
Net income (loss) per
share (Note A). . . . $.03 $(.02) $(.22) $.11
------------- ---------- ---------- ----------
Weighted average number
of shares outstanding. 3,170,222 2,539,800 2,709,504 2,403,457
------------- ---------- ---------- ----------
The accompanying notes are an integral part hereof.
F-3
<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Class A Class B Class C
Common Common Common
Stock Stock Stock
Shares Amount Shares Amount Shares Amount
Balance - June 30, 1994 1,483,500 $14,835 920,000 $9,200 200,000 $2,000
Payment of notes
receivable . ..
Conversion of shares. . 21,162 212 (21,205) (212) (34)
Net income, year ended
June 30, 1995. . . . .
--------- ------ -------- ------ ------- ------
Balance - June 30, 1995 1,504,662 15,047 898,795 8,988 199,966 2,000
Payment of notes
receivable . .
Conversion of shares. . 86,554 866 (86,558) (866) (150) (2)
Exercise of options . . 22,500 225
Issuance of stock for
obligations in lieu of
cash . . 6,600 66
Exercise of bridge loan
warrants. . . . . . . . 33,509 335
Sale of stock in
connection with private
placement. . . . . . 493,750 4,937
Costs related to private
placement ..............
Exercise of IPO
warrants. . . 21,493 215
Issuance of shares with
acquisitions. . . . . . 87,000 870
ercise 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
Additional costs
related to private
placement . . . . . . .
Issuance of shares with
acquisitions. . . . . .. 229,500 2,295
Exercise of options . . 13,475 135
Payment of notes
receivable . .
Conversion of shares. . 80,889 808 (80,889) (808)
Issuance of employee
stock purchase plan
shares . . . . . . 9,452 94
Issuance of shares in
connection with
consulting agreement. 20,000 200
Issuance of warrants
for services and
financing costs . .
Payment of notes
receivable . ..
Cancellation of notes
receivable. . . . . . .
Net income, nine months
ended March 31, 1997...
--------- ------ -------- ------ ------- ------
Balance - MARCH 31, 2,646,884 $26,468 731,348 $7,314 199,816 $1,998
1997 (UNAUDITED). . . .
The accompanying notes are an integral part hereof.
F-4 (Con't on next page)
<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Notes Treasury
Paid-in Receivable Shares Accumulated
Capital for Stock Shares Amount Deficit Total
---------- ---------- --------------- ----------- --------
Balance - June 30,
1994........... $5,554,902 $(93,000) $(1,313,678)$4,174,259
Payment of notes
receivable . .. 17,638 17,638
Conversion of
shares. . (28) (28)
Net income, year
ended June 30,
1995. . . . . 268,671 268,671
--------- --------- ------ ------ ---------- ---------
Balance - June
30, 1995 5,554,874 (75,362) (1,045,007) 4,460,540
Payment of notes
receivable . . 11,434 11,434
Conversion of shares. 2 - 0 -
Exercise of options 113,575 113,800
Issuance of stock
for obligations
in lieu of
cash . ..... 36,184 36,250
Exercise of bridge
loan warrants. . . 153,617 153,952
Sale of stock in
connection with
private
placement. . . . . 1,970,063 1,975,000
Costs related to
private
placement..... (442,395) (442,395)
Exercise of IPO
warrants. . . . 137,785 138,000
Issuance of shares
with
acquisitions. . . 392,678 393,548
Exercise of private
placement warrants. 149,625 150,000
Amount paid for
options, not yet
issued............ 9,375 9,375
Compensatory stock
options. . ..... 3,000 3,000
Net loss, year ended
June 30, 1996. . . . . (585,315) (585,315)
--------- --------- ------ ------ ---------- ---------
Balance - June 30,
1996............. 8,078,383 (63,928) (1,630,322) 6,417,189
Additional costs
related to private
placement . . . . (9,650) (9,650)
Issuance of shares
with
acquisitions. . . 838,524 840,819
Exercise of
options . . 59,709 59,844
Payment of notes
receivable . . 662 662
Conversion of
shares. ....... - 0 -
Issuance of employee
stock purchase plan
shares . . . . . . 30,530 30,624
Issuance of shares in
connection with
consulting
agreement. .........79,800 80,000
Issuance of warrants
for services and
financing costs . .125,000 125,000
Payment of notes
receivable . ..... 25,448 25,448
Cancellation of
notes
receivable. . . . 37,818 8,656 $(37,818) - 0 -
<PAGE>
Net income,
nine months
ended March 31,
1997. . ...... 82,781 82,781
--------- --------- ------ ------ ---------- --------
Balance -
MARCH 31,
1997
(UNAUDITED). $9,202,296 $- 0 - 8,656 $(37,818) $(1,547,541 $7,652,717
The accompanying notes are an integral part hereof.
F-4 (Con't)
<PAGE>
PHC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
March 31, Year Ended June 30,
1997 1996 1996 1995
------------------- -----------------------
(Unaudited)
Cash flows from operating
activities:
Net income (loss) . . . . . 82,781 (62,528) $(585,315) $ 268,671
Adjustments to reconcile
net income (loss) to net
cash used in operating
activities:
Deferred tax provision (418,137) 173,137
(benefit). . . . .
Depreciation and 456,215 352,231 554,025 238,547
amortization . . . . . .
(Increase) in accounts (3,553,085)(3,139,612) (2,985,052) (1,786,691)
receivable . . . .
Compensatory stock options
and stock and warrants
issued for obligations. . 125,000 39,250
(Increase) in prepaid
expenses and other current
assets. . . . . . . . . .(308,103) (209,329) (69,978) (150,933)
(Increase) decrease in
other assets . . . 102,704 (31,971) (107,711) 162,570
Decrease in net assets
of operations held
for sale............. 56,682 107,094 106,886 32,303
Increase in accounts
payable. . . . . . . 486,649 49,769 1,414,089 314,196
Increase (decrease) in
accrued expenses and
other
liabilities . . . . . . (239,620) 169,547 295,475 258,175
--------- -------- ---------- ----------
Net cash used in
operating (2,790,777)(2,764,799) (1,756,468) (490,025)
activities --------- -------- ---------- ----------
Cash flows from investing
activities:
Acquisition of property and (359,372)(1,530,567) (1,557,419)(3,557,378)
equipment and intangibles .
Costs related to business (945,116) (575,000)
acquisitions. . . .
Loan receivable . . . . . .(2,923,290) (17,462) (91,343)
--------- ---------- ----------- ----------
Net cash used in (4,227,778) (2,105,567) (1,574,881)(3,648,721)
investing --------- ---------- ----------- ---------
activities.
Cash flows from financing
activities:
Proceeds from borrowings. 6,256,231 2,770,113 2,043,748 5,149,643
Payments on debt. . . . . (3,155,449) (678,434) (402,828)(2,651,546)
Deferred financing costs.. (711,960)
Issuance of common stock. 1,027,854 2,274,501 2,109,166 17,610
Convertible debt. . . . . 2,656,250
--------- ---------- ----------- ---------
Net cash provided
by financing
activities. 6,784,886 4,366,180 3,038,126 2,515,707
NET DECREASE IN CASH AND
CASH EQUIVALENTS. (233,669) (504,186) (293,223)(1,623,039)
Beginning balance of
cash and cash
equivalents . 293,515 586,738 586,738 2,209,777
--------- ---------- ----------- ---------
ENDING BALANCE OF CASH
AND CASH
EQUIVALENTS. . . 59,846 82,552 293,515 586,738
--------- ---------- ----------- ---------
<PAGE>
Supplemental cash flow information:
Cash paid during the year for:
Interest. . . . . . . . . 956,265 561,427 779,898 575,000
Income taxes. . . . . . 73,620 51,778 187,120 40,200
Supplemental disclosures
of noncash
investing and
financing activities:
Stock issued for acquisitions
of equipment
and services. . . . . . 841,225 323,000 393,548 84,242
Long-term debt assumed
upon acquisition 225,000 84,242
Note payable due for
litigation settlement.
Capital leases. . . . . 108,361 94,699
The accompanying notes are an integral part hereof
F-5
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to March 31, 1997 and
the nine months ended March 31, 1997 and March 31, 1996)
(NOTE A) - The Company and Summary of Significant Accounting Policies:
[1] Basis of presentation and consolidation:
PHC, Inc. ("PHC") operates substance abuse treatment centers in several
locations in the United States, a nursing home in Massachusetts, a psychiatric
hospital in Michigan and psychiatric outpatient facilities in Nevada, 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 costs related to an
addition at Quality Care prior to obtaining a license to admit patients. These
costs, amounting to $128,313, are included in other expense in the accompanying
statement of operations under the caption "Start-up Costs".
[2] Revenues and accounts receivable:
Patient care revenues are recorded at established billing rates or at the
amount realizable under agreements with third-party payors, including Medicaid
and Medicare. Revenues under third-party payor agreements are subject to
examination and adjustment, and amounts realizable may change due to periodic
changes in the regulatory environment. Provisions for estimated third party
payor settlements are provided in the period the related services are rendered.
Differences between the amounts accrued and subsequent settlements are recorded
in operations in the year of settlement.
F-6
<PAGE>
(NOTE A) - The Company and Summary of Significant Accounting Policies:
(continued)
[2] Revenues and accounts receivable: (continued)
A substantial portion of the Company's revenues at the Franvale Nursing and
Rehabilitation Center is derived from patients under the Medicaid and Medicare
programs. There have been and the Company expects that there will continue to
be, a number of proposals to limit Medicare and Medicaid reimbursement, as well
as reimbursement from certain private payor sources for both Franvale and
substance abuse treatment center services. The Company cannot predict at this
time whether any of these proposals will be adopted or, if adopted and
implemented, what effect such proposals would have on the Company.
Medicaid reimbursements are currently based on established rates depending
on the level of care provided and are adjusted proactively at the beginning of
each calendar year. Medicare reimbursements are currently based on provisional
rates that are adjusted retroactively based on annual calendar cost reports
filed by the Company with Medicare. The Company's 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.
The Company has substantial receivables from Medicaid and Medicare,
relating to its long-term care facility aggregating approximately $2,350,000
(including $415,000 related to Medicare adjustments) at June 30, 1996 which
constitutes a concentration of credit risk should these agencies defer or be
unable to make reimbursement payments as due.
[3] Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:
Estimated
Assets Useful Life
Buildings. . . . . . . . . . 20 through 39 years
Furniture and equipment. . . 3 through 10 years
Motor vehicles . . . . . . .. 5 years
Leasehold improvements . . .. term of lease
F-7
<PAGE>
(NOTE A) - The Company and Summary of Significant Accounting Policies:
(continued)
[4] Other assets:
Other assets represent deposits, deferred expenses and costs incurred in
the organization of the Companies. Organization costs are amortized over a
five-year period using the straight-line method.
[5] Goodwill, net of accumulated amortization:
The excess of the purchase price over the fair market value of net assets
acquired are being amortized on a straight-line basis over their estimated
useful lives.
[6] Earnings per share:
Net income or loss per share is based on the weighted average number of
shares of common stock outstanding during each period excluding Class C common
shares held in escrow. Common stock equivalents have been excluded since they
are antidilutive.
[7] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
[8] Cash and cash equivalents:
Cash and cash equivalents are short-term highly liquid investments with
original maturities of less than three months.
[9] Interim financial statements:
The financial statements as of March 31, 1997 and for the nine months ended
March 31, 1997 and 1996, are unaudited. In management's opinion, such unaudited
financial statements include all adjustments necessary for a fair presentation.
Such adjustments were of a normal recurring nature.
F-8
<PAGE>
(NOTE A) - The Company and Summary of Significant Accounting Policies:
(continued)
[10] Fair value of financial instruments:
The carrying amounts cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value.
(NOTE B) - Property and Equipment:
Property and equipment is comprised as follows:
June 30,
1996 1995
------------- -------------
Land. . . . . . . . . . $ 251,759 $ 239,259
Buildings . . . . . . . 7,338,838 3,834,799
Furniture and equipment 1,404,716 1,027,413
Motor vehicles. . . . . 50,889 42,459
Leasehold improvements. 301,067 216,633
Construction. . . . . . 2,753,679
------------- -------------
9,347,269 8,114,242
Less accumulated 1,463,206 1,027,605
depreciation . . . .
------------- -------------
T o t a l . . $7,884,063 $7,086,637
------------- -------------
(NOTE C) - Long-Term Debt:
At June 30, 1996, the Company substantially completed an addition and
renovation to the Quality Care facility in which 37 new beds were added. The
Company financed this addition and renovation through the United States
Department of Housing and Urban Development ("HUD"). At the final endorsement,
which took place subsequent to year-end in July 1996, an additional $479,308 of
costs were advanced bringing the final balance of the note payable to
$6,781,294. At June 30, 1996 deferred financing costs related to the
construction note payable totalled $711,960 and are being amortized over the
life of the note. Interest costs capitalized in conjunction with the
construction approximated $65,250 and $89,000 at June 30, 1996 and June 30,
1995.
F-9
<PAGE>
(NOTE C) - Long-Term Debt: (continued)
Long-term debt is summarized as follows:
June 30,
1996 1995
---------- --------
Notes payable to various entities with interest ranging
from 8% to 9% requiring monthly payments aggregating
approximately $4,000 and maturing through May 2001. . $ 58,154 $ 73,772
Note payable due in monthly installments of $2,000
including imputed interest at 8% through April 1,
1999, when the principal is due . . . . . . . . . . . 60,163 78,145
9% mortgage note due in monthly installments of $4,850
through July 1, 2012, when the remaining principal
balance is payable. . . . . . . . . . . . . . . . . . 505,485 518,224
Mortgage note payable. . . . . . . . . . . . . . . . . . 23,690
Note payable due in monthly installments of $21,506
including interest at 10.5% through November 1,
1999, collateralized by all assets of PHN and
certain receivables . . . . . . . . . . . . . . . . . 735,213
Construction obligations:
Construction note payable collateralized by real
estate and insured by HUD due in monthly
installments of $53,635, including interest at
9.25%, through December 2035. . . . . . . . . . . . 6,301,986 5,049,643
Other construction obligations to be added to note
payable . . . . . . . . . . . . . . . . . . . . . . 344,802
Note payable to a former vendor, payable in monthly
installments of $19,728 including interest at 9.5%
through February 1997 (see Note N). . . . . . . . . . 152,353
------------- ----------
T o t a l. . . . . . . . . . . . . . . . . . 8,158,156 5,743,474
Less current maturities. . . . . . . . . . . . . . . . 403,894 61,438
------------- ----------
Noncurrent maturities. . . . . . . . . . . . . . . . . $7,754,262 $5,682,036
------------- ----------
F-10
<PAGE>
(NOTE C) - Long-Term Debt: (continued)
Maturities of long-term debt are as follows as at June 30, 1996:
Year Ending
June 30, Amount
1997 . . . . . . . . . . . . . $ 403,894
1998 . . . . . . . . . . . . . 273,424
1999 . . . . . . . . . . . . . 302,539
2000 . . . . . . . . . . . . . 157,923
2001 . . . . . . . . . . . . . 56,977
Thereafter . . . . . . . . . 6,618,597
-----------
Subtotal . . . . . 7,813,354
Other construction
obligations to be
added to note
payable . . . . . . . 344,802
-----------
T o t a l. . . . . $8,158,156
-----------
Subsequent to June 30, 1996, the Company and/or its subsidiaries had the
following debt transactions:
Amounts were borrowed under revolving lines of credit resulting in
additional debt being outstanding at March 31, 1997 amounting to approximately
$1,200,000. These credit agreements will be in effect for a period of two years
with an option to renew for additional one-year periods thereafter. Principal is
due upon the expiration of the revolvers and interest is payable monthly at the
prime rate plus 2.25%. The credit is collateralized by substantially all assets
of two of the Company's subsidiaries.
F-11
<PAGE>
(NOTE C) - Long-Term Debt: (continued)
The Company issued two 7% convertible debentures due December 31, 1998 in
the aggregate principal amount of $3,125,000 with warrants to purchase 150,000
shares of Class A Common Stock at an exercise price of $2.00 per share. 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 96% of the average closing
bid price of the Common Stock as reported by NASDAQ for the 5 trading
days immediately preceding the date of conversion. This percentage drops 2% per
month beginning each full month after May 15, 1997 during which the Company does
not have a Registration Statement declared effective by the Securities and
Exchange Commission covering such shares. 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 common stock at $2.00 per
share and expire in 2003. The warrants were valued at $120,000.
The Company mortgaged a building of one of its subsidiaries for $1,100,000
of which approximately $700,000 had been drawn down at March 31, 1997. The
mortgage is payable as to interest only for the first year commencing April 30,
1997 at prime plus 5%, and monthly principal payments of $9,166 plus interest
thereafter to March 2001 at which time a balloon payment of approximately
$780,000 will become due.
A term note secured by a subsidiary's assets was issued in the amount of
$900,000 of which approximately $792,000 is outstanding at March 31, 1997. The
note is payable in 48 monthly installments including interest at 11.5%
commencing July 30, 1996 according to the following schedule:
1st two monthly installments. . . $ 4,792
Next four monthly installments. 8,625
Remainder of monthly installments 26,131
F-12
<PAGE>
(NOTE D) - Capital Lease Obligations:
At June 30, 1996, the Company is obligated under various capital leases for
equipment and real estate providing for monthly payments aggregating
approximately $19,000 for fiscal 1997 and terms expiring from December 1996
through February 2014.
The carrying value of assets under capital leases is as follows:
June 30,
1996 1995
---------- ----------
Building. . . . . . . . . . . . $1,477,800 $1,477,800
Equipment and improvements. . . 214,754 137,207
Less accumulated depreciation . (222,100) (137,057)
---------- ----------
$1,470,454 $1,477,950
---------- ----------
Future minimum lease payments under the terms of the capital lease
agreements are as follows at June 30, 1996:
Year Ending Real
June 30, Equipment Property Total
1997. . . . . . . . . $ 68,895 $ 231,000 $ 299,895
1998. . . . . . . . . 56,728 231,000 287,728
1999. . . . . . . . . 33,262 239,000 272,262
2000. . . . . . . . . 15,075 259,248 274,323
2001. . . . . . . . . 3,098 272,208 275,306
Thereafter. . . . . . 4,886,036 4,886,036
---------- ---------- ----------
Total future minimum
lease payments . . 177,058 6,118,492 6,295,550
Less amount
representing
interest . . . . . (29,711) (4,709,312) (4,739,023)
---------- ---------- ----------
Present value of
future minimum
lease payments . . 147,347 1,409,180 1,556,527
Less current
portion. . . . . 53,936 34,116 88,052
---------- ---------- ----------
Long-term
obligations
under capital
lease. . . . . . $ 93,411 $ 1,375,064 $ 1,468,475
---------- ---------- ----------
F-13
<PAGE>
(NOTE E) - Notes Payable - Related Parties:
Related party debt is summarized as follows:
June 30,
1996 1995
Note payable, president and
principal stockholder,
interest at 8%, due in
installments through
1998 . . . . . . . . . . . . . . $ 78,996 $110,596
Notes payable, other related
parties interest at 12% and
payable on demand. . . . . . . . 24,998 24,998
T o t a l . . . . . . . . 103,994 135,594
Less current maturities . . . . . . 56,600 46,598
----------- ---------
T o t a l . . . . . . . $ 47,394 $ 88,996
----------- ---------
Accrued interest related to these notes totals $3,652 and $21,950 at June
30, 1996 and June 30, 1995, respectively.
Maturities of related party debt are as follows at June 30, 1996:
Year Ending
June 30, Amount
1997. . . . . . . . . . . . . . . . $ 56,600
1998. . . . . . . . . . . . . . . . 31,600
1999. . . . . . . . . . . . . . . . 15,794
----------
T o t a l . . . . . . . . $103,994
----------
Related party interest on notes receivable related to the purchase of
Class A common stock approximated $4,295 and $3,000 for the year ended June 30,
1996 and June 30, 1995, respectively.
(NOTE F) - Income Taxes:
For the year ended June 30, 1995 the Company utilized net operating loss
carryforwards of approximately $754,000 to reduce taxable income. No significant
state income taxes were paid prior to June 30, 1995.
F-14
<PAGE>
(NOTE F) - Income Taxes: (continued)
The Company had the following deferred tax assets included in the
accompanying balance sheets:
June 30,
1996 1995
Temporary differences attributable to:
Allowance for doubtful accounts . . . . $510,000 $251,863
Depreciation. . . . . . . . . . . . . . 154,700
Other . . . . . . . . . . . . . . . . . 5,300
---------- ----------
Total deferred tax asset . . . . 670,000 251,863
Less current portion. . . . . . . . . . 515,300 251,863
Long-term portion. . . . . . . . $154,700 $ - 0 -
---------- ----------
The Company had no deferred tax liabilities at June 30, 1996 and June 30,
1995.
Income tax expense (benefit) is as follows:
Year Ended June 30,
1996 1995
Deferred income taxes (benefit) . . . $(418,137) $173,000
Current income taxes. . . . . . . . . 206,546 68,108
---------- ----------
T o t a l . . . . . . . . $(211,591) $241,108
---------- ----------
F-15
<PAGE>
(NOTE F) - Income Taxes: (continued)
Reconciliations of the statutory U.S. Federal income taxes based on a rate
of 34% to actual income taxes is as follows:
Year Ended June 30,
1996 1995
Income taxes (benefit) at statutory rate. . . $(271,000) $173,000
State income taxes. . . . . . . . . . . . . . 80,850 48,108
Increase due to nondeductible items,
primarily penalties and travel and
entertainment expenses . . . . . . . . . . 12,100 20,000
Other . . . . . . . . . . . . . . . . . . . . (33,541)
------------ ------------
T o t a l . . . . . . . . . . . . . $(211,591) $241,108
(NOTE G) - Commitments and Contingent Liabilities:
[1] Operating leases:
The Company leases office and treatment facilities and furniture and
equipment under operating leases expiring on various dates through May 2000.
Rent expense for the years ended June 30, 1996 and June 30, 1995 was
approximately $450,000 and $386,000, respectively. Minimum future rental
payments under noncancelable operating leases having remaining terms in excess
of one year as of June 30, 1996 are as follows:
Year Ending
June 30, Amount
1997 . . . . . . . . . . . . . . . $ 422,791
1998 . . . . . . . . . . . . . . . 419,490
1999 . . . . . . . . . . . . . . . 205,380
2000 . . . . . . . . . . . . . . . 59,235
--------------
Total minimum future
rental payments . . . $1,106,896
--------------
F-16
<PAGE>
(NOTE G) - Commitments and Contingent Liabilities: (continued)
[2] Center closing:
The Company decided to discontinue operations at its treatment center in
California because of poor financial performance and discharged its last patient
in August 1994. The results of operations for the year ended June 30, 1995
reflect revenues of approximately $90,000 and a net gain of approximately
$72,000 from this center.
(NOTE H) - Stock Plans:
The Company has three stock plans: a stock option plan, an employee stock
purchase plan and a nonemployee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of 300,000
shares of Class A common stock of the Company pursuant to the grant of incentive
stock options to employees or nonqualified stock options to employees,
directors, consultants and others whose efforts are important to the success of
the Company. Subject to the provisions of this plan, the compensation committee
has the authority to select the optionees and determine the terms of the options
including: (i) the number of shares, (ii) option exercise terms, (iii) the
exercise or purchase price (which in the case of an incentive stock option will
not be less than the market price of the Class A common stock as of the date of
grant), (iv) type and duration of transfer or other restrictions and (v) the
time and form of payment for restricted stock upon exercise of options.
In October 1995, the Company adopted an employee stock purchase plan which
provides for the purchase of Class A common stock at 85 percent of the fair
market value at specific dates, to encourage stock ownership by all eligible
employees. At June 30, 1996, 100,000 shares were available for purchase. During
the year ended 1996, there were no shares purchased under this plan.
Also in October 1995, the Company adopted a nonemployee directors' stock
option plan that provides for the grant of nonstatutory stock options
automatically at the time of each annual meeting of the Board. During the
meeting in which this plan was approved, options for 5,500 shares were granted
under this plan. The Company has reserved 30,000 shares for issuance under this
plan. Each outside director shall be granted an option to purchase 2,000 shares
of Class A common stock at fair market value, vesting 25% immediately and 25% on
each of the first three anniversaries of the grant.
F-17
<PAGE>
(NOTE H) - Stock Plan: (continued)
The Company had the following activity in its stock option plans for fiscal
1996 and 1995:
Number of Option Price
Shares Per Share
---------- ---------------
Option plans:
Balance - June 30, 1994. . . 60,500 $5.00 - $6.37
Granted. . . . . . . . . . . 39,000 $5.13
Cancelled. . . . . . . . . . (7,500) $5.00
Balance - June 30, 1995. . . 92,000 $5.00 - $6.37
Granted. . . . . . . . . . . 46,500 $5.25 - $7.00
Cancelled. . . . . . . . . . (1,250) $5.00
Exercised. . . . . . . . . . (22,500) $5.00 - $5.13
Balance - June 30, 1996. . . 114,750 $5.00 - $7.00
Options for 68,625 shares are exercisable as of June 30, 1996 at an average
price of $5.20.
During fiscal 1994 the Company also issued restricted stock to certain of
the directors and officers of the Company for the purchase of 31,000 shares at a
purchase price of $4.00 per share. The directors and officers were required to
pay 25% of the purchase price of their shares immediately, with the balance
being payable quarterly over three years together with interest at 6% per year
until paid in full.
Subsequent to June 30, 1996 104,250 of the above options were repriced at
the then fair market value of $3.50 per share.
F-18
<PAGE>
(NOTE I) - Segment Information:
The Company's continuing operations are classified into two primary
business segments: substance abuse/psychiatric treatment and long-term care.
Year Ended June 30,
1996 1995
-----------------------
Revenue:
Substance abuse/psychiatric
treatment. . . . . . . . . . $16,525,672 $12,227,990
Long-term care . . . . . . . . 5,043,922 4,180,471
Other. . . . . . . . . . . . . 233,164 128,157
------------ -------------
T o t a l . . . . . . . $21,802,758 $16,536,618
------------ -------------
Income (loss) from operations:
Substance abuse/psychiatric
treatment. . . . . . . . . . $ 818,188 $ 649,395
Long-term care . . . . . . . . (826,463) 243,335
Other. . . . . . . . . . . . . 146,407 149,317
General corporate. . . . . . . (180,966) (126,878)
Other income (expense), net. . (754,072) (405,390)
------------ -------------
Income (loss) before income
taxes. . . . . . . . . . . . . $ (796,906) $ 509,779
------------ -------------
Depreciation and amortization:
Substance abuse/psychiatric
treatment. . . . . . . . . . $ 349,437 $ 131,109
Long-term care . . . . . . . . 176,450 78,332
General corporate. . . . . . . 28,138 29,106
------------ -------------
$ 554,025 $ 238,547
------------ -------------
Capital expenditures:
Substance abuse/psychiatric
treatment. . . . . . . . . . $ 233,466 $ 496,793
Long-term care . . . . . . . . 982,978 2,953,679
General corporate. . . . . . . 16,583 36,542
------------ -------------
$ 1,233,027 $ 3,487,014
------------ -------------
Identifiable assets:
Substance abuse/psychiatric
treatment. . . . . . . . . . $10,877,197 $ 8,308,656
Long-term care . . . . . . . . 8,619,133 6,091,763
General corporate. . . . . . . 1,264,205 851,398
Net assets of operations held
for sale . . . . . . . . . . 56,682 163,568
------------ -------------
T o t a l . . . . . . $20,817,217 $15,415,385
------------ -------------
F-19
<PAGE>
(NOTE J) - Operations Held For Sale:
Over the past several years, the Company has been systematically phasing
out its day care center operations (STL). At June 30, 1996 and June 30, 1995,
the Company had net assets relating to its day care centers amounting to
approximately $57,000 and $164,000, respectively, which primarily represents the
depreciated cost of real estate. At June 30, 1996 the Company had one real
estate parcel remaining which was sold in October 1996 at a gain of
approximately $38,000.
The Company does not anticipate any significant future losses due to the
day care center operations.
(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, 1996:
Number of Exercise Expiration
Description Units/Shares Price Date
- - ------------------------- ------------------ ----------- -----------
Bridge warrants 4,814 units $4.57 per unit September 1998
Unit purchase option 146,077 units $5.99 per unit March 1999
IPO warrants 1,657,821 shares $7.50 per share March 1999
Private placement
warrants 703,125 shares $4.00 per share January 1999
Bridge warrants 33,696 shares $7.50 per share March 1999
Incentive bridge
warrants 8,424 shares $6.00 per share December 1998
Each unit consists of one share of Class A common stock and a warrant to
purchase one share of Class A common stock at $7.50 per share.
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
F-20
<PAGE>
(NOTE K) - Certain Capital Transactions: (continued)
Class A common stock at an exercise price of $4.00, subject to adjustment
upon certain events. The warrants expire in January 1999. Upon the issuance of
the units described above, certain additional shares of Class A common stock or
securities exercisable therefor became issuable under the antidilution
provisions of certain outstanding securities of the Company.
Also, in connection with the Company's initial public offering, present
stockholders have agreed to restrictions on approximately 200,000 shares
(designated Class C common stock, which is nonvoting) whereby some or all of
those shares will be transferred to the Company for no consideration if certain
future earnings targets are not achieved through June 30, 1997. The earnings
target for fiscal 1996 was net income of $3.0 million or more to have
restrictions released and increases to $4.0 million for the year ending June 30,
1997. When, and if, the share restrictions are released, the Company will incur
an expense based on the fair market value of the shares at the time the
restrictions lapse. The Company believes that it is unlikely that the earnings
target for the fiscal year ending June 30, 1997 will be achieved.
Subsequent to June 30, 1996, the Company also issued various warrants for
the purchase of common stock in exchange for services. The total value assigned
to these warrants was approximately $40,000 which is being amortized to expense
as the services are provided.
(NOTE L) - Acquisitions:
On September 20, 1994 the Company purchased a 64-bed healthcare facility
located in Michigan ("PHM") which provides psychiatric and other specialty
services to patients. The Company acquired the tangible, intangible, and real
property owned by the seller of the business for consideration consisting of
$759,307 in cash. The purchase price was allocated to the assets acquired as
follows:
Land. . . . . . . . . . . . . . . . . . 20,959
Building. . . . . . . . . . . . . . . . 644,152
Equipment and other assets. . . . . .. 94,196
------------
T o t a l . . . . . . . . . . $759,307
------------
F-21
<PAGE>
(NOTE L) - Acquisitions: (continued)
On November 1, 1995, the Company purchased an outpatient facility located
in Nevada ("PHN") which provides psychiatric services to patients. The Company
acquired the tangible and intangible property owned by the seller of the
business for consideration consisting of $631,000 in cash and 75,000 shares of
Class A common stock of PHC, Inc. which were valued at $323,000. The purchase
price was allocated as follows:
Accounts receivable . . . . . . . . . . $231,509
Equipment and other assets. . . . . . . 54,397
Covenant not to compete . . . . . . . . 10,500
Goodwill. . . . . . . . . . . . . . . . 671,359
Accrued benefits payable. . . . . . . . (13,765)
--------------
T o t a l . . . . . . . . . $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
--------------
T o t a l . . . . . . . . . . $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.
On August 31, 1996, the Company purchased the assets of six outpatient
behavioral health centers located in Michigan ("NPP"). The centers were
purchased for $260,000 and 15,000 shares of Class A common stock of PHC, Inc.
The Company borrowed $900,000 to finance the purchase and to provide working
capital for the centers.
F-22
<PAGE>
(NOTE L) - Acquisitions: (continued)
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 now serviced by BSC. The Company advanced Perlow the funds to acquire
those assets and at March 31, 1997 Perlow owed the Company $2,923,290 which is
expected to be repaid over two years. The Company has no ownership interest in
Perlow although the manager of Perlow is also a member of the Board of Directors
of the Company.
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 80% of the outstanding shares of the
Virginia corporation. Concurrent with the Stock Exchange Agreement the two
owners of the Virginia corporation each executed Employment Agreements with the
Virginia corporation to provide professional services. 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 Januar 17, 1997, PCV entered into a purchase and sale agreement with an
unrelated general partnership, to purchase real estate with buildings and
improvements for $600,000.
F-23
<PAGE>
(NOTE L) - Acquisitions: (continued)
Based on unaudited data, the pro forma results of operations as though the
foregoing acquisitions, which were consummated through June 30, 1996, were made
at the beginning of the periods indicated below are as follows. Management does
not believe such results are indicative of future operations. Information is not
available to present pro forma information for acquisition activity subsequent
to June 30, 1996.
Year Ended June 30,
(in thousands
except per share
data)
1996 1995
Revenues. . . . . . . . . . $22,135 $17,588
Operating expenses. . . . . 22,126 16,559
--------- ---------
Income from operations. . . 9 1,029
Other expenses, including
income taxes . . . . . . 552 (690)
--------- ---------
Net income (loss) . . . . . $ (543) $ 339
--------- ---------
Pro forma income (loss)
per share. . . . . . . . $(.20) $.14
--------- ---------
(NOTE M) - Sale of Receivables:
The Company has entered into a sale and purchase agreement whereby
third-party receivables are sold at a discount with recourse. The interest rate
is calculated at 5.5% plus the six-month LIBOR rate which is 11.3% and 11.5% at
June 30, 1996 and June 30, 1995, respectively. The amount of receivables subject
to recourse at June 30, 1996 totalled approximately $805,000 and the agreement
states that total sales of such outstanding receivables are not to exceed
$4,000,000. Proceeds from the sale of these receivables totalled approximately
$3,500,000 and $2,100,000 at June 30, 1996 and June 30, 1995, respectively. The
purchase fees related to the proceeds above of approximately $73,720 and $30,000
for the years ended June 30, 1996 and June 30, 1995, respectively, are included
in interest expense in the accompanying consolidated statement of operations.
The agreement expires December 31, 1997.
F-24
<PAGE>
(NOTE N) - Litigation:
On October 31, 1994, the Company and a supplier, NovaCare, Inc.,
("NovaCare") became parties to a Civil Action in the Superior Court Department
of the Trial Court of the Commonwealth of Massachusetts. NovaCare is an entity
which contracted with the Company in 1992 to provide rehabilitation therapy and
related administrative services to the Company's long-term care facility. During
the year ended June 30, 1996, the parties agreed to settle all claims and
counterclaims in the Civil Action whereby no additional loss accrual was
necessary. See Note C for payment terms. NovaCare has obtained (but has not
recorded) a Real Estate Attachment for a portion of the settlement amount which
may be employed if PHC does not satisfy its obligation under the settlement
agreement.
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.
The Company was named as a defendant in a complaint filed in the Supreme
Court of the State of New York. The complaint alleges claims for breach of
contract, specific performance and quantum meruit in connection with the merger
and acquisition of PHC with Behavioral Stress Center, Inc. ("BSC") on
November 1, 1996. PHC has referred the defense of the action to BSC, which has
agreed to defend and indemnify PHC for all claims in the action. The complaint
seeks compensatory damages for alleged unpaid advisory fees of approximately
$1.3 million and equitable relief. PHC subsequently moved to dismiss the
complaint on the grounds that it is not a party to nor is it responsible for any
fees allegedly owed under the contract at issue in the case. PHC's motion is
currently pending before the Court.
(NOTE O) - Contingency:
In February 1997, Quality Care was notified by regulatory authorities that
the Company was cited for deficiencies and was subjected to certain fines and
restrictions on its operations.
The Company has addressed the deficiencies and no longer has restrictions
on its operations and is negotiating the reduction of such fines.
F-25
<PAGE>
PHC, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to March 31, 1997 and
the nine months ended March 31, 1997 and March 31, 1996)
(NOTE P) - Subsequent Financing:
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 issuance of these securities will result in the issuance of
some additional Class A common shares under existing dilution agreements with
other stockholders.
F-26
<PAGE>
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
II-16
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 ....................... $ 2,912
NASDAQ Listing Fees ........................ $ 7,500
Legal Fees and Expenses ..................... $ 50,000
Accounting Fees and Expenses ................ $ 10,000
Miscellaneous .............................. $ 1,080
Total $ 71,492
The Registrant will bear all expenses shown above.
Item 26. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement,
the Registrant has issued the following securities without registering such
securities under the Securities Act.
On June 21, 1994 the Company issued 15,000 shares of Class A Common
Stock to Edwin Brown in exchange for the acquisition by the Company of Mr.
Brown's interest in Highland Ridge Hospital.
On July 7, 1995 the Company issued a warrant for the purchase of up to
1,600 shares of Class A Common Stock at an exercise price of $5.47 to
Westergard Publishing in payment for investor relations services.
On November 1, 1995 the Company issued 75,000 shares of Class A Common
Stock to Norton A. Roitman in exchange for the acquisition by the Company of
Dr. Roitman's interest in Harmony Healthcare.
On February 8, 1996 the Company issued 79 units, each of which
consisted of 6,250 shares of Class A Common Stock, and 9,375 warrants, each
of which is exercisable for one share of Class A Common Stock at an exercise
price of $4.00 per share to 11 investors in a private placement, which
resulted in net proceeds to the Company of approximately $1,524,800.
On March 15, 1996 the Company issued 12,000 shares of Class A Common
Stock to Ronald J. Dreier in exchange for the acquisition by the Company of
Mr. Dreier's interest in Total Concept.
On April 15, 1996 the Company issued a warrant to purchase up to 2,500
shares of Class A Common Stock at an exercise price of $5.50 to Peter Mintz
as payment for investor relations services.
On April 23, 1996 the Company issued a warrant to purchase up to 2,500
shares of Class A Common Stock at an exercise price of $5.50 to Barrow
Street Research as payment for investor relations services.
On September 30, 1996 the Company issued 6,000 shares of Class A Common
Stock to Leon Rubenfair and 9,000 shares of Class A Common Stock to Alan
Rickfelder in exchange for the acquisition by the Company of their interest
in NPP.
On November 1, 1996 the Company issued 114,375 shares of Class A Common
Stock to Dr. Irwin Mansdorf and 35,625 shares of Class A Common Stock to Dr.
Yakov Burstein in exchange for the acquisition by the Company of Drs.
Mansdorf's and Burstein's interest in BSC.
On January 13, 1997 the Company issued 32,250 shares of Class A Common
Stock to each of Dr. Himanshu Patel and Dr. Mukesh P. Patel in exchange for
the acquisition by the Company of their interest in PCV.
On November 11, 1996 the Company issued a warrant to purchase up to
25,000 shares of Class A Common Stock at an exercise price of $6.88 per share
to Alpine Capital Partners as payment for consulting services.
On February 18, 1997, the Company issued a warrant to purchase up to
3,000 shares of Class A Common Stock at an exercise price of $3.50 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 June 4, 1997 the Company issued 1,000 shares of its Series A
Convertible Preferred Stock to ProFutures Special Equities Fund, L.P.
resulting in $900,000 of net proceeds to the Company. Also on June 4, 1997
the Company issued a warrant to purchase up to 50,000 shares of its Class A
Common Stock at an exercise price of $2.75 per share to ProFutures Special
Equities Fund, L.P. in connection with the issuance of the Series A
Convertible Preferred Stock.
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>
Exhibits List
- - -------------------------------------------------------------------------------
Exhibit No. Description
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
23.1 Consent of Independent Auditors
- - -------------------------------------------------------------------------------
23.3 Consent of Choate, Hall & Stewart (included in Exhibit 5.1).
- - -------------------------------------------------------------------------------
3.3 Certificate of Vote of Directors establishing a Series of a Class
of Stock dated June 3, 1997.
- - -------------------------------------------------------------------------------
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.
- - --------------------------------------------------------------------------------
<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
June 11, 1997.
PHC, INC.
By: /s/_______________________
*
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
President and Chief June 11, 1997
By: Executive
* Officer and Director
(principal
Bruce A, Shear executive officer)
By: *
Robert H. Boswell Executive Vice President June 11, 1997
Controller, Assistant June 11, 1997
By: * Treasurer
Paula C. Wurts and Assistant Clerk
(principal financial
officer)
By: *
Gerald M. Perlow Clerk and Director June 11, 1997
By: *
Donald E. Robar Treasurer and Director June 11, 1997
By: *
Howard W. Phillips Director June 11, 1997
By: *
William F. Grieco Director June 11, 1997
*By: /s/ Bruce A. Shear
---------------------
Bruce A. Shear
as attorney-in-fact
<PAGE>
Item 27. Exhibits
Exhibits Index
- - -------------------------------------------------------------------------------
Exhibit No. Description
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
++1.1 Form of Underwriting Agreement
- - ------------------------------------------------------------------------------
+3.1 Restated Articles of Organization of the Registrant, as amended
- - -------------------------------------------------------------------------------
****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 Gettinge
- - -------------------------------------------------------------------------------
#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 Sto
- - -------------------------------------------------------------------------------
###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
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 Stock Transfer & Trust Company and AmeriCorp Securities, Inc,
executed in connection with the Private Placement.
- - -------------------------------------------------------------------------------
4.14 Form of Certificates representing the New Warrants (form of
certificate representing New Warrants included in Exhibit 4.8).
- - -------------------------------------------------------------------------------
4.15 Form of Warrant Agreement issued to Alpine Capital Partners,
Inc. to purchase 25,000 Class A Common shares dated October 7,
1996.
- - -------------------------------------------------------------------------------
4.16 Stock Exchange Agreement by and between PHC, Inc. and
Psychiatric & Counseling Associates of Roanoke, Inc.
- - -------------------------------------------------------------------------------
@ 4.17 Form of Warrant Agreement issued to Barrow Street Research, Inc.
to purchase 3,000 Class A Common shares dated February 18,
1997.
- - -------------------------------------------------------------------------------
@ 4.18 Form of Consultant Warrant Agreement by and between PHC, Inc.,
and C.C.R.I. Corporation dated March 3, 1997 to purchase 160,000
shares Class A Common Stock.
- - -------------------------------------------------------------------------------
@ 4.19 Amendment Agreement by and between PHC, Inc., Infinity Investors
Ltd., and Seacrest Capital Limited as parties to Regulation
D Securities Subscription Agreement dated October 7, 1996.
- - -------------------------------------------------------------------------------
@ 4.20 Loan and Security Agreement by and between PHC of Michigan, Inc.
and HCFP Funding, Inc. dated March 11, 1997 in the amount of
$300.000.
- - -------------------------------------------------------------------------------
<PAGE>
Exhibit Index (Con't)
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.
- - --------------------------------------------------------------------------------
xxx5.1 Opinion of Choate, Hall & Stewart.
- - --------------------------------------------------------------------------------
x****10.1 1993 Stock Purchase and Option Plan of PHC, Inc., as amended and
subject to approval of the Company's shareholders.
- - --------------------------------------------------------------------------------
x+10.2 Form of Stock Option Agreement of PHC, Inc.
- - --------------------------------------------------------------------------------
x+10.3 Form of Restricted Stock Agreement with list of employees and
directors who have entered into agreement and corresponding
numbers of shares.
- - --------------------------------------------------------------------------------
+10.4 Form of Subscription Agreement for Bridge financing with list of
bridge investors who have entered into agreement and
corresponding amounts subscribed for.
- - --------------------------------------------------------------------------------
++10.5 Form of 8% Subordinated Notes of PHC, Inc. with list of bridge
investors who have purchased notes and principal amounts thereof
- - --------------------------------------------------------------------------------
+10.6 Form of Warrant Agreement for Bridge financing with list of
bridge investors holding warrant agreements and corresponding
numbers of bridge units for which warrant is exercisable.
- - --------------------------------------------------------------------------------
+10.7 Lease Agreement between Blackacre Realty Trust and PHC, Inc.,
dated April 30, 1985, with amendments dated May 22, 1986, on or
about March 9, 1988, and May 1, 1992.
- - --------------------------------------------------------------------------------
***10.9 Lease Agreement between David H. Bromm and Changes, a division of
Mount Regis, dated April 1, 1995.
- - --------------------------------------------------------------------------------
+10.10 Lease Agreement between PHC, Inc. and Quality Care Centers of
Massachusetts, Inc., dated June 30, 1988, as amended on October
25, 1989.
- - --------------------------------------------------------------------------------
+10.11 Option to Purchase Agreement between PHC, Inc. and Quality Care
Centers of Massachusetts, Inc., dated July 6, 1993.
- - --------------------------------------------------------------------------------
+10.12 Lease Agreement between Anna Meta Leonhard & Claire Leonhard
Morse and PHC, Inc., dated December 13, 1989; Approval of
Assignment of lease by PHC, Inc. to PHC of California, Inc. dated
December 13, 1989.
- - --------------------------------------------------------------------------------
+10.13 Settlement Conference Order, dated February 1, 1993, in the
matter of AIHS of California, Inc. v. Claire Leonhard Morse;
Letter from Jerry M. Ackeret to Godfrey J. Tencer, dated
September 24, 1993, confirming extension of the Settlement;
Letter from Godfrey J. Tencer to Jerry M. Ackeret, dated October
4, 1993, accepting extension in letter of September 24, 1993;
Letter from Jerry M. Ackeret to PHC, Inc., dated February 15,
1994, agreeing to extension of closing of the purchase of the
property to March 8, 1994
- - --------------------------------------------------------------------------------
+10.14 Lease Agreement between Palmer-Wells Enterprises and AIHS, Inc.
and Edwin G. Brown, dated September 23, 1983, with Addendum
dated March 23, 1989, and Renewal of Addendum dated April 7,
1992; Tenant Acceptance Letter to The Mutual Benefit Life
Insurance Company and Palmer-Wells Enterprises, executed by PHC,
Inc. and Edwin G. Brown, dated June 6, 1989.
- - --------------------------------------------------------------------------------
+10.15 Sample Equipment Lease with Trans National Leasing Corp.
- - --------------------------------------------------------------------------------
+10.16 Note of PHC, Inc. in favor of Tot Care, Inc., dated January 1,
1991, in the amount of $55,000.
- - --------------------------------------------------------------------------------
+10.17 Note of PHC, Inc. in favor of Humpty Dumpty School, Inc., dated
March 1, 1991, in the amount of $25,000.
- - -------------------------------------------------------------------------------
+10.18 Note of PHC, Inc. in favor of Bruce A. Shear, dated April 1,
1993, in the amount of $152,500; Subordination letter from
Aquarius Realty to Malden Trust Company as to $50,000 of debt,
dated 1983, regarding debt of PHC, Inc.; Subordination letter
from Bruce A. Shear and Steven J. Shear, individually, to Malden
Trust Company as to $80,000 of debt, dated 1983, regarding debt
of PHC, Inc.
- - -------------------------------------------------------------------------------
+10.19 Note of PHC, Inc. in favor of Steven J. Shear, dated April 1,
1993, in the amount of $25,000
- - -------------------------------------------------------------------------------
+10.20 Note of PHC, Inc. in favor of Gertrude Shear, dated April 15,
1993, in the amount of $27,700.
- - --------------------------------------------------------------------------------
+10.21 Note of PHC, Inc. in favor of Mark S. Cowell and Karen K. Cowell,
dated May 5, 1993, in the amount of $10,000.
- - --------------------------------------------------------------------------------
<PAGE>
Exhibit Index(Con't)
- - --------------------------------------------------------------------------------
Exhibit No. Description
- - --------------------------------------------------------------------------------
+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.
- - --------------------------------------------------------------------------------
+10.33 Deed of Trust Note of Mount Regis Center Limited Partnership in
favor of Douglas M. Roberts, dated July 28, 1987, in the amount
of $560,000, guaranteed by PHC, Inc., with Deed of Trust executed
by Mount Regis Center, Limited Partnership of even date.
- - -------------------------------------------------------------------------------
+10.34 Security Agreement Note of PHC of Virginia, Inc. in favor of
Mount Regis Center, Inc., dated July 28, 1987, in the amount of
$90,000, guaranteed by PHC, Inc., with Security Agreement, dated
July 1987.
- - -------------------------------------------------------------------------------
+10.35 Form of Agreement amending Deed of Trust Note (by Mount Regis
Center Limited Partnership to Douglas M. Roberts, dated July 28,
1987) and Security Agreement Note (by PHC of Virginia, Inc. to
Mount Regis Center, Inc., dated July 28, 1987, and assigned by
Mount Regis to Douglas M. Roberts, effective August 1, 1987) by
and between Douglas M. Roberts, PHC of Virginia, Inc., Mount
Regis Limited Partnership and PHC, Inc., dated September, 1991.
- - --------------------------------------------------------------------------------
+10.37 Note of Quality Care Centers of Massachusetts, Inc. in favor of
Bruce A. Shear, dated April 1, 1993, in the amount of $10,000.
- - --------------------------------------------------------------------------------
10.38 Exhibit intentionally omitted.
- - --------------------------------------------------------------------------------
+10.42 Note of PHC of California, Inc. in favor of Bruce A. Shear, dated
April 1, 1993, in the amount of $100,000.
- - --------------------------------------------------------------------------------
+10.43 Note of PHC of California, Inc. in favor of Marin Addiction
Counseling & Treatment, Inc., dated January 30, 1990, in the
amount of $273,163 with Agreement, dated April 26, 1990,
evidencing assignment of note by Marin Addiction Counseling
Treatment, Inc. to Circle of Help, Inc.; Asset Purchase Agreement
by and between Marin Addiction Counseling & Treatment, Inc. and
PHC of California, Inc., dated January 19, 1990; Waiver Letter
from Circle of Help, Inc. to PHC, Inc., dated February 15, 1994.
- - --------------------------------------------------------------------------------
<PAGE>
Exhibit Index (Con't)
- - --------------------------------------------------------------------------------
Exhibit No. Description
- - --------------------------------------------------------------------------------
+10.45 Promissory Note and Corporate Guarantee of STL, Inc. in favor of
Joseph and Theodora Koziol, dated November 30, 1992, in the
amount of $40,000, Corporate Guarantee by PHC, Inc., with Release
of All Demands of even date attached.
- - ------------- -----------------------------------------------------------------
+10.50 Letter agreement between PHC, Inc. and Leonard M. Krulewich, as
assignee of the ENOBLE Corporation, dated April 26, 1993,
relative to the transfer of ownership of the DoN; Request for
Transfer of DoN, dated May 28, 1993; Request for Transfer of Site
of DoN, dated May 28, 1993; Request for Extension of
Authorization Period from June 27, 1993, dated June 24, 1993;
Letter from counsel of AtlantiCare Medical Center to
Massachusetts Department of Public Health, dated July 13, 1993.
- - --------------------------------------------------------------------------------
***10.51 Medical Director Agreement between Mukesh P. Patel and Mount
Regis Center, dated September 1, 1991
- - --------------------------------------------------------------------------------
+10.52 Copy of Note of Bruce A. Shear in favor of Steven J. Shear, dated
December 1988, in the amount of $195,695; Pledge Agreement by
and between Bruce A. Shear and Steven J. Shear, dated December
15, 1988; Stock Purchase Agreement by and between Steven J.
Shear and Bruce A. Shear, dated December 1, 1988.
- - --------------------------------------------------------------------------------
+10.53 Management Agreement by and between STL, Inc. and Lillian
Furbish, dated September 8, 1993.
- - --------------------------------------------------------------------------------
+10.55 Letter Agreement by and between PHC, Inc. and the Utah Group,
dated November 5, 1993.
- - --------------------------------------------------------------------------------
**10.56 Note of PHC, Inc. in favor of Bruce A. Shear, dated March 31,
1994, in the amount of $110,596.
- - --------------------------------------------------------------------------------
**10.57 Consent of PHC, Inc. and PHC of Virginia, Inc., dated June 10,
1994, as to the transfer of partnership property to PHC of
Virginia, Inc.; Deed by and between Mount Regis Center, Limited
Partnership and PHC of Virginia, Inc., dated June 10, 1994;
Consent to Transfer by Douglas M. Roberts, dated June 23, 1994;
Form of Mount Regis Center, Limited Partnership Assignment and
Assumption of Limited Partnership Interest, by and between PHC
of Virginia, Inc. and each assignor dated as of June 30, 1994;
Mount Regis Center, Limited Partnership Certificate of
Cancellation of Limited Partnership, filed June 30, 1994.
- - --------------------------------------------------------------------------------
**10.58 Letter from PHC of California, Inc. to Circle of Help, Inc.,
dated September 20, 1994, confirming agreement as to payment by
PHC of California, Inc. to Circle of Help, Inc. in the amount of
$100,000 as full satisfaction of promissory note of PHC of
California, Inc. in favor of Marin Addiction Counseling and
Treatment, Inc. in the amount of $273,163 which was assigned to
Circle of Help, Inc. on April 26, 1990.
- - --------------------------------------------------------------------------------
**10.59 Settlement Agreement and Mutual General Release, by and between
PHC of California, Inc. and of the Anna Leonhard Trust, Arnold
Leonhard, individually and as Trustee of the Anna Leonhard Trust,
and Lloyd Leonhard.
- - --------------------------------------------------------------------------------
**10.60 Estoppel, Consent and Subordination Agreement, by and between
Zions First National Bank and Highland Ridge Hospital, dated June
30, 1994.
- - --------------------------------------------------------------------------------
**10.61 Regulatory Agreement for Multifamily Housing Projects, by and
between Quality Care Centers of Massachusetts, Inc. and Secretary
of Housing and Urban Development, dated September 8, 1994;
Mortgage of Quality Care Centers of Massachusetts, Inc. in favor
of Charles River Mortgage, dated September 8, 1994; Mortgage Note
of Quality Care Centers of Massachusetts, Inc. in favor of
Charles River Mortgage Company, Inc., in the amount of
$6,926,700, dated September 8, 1994; Security Agreement by and
between Quality Care Centers of Massachusetts, Inc. and Charles
River Mortgage Company, Inc., dated September 8, 1994; Standard
Form Agreement Between Owner and Architect for Housing Services,
by and between Quality Care Centers of Massachusetts, Inc. and
David H Dunlap Associates, Inc., dated November 5, 1992;
Construction Contract by and between Quality Care Centers of
Massachusetts, Inc. and Corcoran Jennison Construction Co., Inc.,
dated September 8, 1994, and related documents.
- - --------------------------------------------------------------------------------
**10.62 First Amendment to Management Agreement, by and between STL, Inc.
and Lillian Furbish, dated September 21, 1994.
- - --------------------------------------------------------------------------------
<PAGE>
Exhibit Index (Con't)
- - --------------------------------------------------------------------------------
Exhibit No. Description
- - --------------------------------------------------------------------------------
*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
- - -------------------------------------------------------------------------------
##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.
- - -------------------------------------------------------------------------------
<PAGE>
Exhibit Index (Con't)
- - -------------------------------------------------------------------------------
Exhibit No. Description
- - -------------------------------------------------------------------------------
++++10.87 Corporate Guaranty by PHC, Inc., PHC of Rhode Island, Inc.,
PHC of Virginia, Inc., PHC of Nevada, Inc. and LINC Anthem
Corporation dated July 25, 1996 for North Point-Pioneer, Inc.
- - -------------------------------------------------------------------------------
++++10.88 Stock Pledge and Security Agreement by and between PHC, Inc.
and LINC Anthem Corporation.
- - -------------------------------------------------------------------------------
++++10.89 Secured Promissory Note of North Point-Pioneer, Inc. in favor
of LINC Anthem Corporation dated July 25, 1996 in the amount
of $500,000.
- - -------------------------------------------------------------------------------
++++10.90 Lease Agreement by and between PHC, Inc. and 94-19 Associates
dated October 31, 1996 for BSC-NY, Inc.
- - -------------------------------------------------------------------------------
++++10.91 Note by and between PHC Inc. and Yakov Burstein in the amount
of $180,000.
- - -------------------------------------------------------------------------------
++++10.92 Note by and between PHC, Inc. and Irwin Mansdorf in the amount
of $570,000
- - -------------------------------------------------------------------------------
++++10.93 Employment Agreement by and between BSC-NY, Inc. and Yakov
Burstein dated November 1, 1
- - -------------------------------------------------------------------------------
++++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, 199
- - -------------------------------------------------------------------------------
++++10.100 Consulting Agreement by and between Perlow Physicians, P.C.
and Irwin Mansdorf dated November 1, 1996.
- - -------------------------------------------------------------------------------
++++10.101 Option Agreement by and between Pioneer Healthcare and Gerald
M. Perlow M.D., dated November 15, 1996.
- - -------------------------------------------------------------------------------
xx****10.102 Asset Purchase Agreement by and among Norton A. Roitman, M.D.,
Clinical Services of Nevada, Inc., Harmony Healthcare
Services, Inc. and the Company dated October 28, 1995.
- - -------------------------------------------------------------------------------
10.103 Secured Bridge Note in the principal amount of $400,000 by and
between PHC of Michigan, Inc. and HealthCare Financial
Partners, Inc. dated January 13, 1996.
- - -------------------------------------------------------------------------------
-----------------------------------------------------------------
10.104 Guaranty by PHC. Inc. for Secured Bridge Note in principal
amount of $400,000 by and between PHC Michigan and HealthCare
Financial Partners, Inc. dated January 17, 1997.
- - -------------------------------------------------------------------------------
*****10.105 First Amendment to Lease Agreement and Option Agreement by and
between NMI Realty, Inc. and PHC of Rhode Island, Inc. dated
December 20, 1996.
- - -------------------------------------------------------------------------------
10.106 Mortgage by and between PHC of Michigan, Inc. and HCFP Funding
Inc. dated January 13, 1997 in the amount of $2,000,000.
- - -------------------------------------------------------------------------------
10.107 Employment Agreement for Dr. Himanshu Patel; Employment
Agreement for Dr. Mukesh Patel; and Fringe Benefit Exhibit for
both of the Patels' Employment Agreements
- - -------------------------------------------------------------------------------
10.108 Plan of Merger by and between Pioneer Counseling of Virginia,
Inc. and Psychiatric & Counseling Associates of Roanoke, Inc.
- - -------------------------------------------------------------------------------
10.109 Sales Agreement by and between Dillon & Dillon Associates and
Pioneer Counseling of Virginia Inc. for building and land
located at 400 East Burwell St., Salem Virginia in the amount
of $600,000.
- - -------------------------------------------------------------------------------
10.110 Loan and Security Agreement by and between PHC of Michigan,
Inc. and HCFP Funding Inc., in the amount of $1,500,000.
- - -------------------------------------------------------------------------------
++++10.111 Revolving Credit Agreement by and between HCFP and PHC of
Michigan, Inc. in the amount of $1,500.000.
- - -------------------------------------------------------------------------------
<PAGE>
Exhibit Index (Con't)
- - -------------------------------------------------------------------------------
Exhibit No. Description
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
+++++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, 199
- - -------------------------------------------------------------------------------
@ 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,
- - -------------------------------------------------------------------------------
@ 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.
- - -------------------------------------------------------------------------------
##16.1 Letter on Change in Independent Public Accountants
- - -------------------------------------------------------------------------------
****21.1 List of Subsidiaries.
- - -------------------------------------------------------------------------------
23.1 Consent of Independent Auditors
- - -------------------------------------------------------------------------------
23.2 Exhibit intentionally omitted.
- - -------------------------------------------------------------------------------
23.3 Consent of Choate, Hall & Stewart (included in Exhibit 5.1).
- - -------------------------------------------------------------------------------
99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995.
- - -------------------------------------------------------------------------------
+ Filed as an exhibit to the Company's Registration Statement
on Form SB-2 dated March 2, 1994 (Commission file number
33-71418).
- - -------------------------------------------------------------------------------
++ Filed as an exhibit to the Company's quarterly report on Form
10-QSB, filed with the Securities and Exchange Commission
(Commission file number 0-23524) on February 14, 1995.
- - -------------------------------------------------------------------------------
+++ Filed as an exhibit to the Company's quarterly report on Form
10-QSB, filed with the Securities and Exchange Commission
(Commission file number 0-23524) on May 15, 1995.
- - --------------------------------------------------------------------------------
++++ Filed as an exhibit to the Company's quarterly report on Form
10-QSB, filed with the Securities and Exchange Commission
(Commission file number 0-23524) on December 5, 1996.
- - --------------------------------------------------------------------------------
+++++ Filed as an exhibit to the Company's quarterly report on Form
10-QSB, filed with the Securities and Exchange Commission
(Commission file number 0-23524) on February 25, 1997.
- - -------------------------------------------------------------------------------
* Filed as an exhibit to the Amendment to the Company's Current
Report on Form 8-K, filed with the Securities and Exchange
Commission (Commission file number 0-23524) on August 15, 1994.
- - -------------------------------------------------------------------------------
** Filed as an exhibit to the Company's Annual Report on Form
10-KSB, filed with the Securities and Exchange Commission
(Commission file number 0-23524) on September 28, 1994.
- - -------------------------------------------------------------------------------
<PAGE>
- - ------------------------------------------------------------------------------
*** Filed as an exhibit to the Company's Annual Report on Form
10-KSB, filed with the Securities and Exchange Commission
(Commission file number 0-23524) on October 2, 1995.
- - ------------------------------------------------------------------------------
**** Filed as an exhibit to the Company's Post-Effective Amendment
No. 2 on Form S-3 to Registration Statement on Form SB-2
under the Securities Act of 1933 dated November 13, 1995
(Commission file number 33-71418).
- - ------------------------------------------------------------------------------
***** Filed as an exhibit to the Company's Post-Effective Amendment
No. 2 on Form S-3 to Registration Statement on Form SB-2
under the Securities Act of 1933 dated November 13, 1995
(Commission file number 33-71418).
- - -------------------------------------------------------------------------------
# Filed as an exhibit to the Company's Registration Statement on
Form 3 dated March 12, 1996 (Commission file number
33-714418).
- - -------------------------------------------------------------------------------
## 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.
- - -------------------------------------------------------------------------------
<PAGE>
Exhibit Index (Con't)
- - -------------------------------------------------------------------------------
Exhibit No. Description
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
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 in error as an Amendment to SB-2, filed April 15 1997
- - -------------------------------------------------------------------------------
@ Filed as an Exhibit to the Company's Registration Statement on
Form SB-2 dated April 15, 1997 (Commission File No. 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.
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>
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
June 11, 1997.
PHC, INC.
By: *
Bruce A. Shear, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on
the dates indicated.
Signature Title Date
By: /s/ Bruce A. Shear President and Chief June 11, 1997
Bruce A. Shear Executive
Officer and Director
(principal
executive officer)
By: /s/ Robert H. Boswell Executive Vice President June 11, 1997
Robert H. Boswell
By: /s/ Paula C. Wurts Controller, Assistant June 11, 1997
Paula C. Wurts Treasurer
and Assistant Clerk
(principal
financial officer)
By: /s/ Gerald M. Perlow Clerk and Director June 11, 1997
Gerald M. Perlow
By: /s/ Donald E. Robar Treasurer and Director June 11, 1997
Donald E. Robar
By: /s/ Howard W. Phillips Director June 11, 1997
Howard W. Phillips
By: /s/ William F. Grieco Director June 11, 1997
William F. Grieco
*By: /s/ Bruce A. Shear
Bruce A. Shear
as attorney-in-fact
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement on Form SB-2 of
our report dated September 6, 1996 on our audit of the consolidated financial
statements of PHC, Inc. as at June 30, 1996 and June 30, 1995 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
June 10, 1997
<PAGE>
Exhibit 23.3
CHOATE, HALL & STEWART
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
EXCHANGE PLACE
53 STATE STREET
BOSTON, MASSACHUSETTS 02109-2891
TELEPHONE (617) 248-5000
FACSIMILE (617) 248-4000
TELEX 49615860
June 5, 1997
PHC, Inc.
200 Lake Street - Suite 102
Peabody, MA 01960
Gentlemen:
This opinion is delivered to you in connection with the registration
statement on Form SB-2 (the "Registration Statement") filed oh April 15,
1997, by PHC Inc. (the "Company"), as amended in pre-effective amendment #1
to be filed on or about June 9, 1997 (the "Amendment") under the Securities
Act of 1933, as amended, for registration under said Act of 2,740,000 shares
of Class A Common Stock, $.01 par value per share (the "Class A Common
Stock") of the Company. Terms not otherwise defined herein shall he deemed
to have the meaning ascribed to such terms in the Registration Statement.
In connection with rendering this opinion, we have examined such
corporate records, certificates and other documents as we have considered
necessary for the purposes of this opinion. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to the original documents of all
documents submitted to us as copies and the authenticity of the originals of
such latter documents. As to any facts material to our opinion, we have,
when relevant facts were not independently established, relied upon the
aforesaid records, certificates and documents.
In rendering this opinion, we have assumed that the Company's
capitalization and Articles of Organization will not change and the Company
will continue to reserve an adequate number of shares of Class A Common Stock
for issuance upon the conversion of outstanding debentures, the exercise of
outstanding warrants and options, the exercise of warrants and options
issuable upon the exercise of outstanding warrants and options and the
conversion of the Company's Series A Convertible Preferred Stock.
Based upon the foregoing, we are of the opinion that, provided all
outstanding debentures warrants, options and Series A Convertible Preferred
Stock currently held by the Selling Security Holders are converted and
exercised in accordance with their terms, the shares of Class A Common Stock
to be sold by the Selling Security Holders will be legally issued, fully paid
and non-assessable.
We hereby consent to be named in the Registration Statement and in any
amendments thereto as counsel for the Company, to the statements with
reference to our firm made in the Registration Statement under the caption
"Legal Matters," and to the filing and use of this opinion as an exhibit to
the Registration Statement.
Very truly yours,
CHOATE, HALL & STEWART
dsl:335650
<PAGE>
II-19
Exhibit 3.3
FEDERAL
IDENTIFICATION
NO. 04-2601571
Form CD-26-5M-8-83
STAMP:
Secretary of
The
Commonwealth THE COMMONWEALTH OF MASSACHUSETTS
97-JUN-3 PM
3:02 OFFICE OF THE MASSACHUSETTS SECRETARY OF STAT
Corporation
Division MICHAEL JOSEPH CONNOLLY, Secretary
ONE ASHBURTON PLACE, BOSTON, MASS 02108
CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING
A SERIES OF A CLASS OF STOCK
General Laws, Chapter 156B. Section 26
We, Bruce A.Shear
President and
Paula C. Wurts
Assistant Clerk of
PHC, Inc.___________________________________________
(Name of Corporation)
located at: 200 Lake Street, Suite 102, Peabody, MA 01960
hereby certify that at a meeting of the directors of the corporation held on May
30, 1997, the following vote establishing and designating a series of a class of
stock and determining the relative rights and preferences thereof was duly
adopted::
See Continuation Sheet 2A attached hereto and incorporated herein by
reference.
.
NOTE: Votes for which the space provided above is not sufficient should be set
out on continuation sheets to be
numbered 2A, 2B, etc. Continuation sheets must have a left-hand margin 1
inch wide for binding and
shall be 8-1/2" x 11". Only one side should be used.
<PAGE>
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto
signed our names this 3rd day of June in the year 1997.
________________________________________________________, President
Bruce A. Shear
________________________________________________________,Assistant Clerk
Paula C Wurts
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
Certificate of Vote of Directors Establishing
A Series of a Class of Stock
(General Laws, Chapter 156B, Section 26)
I hereby approve the within certificate and, the
filing fee in the amount of $
having been paid, said certificate is hereby filed this
day of , 19
MICHAEL JOSEPH CONNOLLY
Secretary of State
TO BE FILLED IN BY CORPORATION
PHOTO COPY OF CERTIFICATE TO BE SENT
TO: Willie J. Washington, Esq.
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, MA 02109
Telephone (617) 248-5000, x6625
Copy Mailed
<PAGE>
PHC, INC.
CONTINUATION SHEET 2A
TO
CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING
A SERIES OF A CLASS OF STOCK
RESOLVED, That the proposed form of the Certificate of Vote of Directors
Establishing a Series of a Class of Stock, in the form attached
hereto, providing for the authorization of 1,000 shares of
Series A Convertible Preferred Stock, $.01 par value ("Series A
Preferred Stock") having the terms set forth in the attached
Certificate of Vote, be and it hereby is approved; and that the
President and Clerk of this Corporation be and hereby are
authorized and directed to execute and file such Certificate of
Vote with the Secretary of State of the Commonwealth of
Massachusetts.
FURTHER
RESOLVED, That the Corporation offer for sale to certain investors up to
1,000 shares of its Series A Preferred Stock for a purchase
price of $1,000 per share, and that all and any and each,
independently of the others, of the officers and Directors of
this Corporation are hereby authorized and directed to offer and
sell such shares of Series A Preferred Stock to such investors;
and that the President and Treasurer of the Corporation be and
hereby are authorized to issue and deliver such shares of Series
A Preferred Stock and to execute and deliver to each of such
investors a certificate representing the number of shares of
Series A Preferred Stock so purchased against receipt of the
consideration hereinabove specified.
FURTHER
RESOLVED, That the form, terms and provision of the Subscription
Agreement, in the form submitted to this Board, with respect to
the above-described offering to investors, is hereby in each and
every respect approved; and that each and every transaction
effected or to be effected pursuant to, and in substantial
accordance with, the terms of such document is hereby in each
and every respect authorized and approved.
FURTHER
RESOLVED. That this Corporation enter into a Subscription Agreement with
each of the investors referred to in the foregoing resolutions,
and that the President of the Corporation be and hereby is
authorized to execute and deliver such Subscription Agreements;
and that the President be and hereby is authorized and directed
to execute and deliver any other documents or instruments and to
take any other actions which he deems to be necessary and
appropriate to comply with the terms of such Subscription
Agreements or otherwise to effect the purposes and intent of
this resolution, his execution and delivery of such documents or
instruments to be conclusive as to his authority to so act.
<PAGE>
FURTHER
RESOLVED, That the form of stock certificate for Series A Preferred Stock
annexed hereto be and it hereby is adopted as the certificate
for such shares of this Corporation's Series A Preferred Stock.
FURTHER
RESOLVED, That it is desirable and in the best interest of this
Corporation that its securities be qualified or registered for
sale in various states; that the President and the Clerk are
hereby authorized to determine the states in which appropriate
action shall be taken to qualify or register for sale all or
such part of the securities of this Corporation as said officer
may deem advisable; that said officer is hereby authorized to
perform on behalf of this Corporation any and all such acts as
he may deem necessary or advisable in order to comply with the
applicable laws of any such states, and in connection therewith
to execute and file all requisite papers and documents,
including, but not limited to, applications, reports, surety
bonds, irrevocable consents and appointments of agents for
service of process; and the execution by such officer of any
such papers or documents or the doing by him of any act in
connection with the foregoing matters shall conclusively
establish his authority therefor from this Corporation and the
approval and ratification by this Corporation of the papers and
documents so executed and the action so taken.
FURTHER
RESOLVED, That, in connection with the immediately preceding resolution,
any and all resolutions appointing or authorizing any officers
or agencies of any state or jurisdiction of the United States as
agent for the service of process upon this Corporation which may
be required by the securities laws of such state or jurisdiction
in order to permit the securities of this Corporation to be
offered or sold therein for the purpose of offering or selling
shares of its Series A Preferred Stock therein, are hereby
adopted in the form prescribed, as fully as if set out verbatim
herein, provided that such resolutions do not require or
obligate this Corporation in such state or jurisdiction to
register or obtain a license as a dealer or broker under the
securities laws of such state or jurisdiction; and that the
Clerk of this Corporation be and hereby is authorized to certify
that any such resolution has been adopted by this Corporation.
FURTHER
RESOLVED, That the officers of this Corporation be and each of them singly
hereby is authorized to effect the registration with the
Securities and Exchange Commission under the Securities Act of
1933 of the re-sale by the purchasers of the Series A Preferred
Stock authorized pursuant to the preceding resolution of the
shares of common stock of this Corporation issuable on the
conversion of the Series A Preferred Stock.
2
<PAGE>
FURTHER
RESOLVED, That any officer of this Corporation be and hereby is
authorized to execute and deliver, in the name and on behalf of
this Corporation, and, if desired, to affix the corporate seal
to all such documents, instruments and certificates and to take
all such further and other action as he deems necessary or
advisable to carry out the intent and purposes of the foregoing
resolutions.
DSI.344650
3
<PAGE>
SCHEDULE I
PHC, INC.
RESOLUTION ESTABLISHING RIGHTS AND PREFERENCES
FOR SERIES A CONVERTIBLE PREFERRED STOCK
RESOLVED, that there shall be a series of shares of the Corporation
designated "Series A Convertible Preferred Stock"; that the number of such
shares, of such series shall be 1,000, that the Corporation issue such
shares, and the the rights and preferences of such series (the "6%
Preferred") and the limitations or restrictions thereon, shall be as set
forth herein.
The following terms and conditions shall be adopted and incorporated
by reference into the foregoing resolutions as if fully set forth therein:
1. Dividends.
(a) The holders of the 6% Preferred shall be entitled to receive
out of any assets legally available therefor cumulative dividends at the
rate of $60 per share per annum, payable quarterly in arrears on March 31,
June 30, September 30 and December 31 of each year in preference and
priority to any payment of any dividend on the Common Stock or any other
class or series of stock of the Corporation. Such dividends shall accrue
on any given share from the day of original issuance of such share and
shall accrue from day to day whether or not earned or declared. If at any
time dividends on the outstanding 6% Preferred at the rate set forth above
shall not have been paid or declared and set apart for payment with
respect to all preceding periods, the amount of the deficiency shall be
fully paid or declared and set apart for payment, but without interest,
before any distribution, whether by way of dividend or otherwise, shall be
declared or paid upon or set apart for the shares of any other class or
series of stock of the Corporation.
(b) Any dividend payable on a dividend payment date may be paid,
at the option of the Corporation, either (i) in cash or (ii) in shares of
6% Preferred valued at $1,000 per share, if the Common Stock issuable upon
conversion of such shares has been registered for resale under the
Securities Act of 1933, as amended (the "Act"), and the registration
statement including a current prospectus with respect thereto remains in
effect at the date of delivery of such shares, and if the Corporation
shall have given written notice of its intention to pay such dividend in
stock to all holders of the 6% Preferred at least ten (10) days before the
record date for such dividend.
2. Liquidation Preference; Redemption.
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary, the holders of the 6%
Preferred shall be entitled to receive, prior and in preference to any
distribution of any assets of the Corporation to the holders of any other
Class or series of shares, the amount of $ 1,000 per share plus any
accrued but unpaid dividends (the "Liquidation Preference").
(b) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or a sale of all or substantially all
of the assets of the Corporation, shall, at the option of the holders of
the 6% Preferred, be deemed a liquidation, dissolution or winding up
within the meaning of this Section 2 if the shares of stock of the
Corporation outstanding immediately prior to such transaction represent
immediately after such transaction less than a majority of the voting
power of the surviving corporation (or of the acquirer of the
Corporation's assets in the case of a sale of assets). Such option may be
exercised by the vote or written consent of holders of a majority of the
6% Preferred at any time within thirty (30) days after written notice
(which shall be given promptly) of the essential terms of such transaction
shall have been given to the holders of the 6% Preferred in the manner
provided by law for the giving of notice of meetings of shareholders.
1
(c) The Corporation may, at its option. cause all outstanding,
shares of the 6% Preferred to be redeemed after the date on which a
registration statement under the Act ("Registration Statement") has been
declared effective (the "effective date"), provided the Corporation has
given notice of its intention to redeem to the holders of the 6% Preferred
at least five (5) days prior to the redemption date. On the redemption
date, the Corporation shall pay such holders by cashier's check or wire
transfer in immediately available funds the amount of: (a) $1,300 per
share if the redemption date is on or before the one hundred fiftieth
(150th) day after the effective date; or (b) $1,250 per share if the
redemption date is after the one hundred fiftieth (150th ) day following
the effective date, plus any accrued but unpaid dividends. Promptly
thereafter, the holders shall surrender the certificate or certificates
representing the 6% Preferred, duly endorsed, at the office of the
Corporation or of any transfer agent for such shares, or at such other
place designated by the Corporation.
3. 6% Preferred - Forced Conversion.
(a) The Corporation may, at its option. cause all outstanding
shares of the 6% Preferred to be converted into Common Stock at any time
beginning one (1) year after the date of issuance, on at least twenty (20)
days' advance notice, at a conversion price determined as set forth in
Section 4 hereof (the "Conversion Price") as of the date specified in such
notice (the "Conversion Date") and otherwise on the terms set forth in
Section 4 hereof, provided, that the Corporation may not exercise such
right of conversion unless (i) the Closing Price (last trade price) of the
Common Stock as reported by NASDAQ for the twenty (20) consecutive trading
days prior to the date the Conversion Notice is mailed has not on any day
been less than one hundred forty percent (140%) of the last trade price of
the Company's Common Stock on the day of Closing (subject to adjustment
for stock dividends, stock splits and reverse stock splits), and (ii) the
shares issuable upon conversion of the 6% Preferred are registered for
resale by an effective Registration Statement which became effective not
more than one hundred twenty (120) days after the date of issuance of the
6% Preferred, and a current prospectus meeting the requirements of Section
10 of the Act is available for delivery at the Conversion Date.
(b) At least twenty (20) days prior to the Conversion Date,
written notice (the "Conversion Notice") shall be mailed, first class
postage prepaid, by the Corporation to each holder of record of the 6%
Preferred, at the address last shown on the records of the Corporation for
such holder, notifying such holder of the conversion which is to be
effected, specifying the Conversion Date and calling upon each such holder
to surrender to the Corporation, in the manner and at the place
designated, a certificate or certificates representing the number of
shares of 6% Preferred held by such holder. Subject to the provisions of
the following subsection (c), on or after the Conversion Date, each holder
of 6% Preferred shall surrender to the Corporation the certificate or
certificates representing the shares of 6% Preferred owned by such holder
as of the Conversion Date, in the manner and at the place designated in
the Conversion Notice, and thereupon the shares issuable upon such
conversion shall be delivered as provided in Section 4(b) hereof.
(c) If, on the Conversion Date, the registration condition
specified in clause (ii) of subsection (a) shall not be satisfied, then no
shares shall be converted and the Conversion Notice shall be deemed to be
withdrawn. In such event, any certificates for 6% Preferred which have
been surrendered for conversion shall be returned to the persons
surrendering the same; provided, however, that if a holder has received
shares of Common Stock upon conversion of 6% Preferred after the
Conversion Notice was given but before the Conversion Date, such holder
may elect either to retain such Common Stock or rescind such conversion by
tendering such shares of Common Stock to the Corporation.
(d) On the second anniversary of the issuance of the 6% Preferred,
all then outstanding shares of 6.% Preferred shall be automatically
converted into Common Stock at the Conversion Price and otherwise pursuant
to the applicable provisions set forth in Section 4 hereof.
2
<PAGE>
4. 6% Preferred - Optional Conversion. The holders of the 6%
Preferred shall have optional conversion rights as follows:
(a) Right to Convert. At any time after the earlier of (i) the
date on which a Registration Statement has been declared effective, or
(ii) the close of business on the ninety first (91st) day following the
date of issuance of the 6% Preferred, shares of 6% Preferred shall
become convertible, at the option of the holder thereof, into such
number of fully paid and nonassessable shares of Common Stock as is
determined by dividing (A) the Liquidation Preference of the 6%
Preferred determined pursuant to Section 2 hereof on the date the notice
of conversion is given, by (B) the Conversion Price determined as
hereinafter provided in effect on the applicable conversion date.
(b) Mechanics of Conversion. To convert shares of 6% Preferred
into shares of Common Stock, the holder shall give written notice to the
Corporation (which notice may be given by facsimile transmission) that
such holder elects to convert the shares and shall state therein date of
the conversion, the number of shares to be converted and the name or
names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. Promptly thereafter, the holder
shall surrender the certificate or certificates representing the shares
to be converted, duly endorsed, at the office of the Corporation or of
any transfer agent for such shares, or at such other place designated by
the Corporation. The Corporation shall, immediately upon receipt of
such notice, issue and deliver to or upon the order of such holder,
against delivery of the certificates representing the shares which have
been converted, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled and such
certificate or certificates shall not bear any restrictive legend;
provided (A) the Common Stock evidenced thereby are sold pursuant to an
effective registration statement under the Act, (B) the holder provides
the Corporation with an opinion of counsel reasonably acceptable to the
Corporation to the effect that a public sale of such shares may be made
without registration under the Act, or (C) such holder provides the
Corporation with reasonable assurance that such shares can be sold free
of any limitations imposed by Rule 144, promulgated under the Act. The
Corporation shall cause such issuance to be affected within three (3)
business days and shall transmit the certificates by messenger or
overnight delivery service to reach the address designated by such
holder within three (3) business days after the receipt of such notice.
The Corporation shall immediately pay such holder in cash or by wire
transfer in immediately available funds $500 per day as liquidated
damages for each day such shares have not been delivered to the holder
after the end of such three (3) business day period. The notice of
conversion may be given by a holder at any time during the day up to
5:00 p.m. Boston, Massachusetts time and such conversion shall be
deemed to have been made immediately prior to the close of business on
the date such notice of conversion is given. The person or persons
entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock at the close of business on such
date.
(c)Conversion/Payment Required. The Corporation acknowledges and
understands that a delay in the issuance of the Common Stock pursuant to
the provisions hereof or payment under Subsection (d)(i) below could
result in economic loss to the holders of the 6% Preferred. As
compensation to any holder when the Corporation his failed with respect
to such holder to comply with the Corporation's obligations under
Subsection (a) above or under Subsection (d)(i) below with regard to any
payments due, and not as a penalty, the Corporation shall pay to such
holder liquidated damages an amount equal to two percent (2%) of the
total Purchase Price of 6% Preferred and any Common Stock then held by
the holder for the first thirty (30) day period after the date on which
the Common Stock should have been issued by the Corporation (i.e., the
end of the three (3) business day period described in Subsection (b)),
plus amount equal to two percent (2%) of the total Purchase Price of 6%
Preferred and any Common Stock then held by the holder for each
subsequent thirty (30) day period thereafter (pro-rated as to a periods
of less than thirty (30) days). Such amounts shall be paid to the
holder immediately by cashier's check or wire transfer in immediately
available funds to such account as shall be designated in writing by the
holder.
3
(d) Determination of Conversion Price.
(i) The "Conversion Price" for purposes of hereof shall be
equal to eighty percent (80%) of the average closing bid price of the
Common Stock as reported by NASDAQ during the five (5) consecutive trading
days preceding the conversion date (but not including such date).
provided, however, that in no event may the Conversion Price be more than
four dollars and fifty cents ($4.50) per share (the "Maximum Conversion
Price") or less than two dollars ($2.00) per share of Common Stock (the
"Minimum Conversion Price"). If, but for this Section 4(d)(i), the
Conversion Price would have been below two dollars ($2.00) per share, the
Company shall pay the holder by delivering to holder a Promissory Note, in
the form attached hereto as Schedule II and incorporated herein by
reference, bearing the principal amount equal to the difference between
(A) the number of shares of Common Stock that would have been issued at
the amount the Conversion Price would have been but for this Section
4(d)(i) multiplied by 100% of the closing bid price of the Common Stock on
the conversion date as determined in accordance with the Subsection (d)
(the latter amount being referred to herein as the "Conversion Date
Price"), minus (B) the number of shares of Common Stock actually issued
pursuant to the conversion multiplied by the Conversion Date Price.
(ii) The "closing bid price" of the Common Stock on a trading
day shall be the closing bid price of the Common Stock on the NASDAQ Small
Cap Market or any other principal securities price quotation system or
market on which prices of the Common Stock are reported. The term
"trading day" means a day on which trading is reported on the principal
quotation system or market on which prices of the Common Stock are
reported.
(iii) If, during the period of consecutive trading days
provided for above, the Corporation shall declare or pay any dividend on
the Common Stock payable in Common Stock or in rights to acquire Common
Stock, or shall effect a stock split or reverse stock split, or a
combination, consolidation or reclassification of the Common Stock, the
Conversion Price, Maximum Conversion Price and Minimum Conversion Price
shall be proportionately decreased or increased, as appropriate, to give
effect to such event.
(e) Distributions. If the Corporation shall at any time or from
time to time make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other
distribution payable in securities of the Corporation or any of its
subsidiaries other than additional shares of Common Stock, then in each
such event provision shall be made so that the holders of 6% Preferred
shall receive, upon the conversion thereof, the securities of the
Corporation which they would have received had they been the owners on the
date of such event of the number of shares of Common Stock issuable to
them upon conversion.
(f) Certificates as to Adjustments. Upon the occurrence of any
adjustment or readjustment of the Conversion Price, the Maximum Conversion
Price and Minimum Conversion Price pursuant to this Section 4, the
Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the term hereof and cause independent
public accountants regularly employed to audit the financial statements of
the Corporation to verify such computation and prepare and furnish to each
holder of 6% Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at
any time of any holder of 6% Preferred, furnish or cause to be furnished
to such holder a like certificate prepared by the Corporation setting
forth (i) such adjustments and readjustments, and (ii) the number of other
securities and the amount, if any, of other property which at the time
would be received upon the conversion of 6% Preferred with respect to each
share of Common Stock received upon such conversion.
(g) Notice of Record Date. In the event of any taking by the Corporation of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any security or right convertible
into or entitling the holder thereof to receive additional shares of Common
Stock, or any right to subscribe for, purchase or otherwise acquire any shares
of stock of any class or any other securities or property, or to receive any
other right, the Corporation shall mail to each holder of 6% Preferred at least
ten (10) days prior to the date specified therein, a notice specifying the date
on which
4
<PAGE>
any such record is to be taken for the purpose of such dividend,
distribution, security or right and the amount and character of such
dividend, distribution. security or right.
(h) Issue Taxes. The Corporation shall pay any and all issue and
other taxes, excluding any income franchise or similar taxes, that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of 6% Preferred pursuant hereto; provided, however,
that the Corporation shall not be obligated to pay any transfer taxes
resulting from any transfer requested by any holder in connection with any
such conversion.
(i) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the 6% Preferred such number of its shares of
Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the 6% Preferred, and if at any
time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares
of the 6% Preferred, the Corporation will take such corporate action as
may be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain any
requisite shareholder approval.
(j) Fractional Shares. No fractional shares shall be issued upon
the conversion of any share or shares of 6% Preferred. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one share of 6% Preferred by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result
in the issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction of
a share of Common Stock, the Corporation shall, in lieu of issuing any
fractional share, pay the holder otherwise entitled to such fraction a sum
in cash equal to the fair market value of such fraction on the date of
conversion (as determined in good faith by the Board of Directors of the
Corporation).
(k) Notices. Any notice required by the provisions of this Section
to be given to the holders of shares of 6% Preferred shall be deemed given
if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at its address appearing on the books of the
Corporation.
(l) Reorganization or Merger. In case of any reorganization or
any reclassification of the capital stock of the Corporation or any
consolidation or merger of the Corporation with or into any other
corporation or corporations or a sale of all or substantially all of the
assets of the Corporation to any other person, and the holders of 6%
Preferred do not elect to treat such transaction as a liquidation,
dissolution or winding up as provided in Section 2 hereof, then, as part
of such reorganization, consolidation, merger or sale, provision shall be
made so that each share of 6% Preferred shall thereafter be convertible
into the number of shares of stock or other securities or property
(including cash) to which a holder of the number of shares of Common Stock
deliverable upon conversion of such share of 6% Preferred would have been
entitled upon the record date of (or date of, if no record date is fixed)
such event and, in any case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of
the holders of the 6% Preferred, to the end that the provisions set forth
herein shall thereafter be applicable, as nearly as equivalent as is
practicable, in relation to any shares of stock or the securities or
property (including cash) thereafter deliverable upon the conversion of
the shares of 6% Preferred.
5. Re-issuance of Certificates. In the event of a conversion (or,
if applicable, redemption) of 6% Preferred in which less than all of the
shares of 6% Preferred of a particular certificate are converted or
redeemed, as the case may be, the Corporation shall promptly without delay
cause to be issued and delivered to the holder of such certificate, a
certificate representing the remaining shares of 6% Preferred which have
not been so converted or redeemed.
6. Other Provisions. For all purposes of this Resolution, the term "date of
issuance" and the terms "Closing" or "Closing Date" shall mean the day on which
shares of the 6% Preferred are first issued by the Corporation. Any provision
herein which conflicts with or violates any applicable usury law shall be deemed
modified to the extent necessary to avoid such conflict or violation. The term
"NASDAQ" herein refers to the principal market
5
<PAGE>
on which the Common Stock of the Corporation is traded. If the Common
Stock is listed on a securities exchange, or if another market becomes the
principal market on which the Common Stock is traded or through which
price quotations for the Common Stock are reported. the term "NASDAQ"
shall be deemed to refer to such exchange or other principal market.
5
7. Restrictions and Limitations. The Corporation shall not
undertake the following actions without the consent of the holders of a
majority of the 6% Preferred: (i) modify its Articles of Organization or
Bylaws so as to amend or change any of the rights, preferences, or
privileges of the 6% Preferred, (ii) authorize or issue any other
preferred equity security senior to or on a parity with the 6% Preferred,
as to dividends, liquidation preferences, conversion rights, redemption
rights or other rights, preferences or privileges for a period of thirty
(30) days after Closing, as applicable or (iii) purchase or otherwise
acquire for value any Common Stock or other equity security of the
Corporation either junior or senior to or on a parity with the 6%
Preferred while there exists any arrearage in the payment of cumulative
dividends hereunder other than redemptions of stock from terminating
employees pursuant to rights in favor of the Corporation.
8. Voting Rights. Except as provided herein or as provided for by
law, the 6% Preferred shall have no voting rights.
9. Attorneys' Fees Any holder of 6% Preferred shall be entitled
to recover from the Corporation the reasonable attorneys' fees and
expenses incurred by such holder in connection with enforcement by such
holder of any obligation of the Corporation hereunder.
10. No Adverse Actions. The Corporation shall not in any
manner, whether by amendment of Articles of Organization (including,
without limitation, any vote establishing a class or series of stock),
merger, reorganization, re-capitalization, consolidation, sales of assets,
sale of stock, tender offer, dissolution or otherwise, take any action, or
permit any action to be taken, solely or primary for the purpose of
increasing the value of any class of stock of the Corporation if the
effect of such action is to reduce the value or security of the 6%
Preferred.
6
<PAGE>
Exhibit 4.21
SUBSCRIPTION AGREEMENT
PHC, INC.
THE SECURITIES WHICH ARE THE SUBJECT TO THIS SUBSCRIPTION AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE
SECURITIES LAWS OF ANY STATE AND WILL BE OFFERED AND SOLD IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THESE LAWS BY VIRTUE OF PHC,
INC.'S INTENDED COMPLIANCE WITH SECTIONS 3(b), 4(2) AND 4(6) OF THE
SECURITIES ACT OF 1933, THE PROVISIONS OF REGULATION D UNDER SUCH ACT AND
SIMILAR EXEMPTIONS UNDER STATE LAW. THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY ANY REGULATORY AUTHORITY. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The undersigned purchaser (hereafter, the "Purchaser") hereby offers to
purchase certain Series A Convertible Preferred Stock (referred to herein as
a "Share" or collectively as "Shares") of PHC, Inc. (the "Company"), a
publicly held corporation formed under the laws of the Commonwealth of
Massachusetts. This offer to purchase may, for any reason whatsoever, be
revoked by the Purchaser or rejected by the Company prior to acceptance of
this offer by the Company.
Section 1.1 Purchase and Sale of Shares. Upon the following terms and
conditions, the Company shall issue and sell to the Purchaser, and the
Purchaser shall purchase from the Company, the number of Shares indicated
herein, which Shares shall have the rights, designations and preferences set
forth in Schedule I hereto.
Section 1.2 Purchase Price. The purchase price for the Shares (the
"Purchase Price") shall be $1,000 per Share.
Section 1.3 The Closing.
(a) The closing of the purchase and sale of the Shares (the
"Closing"), shall take place at the offices of Choate, Hall & Stewart at
10:00 a.m., local Boston, Massachusetts time, on the later of the following:
(i) the date on which the last to be fulfilled or waived of the conditions
set forth in Section 4.1 and 4.2 hereof and applicable to the Closing shall
be fulfilled or waived in accordance herewith or (ii) such other time and
place and/or on such other date as the Purchaser and the Company may agree.
The date on which the Closing occurs is referred to herein as the "Closing
Date."
(b) On the Closing Date, the Company shall deliver to the Purchaser
certificates representing the Shares registered in the name of the Purchaser
or deposit such Shares into accounts designated by the Purchaser, and the
Purchaser shall deliver to the Company the Purchase Price for all the Shares
by cashier's check or wire transfer in immediately available funds to such
account as shall be designated in writing by the Company. In addition, each
party shall deliver all documents, instruments and writings required to be
delivered by such party pursuant to this Agreement at or prior to the Closing.
1
<PAGE>
Section 1.4 Covenant to Register.
(a) For purposes of this Section, the following definitions shall apply:
The terms "register," "registered," and "registration" refer
to a registration under the Securities Act of 1933, as amended (the "Act"),
effected by preparing and filing a registration statement or similar document
in compliance with the Act, and the declaration or ordering of effectiveness
of such registration statement. document or amendment thereto.
(ii) The term "Registrable Securities" means the shares of the
Company's Common Stock issuable upon conversion of shares of the Shares, or
upon conversion of any other stock issued in payment of dividends on the
Shares, or otherwise issuable pursuant to this Agreement or the provisions of
Schedule I hereto, and any securities of the Company or securities of any
successor corporation issued as, or issuable upon the conversion or exercise
of any warrant, right or other security that is issued as a dividend or other
distribution with respect to, or in exchange for, or in replacement of, the
Shares.
(iii) The term "holder of Registrable Securities" means the
Purchaser and any permitted assignee of registration rights pursuant to
Section 1.4(h).
(b) (i) The Company shall as soon as possible amend
its registration statement on Form SB-2 covering all the Registrable
Securities, and shall use its best efforts to cause such registration
statement to become effective on or before thirty (30) days after the Closing
Date (the "Initial Registration"). In the event such registration is not so
declared effective or does not include all Registrable Securities, a holder
of Registrable Securities shall have the right to require by notice in
writing that the Company register all or any part of the Registrable
Securities held by such holder (a "Demand Registration") and the Company
shall thereupon effect such registration in accordance herewith (which may
include adding such shares to an existing shelf registration). The parties
agree that if the holder of Registrable Securities demands registration of
less than all of the Registrable Securities, the Company, at its option, may
nevertheless file a registration statement covering all of the Registrable
Securities. If such registration statement is declared effective with
respect to all Registrable Securities and the Company is in compliance with
its obligations under Subsection (d) of this Section 1.4, the demand
registration rights granted pursuant to this Subsection (b)(i) shall cease.
If such registration statement is not declared effective with respect to all
Registrable Securities or if the Company is not in compliance with such
obligations, the demand registration rights described herein shall remain in
effect.
(ii) The Company shall not be obligated to effect a Demand
Registration under Subsection (b)(i) above: (A) if all of the Registrable
Securities held by the holder of Registrable Securities which are demanded to
be covered by the Demand Registration are, at the time of such demand,
included in an effective registration statement and the Company is in
compliance with its obligations under Subsection (d) of this Section 1.4; (B)
if all of the Registrable Securities may be sold under Rule 144(k) of the Act
and the Company's transfer agent has accepted an instruction from the Company
to such effect; or (C) at any time after two (2) years from the Closing Date.
(iii) Subject to Subsection (iv)(B) hereof, the Company may
suspend the effectiveness of any such registration effected pursuant to
this Subsection (b) in the event and for such period of time as, such a
suspension is required by the rules and regulations of the Securities and
Exchange Commission ("SEC"). The Company will use its best efforts to
cause such suspension to terminate at the earliest possible date.
2
<PAGE>
(iv) (A) If the registration statement covering all
Registrable Securities is not effective by the thirtieth (30th) day after the
Closing Date (the "Effective Date"). the Company shall pay Purchaser as
liquidated damages an amount equal to two percent (2%) of the total Purchase
Price of Shares and any Registrable Securities then held by Purchaser for the
first thirty (30) day period after the Effective Date, plus amount equal to
two percent (2%) of the total Purchase Price of Shares and any Registrable
Securities then held by Purchaser for each subsequent thirty (30) day period
thereafter (pro-rated as to a periods of less than thirty (30) days). Such
amounts shall be paid to the Purchaser by cashier's check or wire transfer in
immediately available funds to such account as shall be designated in writing
by the Purchaser.
(B) If, following such effectiveness, either the
effectiveness of the Registration Statement is suspended or a current
prospectus meeting the requirements of Section 10 of the Act is not available
for delivery by the Purchaser (either referred to herein as a "suspension"),
the Company shall pay Purchaser as liquidated damages an amount equal to two
percent (2%) of the total Purchase Price of Shares and any Registrable
Securities then held by Purchaser for the first thirty (30) day period after
the date of the suspension, plus amount equal to two percent (2%) of the
total Purchase Price of Shares and any Registrable Securities then held by
Purchaser for each subsequent thirty (30) day period the (pro-rated as to a
periods of less than thirty (30) days). Such amounts shall be paid to the
Purchaser by cashier's check or wire transfer immediately available funds to
such account as shall be designated in writing by the Purchaser.
(C) Any amount payable pursuant to the foregoing
provisions of this subsection (iv) shall be delivered on or before the fifth
(5th) day following the end of the calendar month in which such payment
obligation arose. The "Purchase Price" of Registrable Securities shall be
(1) if derived from conversion or substitution of Shares, the Purchase Price
of the Shares, and (2) if received in satisfaction of a Company obligation,
the dollar amount of such obligation.
(D) This subsection is in addition to the provisions of Section 7.2(a)
hereof.
(c) If the Company proposes to register (including for this purpose a
registration effected by the Company for shareholders other than the
Purchaser) any of its stock or other securities under the Act in connection
with a public offering of such securities (other than a registration on Form
S-4, Form S-8 or other limited purpose form) and all Registrable Securities
have not theretofore been included in a registration statement under
Subsection (b) of this Section 1.4 which remains effective, the Company
shall, at such time, promptly give all holders of Registrable Securities
written notice of such registration. Upon the written request of any holder
of Registrable Securities given within twenty (20) days after receipt of such
notice by the holder of Registrable Securities, the Company shall use its
best efforts to cause to be registered under the Act all Registrable
Securities that such holder of Registrable Securities requests to be
registered. However, the Company shall have no obligation under this
Subsection (c) if (i) the Registrable Securities may be sold without
registration under Rule 144(k) and the Company's transfer agent has accepted
an instruction from the Company to such effect. (ii) the Registration
Statement is filed more than two (2) years after the Closing Date, or (iii)
to the extent that, with respect to any underwritten offering initiated by
the Company later than one calendar year following the Closing, the managing
underwriter of such offering reasonably notifies such holder(s) in writing of
its determination that the Registrable Securities or a portion thereof shall
be excluded therefrom.
(d) Whenever required under this Section 1.4 to effect the
registration of any Registrable Securities including, without limitation, the
Initial Registration, the Company shall, as expeditiously as reasonably
possible:
(i) Prepare and file with the SEC a registration statement or
amendment thereto with respect to such Registrable Securities and use its
best efforts to cause such registration to become effective as provided in
Section 1.4(b)(i), and keep such registration statement effective for so long
as any holder of Registrable Securities desires to dispose of the securities
covered by such registration statement; provided however, that in no event
shall the Company be required to keep the Registration Statement effective
for a period greater than two (2) years from the Closing Date;
3
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply
with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement and notify the holders of
the filing and effectiveness of such Registration Statement and any
amendments or supplements;
(iii) Furnish to each holder of Registrable Securities such
numbers of copies of a current prospectus, including a preliminary
prospectus, conforming with the requirements of the Act, copies of the
registration statement any amendment or supplement to any thereof and any
documents incorporated by reference therein and such other documents, all
free of charge, as such holder of Registrable Securities may reasonably
require in order to facilitate the disposition of Registrable Securities
owned by such holder of Registrable Securities.
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or "Blue
Sky" laws of such jurisdictions as shall be reasonably requested by the
holder of Registrable Securities;
(v) Notify each holder of Registrable Securities immediately of
the happening of any event as a result of which the prospectus included in
such registration statement as then in effect includes an untrue statement of
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing, and use its best efforts to promptly update
and/or correct such prospectus;
(vi) Furnish, at the request of any holder of Registrable
Securities in connection with any underwritten public offering, (A) an
opinion of counsel of the Company, dated the effective date of the
registration statement, in form and substance reasonably satisfactory to the
holder and its counsel and covering, without limitation, such matters as the
due authorization and issuance of the securities being registered and certain
matters pertaining to disclosure under and compliance with securities laws by
the Company in connection with the registration thereof and/or (B) a
"comfort" letter or letters of the Company's independent public accountants
provided at the Company's expense in form and substance reasonably
satisfactory to the holder and its counsel;
(vii) Use its best efforts to list the Registrable Securities
covered by such registration statement with any national market or securities
exchange on which such securities are then listed;
(viii) Make available for inspection by the holder of Registrable
Securities, upon request, all SEC Documents (as defined below) filed
subsequent to the Closing and require the Company's officers, directors and
employees to supply all information reasonably requested by any holder of
Registrable Securities in connection with such registration statement; and
(ix) Furnish to each holder of Registrable Securities prompt
notice of the commencement of any stop-order proceedings under the Act,
together with copies of all documents in connection therewith, and use its
best efforts to obtain withdrawal of any such stop order as soon as possible.
(e) Upon request of the Company, each holder of Registrable Securities
will furnish to the Company in connection with any registration under this
Section such information regarding itself, the Registrable Securities and
other securities of the Company held by it, and the intended method of
disposition of such securities as shall be reasonably required to effect the
registration of the Registrable Securities held by such holder of Registrable
Securities. The intended method of disposition (Plan of Distribution) of
such securities as so provided by Purchaser shall be included without
alteration in the Registration Statement covering the Registrable Securities
and shall not be changed without the prior written consent of the Purchaser.
4
(f) (i) One Company shall indemnify, defend and hold harmless each
holder of Registrable Securities which are included in a registration
statement pursuant to the provisions of Subsections (b) or (c) hereof and
each of its officers, directors, employees, agents, partners or controlling
persons (within the meaning of the Act) (each, an "indemnified party") from
and against and shall reimburse such indemnified party with respect to, any
and all claims, suits, demands, causes of action, losses, damages,
liabilities, costs or expenses ("Liabilities") to which such indemnified
party may become subject under the Act or otherwise, arising from or relating
to (A) any untrue statement or alleged untrue statement of any material fact
contained in such registration statement, any prospectus contained therein or
any amendment or supplement thereto, or (B) the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading, provided however, that the Company shall not be
liable in any such case to the extent that any such Liability arises out of
or is based upon an untrue statement or omission so made in strict conformity
with information furnished by such indemnified party in writing specifically
for use in a registration statement
(ii) In the event of any registration under the Act of
Registrable Securities pursuant to Subsections (b) or (c), each holder of
such Registrable Securities hereby severally agrees to indemnity, defend and
hold harmless the Company, and its officers, directors, employees, agents,
partners or controlling persons (within the meaning of the Act) (each, an
"indemnified party") from and against, and shall reimburse such indemnified
party with respect to, any and all Liabilities to which such indemnified
party may become subject under the Act or otherwise, arising from or
relating to (A) any untrue statement or alleged untrue statement of any
material fact contained in such registration statements any prospectus
contained therein or any amendment or supplement thereto, or (B) the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, provided, that such
holders will be liable in any such case to the extent and only to the extent,
that any such Liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, prospectus or amendment or supplement thereto in
reliance upon and in conformity with written information furnished by such
holder specifically for use in the preparation thereof.
(iii) Promptly after receipt by any indemnified party of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against another party (the
"indemnifying party") hereunder, notify such party in writing thereof, but
the omission so to notify such party shall not relieve such party from any
Liability which it may have to the indemnified party other than under this
Section and shall only relieve it from any Liability which it may have to the
indemnified party under this section if and to the extent an indemnifying
party is materially prejudiced by such omission. In case any such action
shall be brought against any indemnified party and such indemnified party
shall notify an indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
reasonably satisfactory to such indemnified party, and, after notice from the
indemnifying party to the indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
the indemnified party under this section for any legal expenses subsequently
incurred by the indemnified party in connection with the defense thereof
other than reasonable costs of investigation and of liaison with counsel so
selected; provided, however, that if the defendants in any such action
include both parties and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to them which are
different from or additional to those available to the indemnifying party or
if the interests of the indemnified party reasonably may be deemed to
conflict with the interests of the indemnifying party, the indemnified party
shall have the right to select a separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
reasonable expenses and fees of one such separate counsel and other
reasonable expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
5
(g) (i) With respect to the inclusion of Registrable Securities in
a registration statement pursuant to Subsections (b) or (c), all fees, costs
and expenses of and incidental to such registration, inclusion and public
offering shall be borne by the Company; provided however, that any
securityholders participating in such registration shall bear their pro-rata
share of the underwriting discounts and commissions, if any, incurred by them
in connection with such registration.
(ii) The fees, costs and expenses of registration to be borne by
the Company as provided in this Subsection (g) shall include, without
limitation, all registration, filing and NASD fees, printing expenses, fees
and disbursements of counsel and accountants for the Company, and all legal
fees and disbursements and other expenses of complying with state securities
or Blue Sky laws of any jurisdiction or jurisdictions in which securities to
be offered are to be registered and qualified. Subject to appropriate
agreements as to confidentiality, the Company shall make available to the
holders of Registrable Securities and their counsel its documents and
personnel for due diligence purposes. Except as otherwise provided herein,
fees and disbursements of counsel and accountants for the selling security
holders shall be borne by the respective selling security holders.
(h) The rights to cause the Company to register all or any portion of
Registrable Securities pursuant to this Section 1.4 may be assigned by
Purchaser to a transferee or assignee. Within a reasonable time after such
transfer, the Purchaser shall notify the Company of the name and address of
such transferee or assignee, and the securities with respect to which such
registration rights are being assigned. Such assignment shall be effective
only if, immediately following such transfer, the further disposition of such
securities by the transferee or assignee is restricted under the Act. Any
transferee asserting registration rights hereunder shall be bound by the
applicable provisions of this Agreement.
(i) The Company shall not agree to allow the holders of any
securities of the Company to include any of their securities in any
registration statement filed by the Company pursuant to Subsection (b) unless
such inclusion will not reduce the amount of the Registrable Securities
included therein.
Section 1.5 Company Standoff. Except in a business combination, or
under existing employee stock incentive or purchase plans, the Company shall
not for its own account effect any public sale or distribution of any
securities similar to the Registrable Securities or any securities
exercisable for or convertible or changeable into the Registrable Securities
during the thirty (30) days prior to, and during the (30) days immediately
following, the effective date of any registration statement filed or amended
pursuant to Section 1.4(b); provided, however, that the Company may effect
such public sale or distribution during the (30) days immediately following
the effective date of such registration statement if such sale or
distribution of securities is at a price equal to or greater than 125% of the
last trade price of the Company's Common Stock on the day of Closing.
Section 2.1 Representations and Warranties of the Purchaser. The
Purchaser makes the following representations and warranties to the Company.
(a) Accredited Investor. The Purchaser is an "accredited investor",
as such term is defined in Rule 501 (a) of Regulation D, promulgated under
the Act.
(b) Speculative Investment. The Purchaser is aware that an
investment in the Shares is highly speculative and subject to substantial
risks. The Purchaser is capable of bearing the high degree of economic risk
and the burden of this venture. including, but not limited to, the
possibility of complete loss of the Purchaser's investment in the Shares and
underlying Common Stock which make liquidation of this investment impossible
for the indefinite future.
6
<PAGE>
(c) Disposition. The Purchaser understands that neither the Shares
nor the underlying Common Stock have been registered under the Act. The
Shares are being acquired by reason of a specific exemption under the Act as
well as under certain state statutes for transactions by an issuer not
involving any public offering and that any disposition of the Shares may,
under certain circumstances, be inconsistent with this exemption and may make
the Purchaser an "underwriter" within the meaning of the ACT. The Purchaser
acknowledges that the Shares purchased must be held and may not be sold,
transferred, or otherwise disposed of for value unless they are subsequently
registered under the Act, sold pursuant to Rule 144 of the Act, or an
exemption from registration under the Act is available.
(d) Privately Offered. The offer to acquire the Shares was directly
communicated to the Purchaser in such manner that the Purchaser was able to
ask questions of and receive answers concerning the terms and conditions of
this transaction. Av no time was the Purchaser presented with or solicited
by or through any leaflet, public promotional meeting, television
advertisement, or any other form of general advertising.
(e) Purchase for Investment. The Shares are being acquired solely for
the Purchaser's own account, for investment, and are not being purchased with
view to the resale, distribution, subdivision or fractionalization thereof
without a valid registration with applicable Governmental authorities.
Section 2.2 Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to the Purchaser:
(a) Organization and Qualification. The Company is a corporation duly
incorporated and existing in good standing under the laws of the Commonwealth
of Massachusetts and has the requisite corporate power to own its properties
and to carry on its business as now being conducted. The Company does not
have any subsidiaries except as listed in Exhibit A hereto. The Company and
each such subsidiary, if any, is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which the nature
of the business conducted on property owned by it makes such qualification
necessary other than those in which the failure so to qualify would not have
a Material Adverse Effect. "Material Adverse Effect", for purposes of this
Subscription Agreement (as it may be amended from time to time, the
"Agreement"), means any adverse effect on the business, operations,
properties, prospects, or financial condition of the entity with respect to
which such term is used and which is material to such entity and other
entities controlled by such entity taken as a whole.
(b) Authorization Enforcement (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement and to
issue the Shares and Registrable Securities in accordance with the terms
hereof, (ii) the execution and delivery of this Agreement by the Company and
the consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate action, and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required, (iii) this Agreement has been duly executed and delivered by the
Company, (iv) this Agreement constitutes a valid and binding obligation of
the Company enforceable against the Company in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating
to, or affecting generally the enforcement of, creditors' rights and remedies
or by other equitable principles of general application) and (v) prior to the
Closing Date, any necessary Certificate of Amendment to the Company's Charter
authorizing Company to issue all of the Shares and Registrable Securities, in
accordance with Schedule 1, will have been filed with the Massachusetts
Secretary of State and will be in full force and effects enforceable against
the Company in accordance with the terms of such amended Charter.
7
<PAGE>
(c) Authorized Capital: Rights or Commitments to Stock. The
authorized capital stock of the Company consists of 22,200,000 shares of
Common Stock and 1,000,000 shares of Series A Preferred Stock; there are
3,578,048 shares of Common Stock issued and 3,569,392 shares of Common
Stock outstanding; there are no shares of such Preferred Stock issued and
outstanding; and, upon issuance of the Shares in accordance with the terms
hereof, there will be 3,578,048 shares of Common Stock and 1,000 shares of
such Preferred Stock issued and outstanding.
All of the outstanding shares of the Company's Common Stock have been
validly issued and are fully paid and nonassessable. Except as set forth
in Exhibit A hereto or as described in the SEC Documents, no shares of
Common Stock are entitled to preemptive rights or registration rights and
there are no outstanding options, warrants, scrip, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, any shares of capital stock of the Company, or
contracts, commitments, understandings, or arrangements by which the
Company is or may become bound to issue additional shares of capital stock
of the Company or options, warrants, scrip, rights to subscribe to, or
commitments to purchase or acquire, any shares, or securities or rights
convertible into shares, of capital stock of the Company. The Company has
furnished or made available to the Purchaser true and correct copies of the
Company's Articles of Organization as in effect on the date hereof (the
"Charter"), and the Company's By-Laws, as in effect on the date hereof
(the "By-Laws").
(d) Issuance of Shares. The issuance of the Shares has been duly
authorized and, when paid for and issued in accordance with the terms
hereof, the shall be validly issued, fully paid and non-assessable and
entitled to the rights and preferences set forth in Schedule I hereto. The
Common Stock issuable upon conversion of the Shares will be duly authorized
and reserved for issuance and, upon conversion, will be validly issued,
fully paid and non-assessable and the holders shall be entitled to all
rights and preferences accorded to a holder of Common Stock.
(e) No Conflicts. The execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby do not and will not (i) result in a violation of the
Company's Charter or By-Laws or (ii) conflict with, or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any federal,
state, local or foreign law, rule, regulation, order, judgment or decree
(including Federal and state securities laws and regulations) applicable to the
Company or any of its subsidiaries or by which any property or assets of the
Company or any of its subsidiaries is bound or affected (except for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect); provided that for purposes of such representation as to
Federal, state, local or foreign law, rule or regulation, no representation is
made herein with respect to any of the same applicable solely to the Purchaser
and not to the Company. The business of the Company is not being conducted in
violation of any law, ordinance or regulations of any governmental entity,
except for violations which either singly or in the aggregate do not and will
not have a an Adverse Effect. The Company is not required under Federal, state
or local law, rule or regulation in the United States to obtain any consent,
authorization or order of, or make any filing (other than any filing of a vote
establishing a class or series of stock with the Massachusetts Secretary of
State) or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Agreement or issue
and sell the Shares in accordance with the terms hereof (other than any SEC,
NASD or state securities filings which may be required to be made by the Company
subsequent to the Closing, and any registration statement which may be filed
pursuant hereto); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Purchaser herein.
8
(f) SEC Documents, Financial Statements. The Common Stock of the
Company is registered pursuant to Section 12(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and, except as set forth in
Exhibit A, the Company has filed on a timely basis all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
pursuant to the reporting requirement of the Exchange Act, including material
filed pursuant to Section 13(a) or 15(d), in addition to one or more
registration statements and amendments thereto heretofore filed by the
Company with the SEC under the Act (all of the foregoing including filings
incorporated by reference therein being referred to herein as the "SEC
Documents"). The Company directly or through its agent has delivered to the
Purchaser true and complete copies of the SEC Documents. The Company has not
provided to the Purchaser any information which, according to applicable law,
rule or regulation, should have been disclosed publicly by the Company but
which has not been so disclosed, other than with respect to the transactions
contemplated by this Agreement.
Except as set forth in Exhibit A, as of their respective dates the SEC
Documents complied in all material respects with the requirements of the Act
or the Exchange Act as the case may be and the rules and regulations of the
SEC promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Except as set forth in Exhibit A, the financial statements
of the Company included in the SEC Documents comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations
with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the
case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in
all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(g)No Material Adverse change. Since the date through which the
most recent quarterly report of the Company on Form 10-Q has been prepared
and filed with the SEC, a copy of which is included in the SEC Documents, no
Material Adverse Effect has occurred or exists with respect to the Company or
any of its subsidiaries.
(h)No Undisclosed Liabilities. The Company and its subsidiaries
have no material liabilities or obligations not disclosed in the SEC
Documents, other than those incurred in the ordinary course of the Company's
or any of its subsidiaries' respective businesses since the date of the most
recently filed SEC Documents which, individually or in the aggregate, do not
or would not have a Material Adverse Effect on the Company or any of its
subsidiaries.
(i)No Undisclosed Events or Circumstances. No event or circumstance
has occurred or exists with respect to the Company or any of its subsidiaries
or their respective businesses, properties, prospects, operations or
financial condition which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.
(j) No General Solicitation. Neither the Company, nor any of
its or, to the best of its knowledge, any person acting on its or their
behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Act) in connection
with the offer or sale of the Shares.
9
<PAGE>
(k) No Integrated Offering. Neither the Company, nor any of its
affiliates nor any person acting on its or their behalf has directly or
indirectly, made any offers or sales of any security or solicited any offers
to buy any security, under circumstances that would require registration of
the Shares under the Act.
Section 3.1 Securities Compliance. The Company shall notify the
SEC and NASD, in accordance with their requirements, of the transaction
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Shares, and the Common
Stock issuable upon conversion thereof, to the Purchaser.
Section 3.2 Registration and Listing. Until at least two (2)
years after all Shares have been converted into Registrable Securities, the
Company will cause its Common Stock to continue to be registered under
Sections 12(b) or 12(g) of the Exchange Act, will comply in all respects with
its reporting and filing obligations under such Exchange Act, will comply
with all requirements related to any registration statement filed pursuant to
this Agreement and will not take any action or file any document (whether or
not permitted by the Act or the Exchange Act or the rules thereunder) to
terminate or suspend such registration or to terminate or suspend its
reporting and filing obligations under said Acts, except as permitted
herein. Until at least two (2) years after all Shares have been converted
into Common Stock, the Company will take all action within its power to
continue the listing or trading of its Common Stock on the NASDAQ Small Cap
Market and will comply in all respects with the Company's reporting, filing
and other obligations under the bylaws or rules of the NASD and NASDAQ, The
covenants set forth in this Section 3.2 shall not be deemed to prohibit a
merger, sale of all assets or other corporate reorganization if the entity
surviving or succeeding to the Company is bound by this Agreement with
respect to its securities issued in exchange for or in replacement of the
Shares or Common Stock or the consideration received for or in replacement of
the Shares or Common Stock is cash.
Section 3.3 Right of First Refusal and Most-Favored-Nation Claus.
If at any time before the end of the thirty (30) day period following the
effective date of a registration statement filed pursuant to Section 1.4
hereof the Company proposes to issue Common Stock or securities convertible
into or exercisable for Common Stock or other convertible securities,
pursuant to an offering exempt from registration under the Act, the Company
shall provide to Purchaser reasonable advance notice of all the terms of such
proposed issuance. The Purchaser shall have the right to purchase or refuse
to purchase all or any part of such securities proposed to be issued in such
offering, and shall have at least seventy two (72) hours after receipt of
such notice to review the terms of the proposed issuance.
If the Company issues Common Stock or securities convertible into or
exercisable for Common Stock or other convertible securities at a time when
any of the Shares remain outstanding at an effective price per share of
Common Stock which is lower than the conversion price of the Shares at that
time, then the Company shall issue to each holder upon conversion an
additional number of shares of Common Stock necessary to reduce the effective
conversion price to such lower issue price. This Section shall not be
applicable to issuances of Common Stock, or options granted at market price,
pursuant to any shareholder-approved option plan covering not more than 10%
of the Company's outstanding stock.
Section 3.4 Short Sale Restrictions. Purchaser agrees not to sell
Common Stock of the Company "short" prior to the effective date of a
registration statement filed pursuant to Section 1.4 hereof except for (a)
shares of Common Stock issuable to the Purchaser upon conversion, made within
seventy two (72) hours prior to the time notice of conversion is given or (b)
sales against shares of Common Stock owned the day the short sale is
established.
10
<PAGE>
Section 4.1 Conditions Precedent to the Obligation of the Company to
Sell the Shares. The obligation hereunder of the Company to issue and/or sell
the Shares to the Purchaser is subject to the satisfaction, at or before the
Closing, of each of the conditions set forth below. These conditions may be
waived by the Company at any time in its sole discretion.
(a) Accuracy of the Purchaser's Representations and Warranties. The
representations and warranties of the Purchaser shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that
speak as of a particular date).
(b) Performance by the Purchaser. The Purchaser shall have performed
all agreements and satisfied all conditions required to be performed or
satisfied by the Purchaser at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction
which prohibits the consummation of any of the transactions contemplated by
this Agreement.
(d) Legal action. No legal action, suit or proceeding shall be
pending or threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement.
Section 4.2 Conditions Precedent to the Obligation of the Purchaser to
Purchase the Shares The obligation hereunder of the Purchaser to acquire and
pay for the Shares is subject to the satisfaction. at or before the Closing,
of each of the conditions set forth below. These conditions may be waived by
the Purchaser at any time in its sole discretion.
(a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that
speak as of a particular date).
(b) Performance by the Company, The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied
by the Company at or prior to the Closing.
(c) NASDAQ. From the date hereof to the Closing Date, trading in the
Company's Common Stock shall not have been suspended by the SEC or the NASDAQ
Small Cap Market (except for any suspension of trading of limited duration
agreed to between the Company and the NASDAQ Small Cap Market solely to
permit dissemination of material information regarding the Company), and
trading in securities generally as reported by NASDAQ shall not have been
suspended or limited or minimum prices shall not have been established on
securities whose trades are reported by NASDAQ.
(d) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or Governmental authority of competent jurisdiction
which prohibits the consummation of any of the transactions contemplated by
this Agreement.
(e) Opinion of Counsel, Etc. The Purchaser shall have received
before or at the Closing an opinion of counsel to the Company (covering,
without limitation, such of the matters set forth in Section 2.2(a) through
(c)), as are in form and substance reasonably satisfactory to the Purchaser
and its counsel, and such other certificates and documents as the Purchaser
or its counsel shall reasonably require incident to the Closing.
11
Section 5.1 Legend on Stock. Each certificate representing the Shares
and, if necessary, Common Stock issued upon conversion thereof, shall be
stamped or otherwise imprinted with a legend substantially in the following
form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR
SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS.
<PAGE>
The Company agrees to reissue certificates representing the Shares or,
if applicable, the Common Stock issued upon conversion thereof without the
legend set forth above at such time as (a) the holder thereof is permitted to
dispose of such Shares (or securities issued upon conversion thereof)
pursuant to Rule 144(k) under the Act, (b) the securities are sold to a
purchaser or purchasers who (in the opinion of counsel to such holders, in
form and substance reasonably satisfactory to the Company and its counsel)
are able to dispose of such securities publicly without registration under
the Act, or (iii) such securities are registered under the Act.
Section 6.1 Termination by Mutual Consent. This Agreement may be
terminated at any time prior to the Closing by the mutual written consent of
the Company and the Purchaser.
Section 6.2 Other Termination. This Agreement may be terminated by
action of the Board of Directors or other governing body of the Purchaser or
the Company at any time if the Closing shall not have been consummated by
the fifth (5th) business day following the date of this Agreement, provided
that the party seeking to terminate the Agreement is not in breach of the
Agreement.
Section 6.3 Automatic Termination. This Agreement shall automatically
terminate without any further action of either party hereto if the Closing
shall not have occurred by the seventh (7th) business day following the date
of this agreement, provided, however, that any such termination shall not
terminate the liability of any party which is then in breach of the Agreement.
Section 7.1 Fees and Expenses. Except as otherwise set forth in
Section 1.4 hereof, each party shall pay the fees and expenses of its
advisers, counsel, accountants and other experts if any, and all other
expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. The Company shall pay
all stamp and other taxes and duties levied in connection with the issuance
of the Share and Common Stock pursuant hereto.
Section 7.2 Specific Enforcement, Consent to Jurisdiction.
(a) The Company and the Purchaser acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent or cure breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which either
of them may be entitled by law or equity.
12
<PAGE>
(b) The Company and the Purchaser each (i) hereby irrevocably submits
to the jurisdiction of the United States District Court and other courts of
the United States sitting in Texas for the purposes of any suit, action or
proceeding arising out of or relating to this Agreement and (ii) hereby
waives, and agrees not to assert in any such suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction of such court,
that the such action or proceeding is brought in an inconvenient forum or
that the venue of the suit, action or proceeding is improper. The Company
and the Purchaser each consents to process being served in any such suit,
action or proceeding by mailing a copy thereof to such party at the address
in effect for notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing in this paragraph shall affect or limit any right to serve process in
any other manner permitted by law.
Section 7.3 Entire Agreement: Amendment. This Agreement contains the
entire understanding of the parties with respect to the matters covered
hereby and, except as specifically set forth herein, neither the Company nor
the Purchaser makes any representation, warranty, covenant or undertaking
with respect to such matters. No provision of this Agreement may be waived
or amended other than by a written instrument signed by the party against
whom enforcement of any such amendment or waiver is sought.
Section 7.4 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective
(a) upon hand delivery or delivery by telex (with correct answer back
received), telecopy or facsimile at the address or number designated below
(if delivered on a business day during normal business hours where such
notice is to be received), or the following business day following such
delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second (2nd)
business day following the date of mailing by express courier service, fully
prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:
to the Company: Bruce A. Shear, President and Chief Executive Officer
PHC, Inc.
200 Lake Street - Suite 102
Peabody, Massachusetts 01960
to the Purchaser At the address set forth at the
foot of this Agreement or as specified in writing by
Purchaser.
Any party hereto may from time to time change its address for notices by
giving at least ten (10) days' written notice of such changed address to the
other party hereto.
Section 7.5 Waivers. No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission
of either party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter.
Section 7.6 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 7.9 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the present
state of incorporation of the Company without regard to such state's
principles of conflict of laws.
13
Section 7.1.0 Survival. The representations and warranties of the
Company and the Purchaser contained in herein and the agreements and
covenants set forth in Sections 1.1 through 1.5, 3.1 through 3.4 and 7.1
through 7.15 shall survive the Closing for a period of one year.
Section 7.11 Publicity. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of the Purchaser
without its consent, unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.
Section 7.12 NASDAQ. The term "NASDAQ" or "NASDAQ Small Cap Market"
herein refers to the principal market on which the Common Stock of the
Company is traded. If the Common Stock is listed on a securities exchange,
or if another market becomes the principal market on which the Common Stock
is traded or through which price quotations for the Common Stock are
reported, the term "NASDAQ" or "NASDAQ Small Cap Market" shall be deemed to
refer to such exchange or other principal market
Section 7.13 Acceptance. Execution and delivery of this Agreement
shall constitute an offer to purchase the Shares, which offer, unless
previously revoked by the Purchaser, may be accepted or rejected by the
Company, in its sole discretion for any cause or for no cause and without
liability to the Purchaser. The Company shall indicate acceptance of this
Agreement by signing as indicated on the signature page hereof.
Section 7.14 Binding Agreement Upon acceptance of this Agreement by the
Company, the Purchaser agrees that he may not cancel, terminate or revoke any
agreement of the Purchaser made hereunder, and that this Agreement shall
survive the death or disability of the Purchaser and shall be binding upon
heirs, successors, assigns, executors, administrators, Guardians,
conservators or personal representatives of the Purchaser.
Section 7.15 Incorporation by Reference. All information set forth on
the signature page is incorporated as integral terms of this Agreement.
Section 7.16 Counterparts. This Agreement may be signed in multiple
counterparts, which counterparts shall constitute one and the same original
instrument
THIS SPACE HAS BEEN LEFT BLANK INTENTIONALLY..
THE SIGNATURE PAGE FOLLOWS.
14
<PAGE>
IN WITNESS WHEREOF, the Purchaser has executed this Agreement on the date
set forth below.
For the purchase price of $1,000 per Share, the Purchaser tenders herewith
the full purchase price of:
$1 Million Dollars ($1,000,000)
The exact name(s) (Including correct, legible spelling) and the information
under which title to the Shares will be taken is as follows (Please print or
type):
ProFutures Special Equities Fund, L.P___________
Address of Purchaser:
1310 Highway 620 South - Suite 200, Austin, Texas 78734______
Social Security or IRS Employer Identification Number(s):
74-2786952____________________________
Signature of Purchaser:
Name of Purchaser: ProFutures Special Equities Fund, L.P.
By: ProFutures Fund Management, Inc., a General Partner
By: __________________________________________ Dated: June 4, 1997
Name: Gary D. Halbert
Title: President
Accepted by:
PHC, INC., a Massachusetts corporation
By: ____________________________________
Name: ____________________________________
Title: ____________________________________
15
<PAGE>
EXHIBIT A
to PHC, Inc. Subscription Agreement
Section 2.2(a): PHC, Inc. Subsidiaries:
PHC of Utah, Inc. PHC of Michigan, Inc.
D/B/A Highland Ridge Hospital D/B/A Harbor Oaks Hospital
4578 Highland Drive 35031 23 Mile Road
Salt Lake City, UT 84117 New Baltimore, MI 48047
PHC of Virginia, Inc. PHC of Rhode Island, Inc.
D/B/A Mount Regis Center D/B/A Good Hope Center
D/B/A Changes P.O. Box 1491
405 Kimball Avenue Coventry, RI 02816-0029
Salem, VA 24153
Quality Care Centers of Mass, Pioneer Counseling of Virginia, Inc.
Inc. (80% Owned)
D/B/A Franvale Nursing & Rehab D/B/A Pioneer Counseling of Virginia
Center D/B/A Counseling Associates of
20 Pond Street Virginia
Braintree, MA 02184 400 East Burwell street
Salem, VA 24153
PHC of Nevada, Inc. PHC of Kansas, Inc.
D/B/A Harmony Healthcare D/B/A Total Concept EAP
2340 Paseo del Prado, Bldg. D 7451 Szwitzer, Suite 101
Las Vegas, NV 89102 Shawnee Mission, KS 66203
Northpoint - Pioneer, Inc. PHC of California, Inc.
D/B/A Pioneer Counseling Center D/B/A Marin Grove
31700 W. 13 Mile; Suite 201 42 Grove Street
Farmington Hills, MI 48334 San Rafael, CA 94901
STL, Inc. Professional Health Associates
200 Lake Street 94-19 59 Avenue
Suite 102 Elmhurst, NY 11373
Peabody, MA 01960
BSC-NY, Inc.
D/B/A Behavioral Stress Center
94-19 59 Avenue
Elmhurst, NY 11373
Harmony Behavioral Health
2340 Paseo del Prado, Bldg. D
Las Vegas, NV 89102
<PAGE>
EXHIBIT A (cont'd.)
Section 2.2(f):
The Company failed to file two years' of audited financial statements for
Behavioral Stress Centers, Inc, and Clinical Diagnostics and Clinical
Associates, as described in the December 18, 1996 letter from Choate, Hall &
Stewart to Mr. Robert Bayless of the Securities and Exchange Commission,
attached hereto as Exhibit 1.
<PAGE>
EXHIBIT 1
CHOATE, HALL & STEWART
A PARTNERSHIP
EXCHANGE PLACE 1934 Act
53 STATE STREET Form S-K
BOSTON, MASSACHUSETTS 02109-2891 Item 7
TELEPHONE (617) 248-5000
FACSIMILE (617) 248-4000
TELEX _________
December 18, 1996
Securities and Exchange Commission
450 Fifth Street
Judiciary Plaza
Washington, D.C. 20549
Attention: Mr. Robert Bayless
Associate Director
(Chief Accountant)
Division of Corporation Finance
Mail Stop 3-10
RE: PHC, Inc.
Commission File No. 0-23524
Dear Mr. Bayless:
I am writing on behalf of our client, PHC, Inc. (the "Company") and at
the suggestion of Mr. Wayne Carnall and Mr. William Carter of the staff of
the Securities and Exchange Commission (the "Commission"). The subject of
this letter was discussed between Mr. Carnall and Grant P. Waite, a member of
the firm of Richard A. Eisner & Company, LLC, the Company's independent
certified public accountants on December 3, 1996. I spoke with Mr. Carter
today.
I am writing to request that the Division of Corporation Finance agree
that it will not recommend any enforcement action against the Company based
solely on its failure to file certain audited financial information of an
acquired business as required by Item 7 of Form 8-K in the following
circumstances:
The Company is a national health care company specializing in the
treatment of substance abuse, which includes alcohol and drug dependency and
related disorders, and in the provision of psychiatric and long-term care.
Effective October 31, 1996, the Company acquired through a wholly-owned
subsidiary (the "Subsidiary"), Behavioral Stress Centers, Inc., a New York
corporation which provided management and administrative services to
psychotherapy and psychological practices in the New York City metropolitan
area. The Subsidiary concurrently entered into a management Agreement with a
newly formed professional corporation ("the "Professional Corporation") which
acquired certain assets, including service contracts with 35
nursing homes in the New York
<PAGE>
Mr. Robert Bayless
December 18, 1996
Page 2
metropolitan area, of Clinical Associates and Clinical Diagnostic, entities
owned by the owners of B ehavior Stress Centers, Inc. Behavioral Stress
Centers, Inc., Clinical Diagnostics and Clinical Associates are hereinafter
referred to as the "Acquired Companies".
As merger consideration, the Company issued 150,000 shares of its
Class A Common Stock to the owners of Behavioral Stress Centers, Inc. In
addition, the Company is obligated to pay the Sellers 49% of the profits of
the Subsidiary over the next three years plus an additional amount equal to
four times 49% of the profits during the third year, payable partly in stock
and partly in cash and notes. The profits of the Subsidiary for this purpose
will include the fees from the Professional Corporation. The purchase price
for the assets of Clinical Associates and Clinical Diagnostics was $750,000
which was paid by the Company pursuant to a promissory note.
The Acquired Companies utilized the cash basis method of accounting.
Their record keeping was rudimentary at best. For example, revenue was
recognized by the Acquired Companies upon the receipt of payment,
irrespective of when services were rendered. Unfortunately, the Acquired
Companies did not retain, in all circumstances, the documentation required to
verify the date on which services were rendered, and some of the records that
were retained were destroyed in a basement flood. Accordingly, there is no
consistent and accurate record available that would allow the determination
of the period in which a service, resulting in a payment. was actually
rendered.
In addition, it appears that the Acquired Companies did not invoice all
services rendered and in many cases did not create invoices in a timely
manner. Some of the records of invoices which were retained were also
destroyed in the flood described above, and the Acquired Companies did not
retain backup information in a secure, off-site location. As a result of the
poor record-keeping of the Acquired Companies, it is impossible to trace
invoices to determine whether payment has been received or whether the
services were billed.
Prior to the acquisition of the Acquired Companies and in light of the
inability of the Company to verify certain accounting records of the Acquired
Companies, the Company spent significant time and effort studying the
prudence of the acquisition and whether the transaction would be economically
beneficial to the Company and its shareholders. Among the due diligence
conducted by the Company was an attempt to substantiate cash basis income by
verifying actual cash deposits to various bank accounts maintained by the
Acquired Companies through analysis of corresponding deposit slips and
photocopies of checks provided by the Acquired Companies. In its internal
analysis of expected cash flow from the Acquired Companies, the Company
excluded any items that did not seem representative of revenue derived from
the rendering of service. The Company reviewed the check ledgers of the
Acquired Companies to analyze their expenses, verifying that all checks were
accounted for based on their sequential numbering, in analyzing the economic
impact on the Company of the proposed acquisition, the Company assumed that
all non-payroll expenses were to be included in the expenses of the Acquired
Companies and made an independent estimate of payroll expenses based on the
Company's Personnel costs.
The structure of the transaction was designed to limit the potential
exposure of the company arising from the transaction. Much of the
consideration payable to the sellers is in the form of an earn-out based on
the profitability of the Subsidiary. The Agreement and Plan of Merger
contains representations of the sellers relating to the average cash flow of
the Acquired Companies; if these representations prove untrue, in addition to
the Company's normal contractual indemnities and rights, there is a right of
set-off against the consideration payable to the Sellers. The Management
Agreement entitles the (Company, for the 90-day period following the Closing,
to set off against its $750,000 note to the sellers a pro raga reduction for
each nursing home which may terminate its contract with the Professional
Corporation.
<PAGE>
Mr. Robert Bayless
December 18, 1996
Page 3
In addition to the financial testing described above, the company
conducted extensive due diligence which included inquiries concerning the
reputation of the sellers and the acquired Companies, a review of all bank
accounts, a review of all material contracts, insurance matters, copies of
all licensees and registrations and a review of all tax returns of the
Acquired Companies for the tax years from 1992-1995. Based on its due
diligence review, the Company believes that the acquisition of the Acquired
Companies will be beneficial to the Company and its shareholders.
Pursuant to Item 310(c) of Form S-B (whether as in effect on the
closing of the acquisition or as subsequently amended), it is estimated that
the Acquired Companies are of maximum significance to the Company. On
November 14, 1996, in its Report on Form 10-QSB (as amended by a filing of
Form 10-QSB-A-1 on December 5, 1996), the Company reported on the acquisition
of the Acquired Companies. Such filing did not include any financial
information for the Acquired Companies. Pursuant to item 7(a)(4) of Form
S-K, the Company is obligated to file two years' of audited financial
statements for the Acquired Companies within 60 days after the Report on Form
8-K is filed (in this case, not later than January 13, 1997). For the
reasons stated above, the Company's independent public accountants, Richard
A. Eisner Company, LLP, have indicated to the Company that they will not be
able to conduct an audit of the Acquired Companies in accordance with
generally accepted accounting standards for the periods required. In
addition, the Company believes that it will be virtually impossible to
produce unaudited financial statements for the Acquired Companies on an
accrual basis in accordance with generally accepted accounting principles for
the period prior to the Closing. The Company intends to file a Form 8-K
shortly which will explain its inability to file the required audited
financial statements for the Acquired Companies.
We understand that the staff generally will not waive the requirement
for audited financial statements set forth in item 7 of Form 8-K.
Accordingly, we are writing to request in the circumstances that the Division
of Corporation Finance agree not to recommend enforcement action against the
Company for its failure to file the audited financial statements of the
Acquired Companies as required by item 7 of Form 8-K.
Please call me at the direct dial number set forth above should you
have any questions concerning this request. Thank you for your time and
consideration of this matter.
Very truly yours,
Roslyn G. Daum
cc: William H. Carter, Esq. Mr. Wayne E. Carnall
Office of Chief Counsel Office of Chief Accountant
Mail Stop 3-3 Mail Stop 3-13
<PAGE>
SCHEDULE I
PHC, INC.
RESOLUTION ESTABLISHING RIGHTS AND PREFERENCES
FOR SERIES A CONVERTIBLE PREFERRED STOCK
RESOLVED, that there shall be a series of shares of the Corporation
designated "Series A Convertible Preferred Stock"; that the number of shares
of such series shall be 1,000, that the Corporation issue such shares, and
that the rights and preferences of such series (the "6% Preferred") and the
limitations or restrictions thereon, shall be as set forth herein.
The following terms and conditions shall be adopted and incorporated by
reference into the foregoing resolutions as if fully set forth therein:
1. Dividends.
(a) The holders of the 6% Preferred shall be entitled to receive out
of any assets legally available therefor cumulative dividends at the rate of
$60 per share per annum, payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, in preference and priority to any
payment of any dividend on the Common Stock or any other class or series of
stock of the Corporation. Such dividends shall accrue on any given share
from the day of original issuance of such share and shall accrue from day to
day whether or not earned or declared. If at any time dividends on the
outstanding 6% Preferred at the rate set forth above shall not have been paid
or declared and set apart for payment with respect to all preceding periods,
the amount of the deficiency shall be fully paid or declared and set apart
for payment, but without interest, before any distribution, whether by way of
dividend or otherwise, shall be declared or paid upon or set apart for the
shares of any other class or series of stock of the Corporation.
(b) Any dividend payable on a dividend payment date may be paid, at
the option of the Corporation, either (i) in cash or (ii) in shares of 6%
Preferred valued at $1,000 per share, if the Common Stock issuable upon
conversion of such shares has been registered for resale under the Securities
Act of 1933, as amended (the "Act"), and the registration statement including
a current prospects with respect thereto remains in effect at the date of
delivery of such shares, and if the Corporation shall have given written
notice of its intention to pay such dividend in stock to all holders of the
6% Preferred at least ten (10) days before the record date for such dividend.
2. Liquidation Preference; Redemption.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the 6% Preferred
shall be entitled to receive, prior and in preference to any distribution of
any assets of the Corporation to the holders of any other class or series of
shares, the amount of $1,000 per share plus any accrued but unpaid dividends
(the "Liquidation Preference").
(b) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or a sale of all or substantially all of
the assets of the Corporation, shall, at the option of the holders of the 6%
Preferred be deemed a liquidation, dissolution or winding up within the
meaning of this Section 2 if the shares of stock of the Corporation
outstanding immediately prior to such transaction represent immediately after
such transaction less than a majority of the voting power of the surviving
corporation (or of the acquirer of the Corporation's assets in the case of a
sale of assets). Such option may be exercised by the vote or written consent
of holders of a majority of the 6% Preferred at any time within thirty (30)
days after written notice (which shall be given promptly) of the essential
terms of such transaction shall have been given to the holders of the 6%
Preferred in the manner provided by law for the giving of notice of meetings
of shareholders.
<PAGE>
(c) The Corporation may, at its option. cause all outstanding, shares
of the 6% Preferred to be redeemed after the date on which a registration
statement under the Act ("Registration Statement") has been declared
effective (the "effective date"), provided the Corporation has given notice
of its intention to redeem to the holders of the 6% Preferred at least five
(5) days prior to the redemption date. On the redemption date, the
Corporation shall pay such holders by cashier's check or wire transfer in
immediately available funds the amount of (a) $1,300 per share if the
redemption date is on or before the one hundred fiftieth (150th ) day after
the effective date; or (b) $1,250 per share if the redemption date is after
the one hundred fiftieth (150th ) day following the effective date, plus any
accrued but unpaid dividends. Promptly thereafter, the holders shall
surrender the certificate or certificates representing the 6% Preferred, duly
endorsed, at the office of the Corporation or of any transfer agent for such
shares, or at such other place designated by the Corporation.
3. 6% Preferred - Forced Conversion.
(a) The Corporation may, at its option, cause all outstanding shares
of the 6% Preferred to be converted into Common Stock at any time beginning
one (1) year after the date of issuance, on at least twenty (20) days'
advance notice, at a conversion price determined as set forth in Section 4
hereof (the "Conversion Price") as of the date specified in such notice (the
"Conversion Date") and otherwise on the terms set forth in Section 4 hereof,
provided, that the Corporation may not exercise such right of conversion
unless (i) the Closing Price (last trade price) of the Common Stock as
reported by NASDAQ for the twenty (20) consecutive trading days prior to the
date the Conversion Notice is mailed has not on any day been less than one
hundred forty percent (140%) of the last trade price of the Company's Common
Stock on the day of Closing (subject to adjustment for stock dividends, stock
splits and reverse stock splits), and (ii) the shares issuable upon
conversion of the 6% Preferred are registered for resale by an effective
Registration Statement which became effective not more than one hundred
twenty (120) days after the date of issuance of the 6% Preferred, and a
current prospectus meeting the requirements of Section 10 of the Act is
available for delivery at the Conversion Date.
(b) At least twenty (20) days prior to the Conversion Date, written
notice (the "Conversion Notice") shall be mailed, first class postage
prepaid, by the Corporation to each holder of record of the 6% Preferred, at
the address last shown on the records of the Corporation for such holder,
notifying such holder of the conversion which is to be effected, specifying
the Conversion Date and calling upon each such holder to surrender to the
Corporation, in the manner and at the place designated, a certificate or
certificates representing the number of shares of 6% Preferred held by such
holder. Subject to the provisions of the following subsection (c), on or
after the Conversion Date, each holder of 6% Preferred shall surrender to the
Corporation the certificate or certificates representing the shares of 6%
Preferred owned by such holder as of the Conversion Date, in the manner and
at the place designated in the Conversion Notice, and thereupon the shares
issuable upon such conversion shall be delivered as provided in Section 4(b)
hereof.
(c) If on the Conversion Date, the registration condition specified
in clause (ii) of subsection (a) shall not be satisfied, then no shares shall
be converted and the Conversion Notice shall be deemed to be withdrawn. In
such event, any certificates for 6% Preferred which have been surrendered for
conversion shall be returned to the persons surrendering the same; provided,
however, that if a holder has received shares of Common Stock upon conversion
of 6% Preferred after the Conversion Notice was given but before the
Conversion Date, such holder may elect either to retain such Common Stock or
rescind such conversion by tendering such shares of Common Stock to the
Corporation.
(d) On the second anniversary of the issuance of the 6% Preferred,
all then outstanding shares of 6% Preferred shall be automatically converted
into Common Stock at the Conversion Price and otherwise pursuant to the
applicable provisions set forth in Section 4 hereof.
2
<PAGE>
4. 6% Preferred - Optional Conversion. The holders of the 6%
Preferred shall have optional conversion rights as follows:
(a) Right to Convert. At any time after the earlier of (i) the date
on which a Registration Statement has been declared effective, or (ii) the
close of business on the ninety first (91st) day following the date of
issuance of the 6% Preferred, shares of 6% Preferred shall become
convertible, at the option of the holder thereof, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing
(A) the Liquidation Preference of the 6% Preferred determined pursuant to
Section 2 hereof on the date the notice of conversion is given, by (B) the
Conversion Price determined as hereinafter provided in effect on the
applicable conversion date.
(b) Mechanics of Conversion. To convert shares of 6% Preferred into
shares of Common Stock, the holder shall give written notice to the
Corporation (which notice may be given by facsimile transmission) that such
holder elects to convert the shares and shall state therein date of the
conversion, the number of shares to be converted and the name or names in
which such holder wishes the certificate or certificates for shares of Common
Stock to be issued. Promptly thereafter, the holder shall surrender the
certificate or certificates representing the shares to be converted, duly
endorsed, at the office of the Corporation or of any transfer agent for such
shares, or at such other place designated by the Corporation. The
Corporation shall, immediately upon receipt of such notice, issue and deliver
to or upon the order of such holder, against delivery of the certificates
representing the shares which have been converted, a certificate or
certificates for the number of shares of Common Stock to which such holder
shall be entitled and such certificate or certificates shall not bear any
restrictive legend; provided (A) the Common Stock evidenced thereby are sold
pursuant to an effective registration statement under the Act (B) the holder
provides the Corporation with an opinion of counsel reasonably acceptable to
the Corporation to the effect that a public sale of such shares may be made
without registration under the Act, or (C) such holder provides the
Corporation with reasonable assurance that such shares can be sold free of
any limitations imposed by Rule 144, promulgated under the Act. The
Corporation shall cause such issuance to be effected within three (3)
business days and shall transmit the certificates by messenger or overnight
delivery service to reach the address designated by such holder within three
(3) business days after the receipt of such notice. The Corporation shall
immediately pay such holder in cash or by wire transfer in immediately
available funds $500 per day as liquidated damages for each day such shares
have not been delivered to the holder after the end of such three (3)
business day period. The notice of conversion may be given by a holder at
any time during the day up to 5:00 p.m. Boston, Massachusetts time and such
conversion shall be deemed to have been made immediately prior to the close
of business on the date such notice of conversion is given. The person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders
of such shares of Common Stock at the close of business on such date.
(c) Conversion/Payment Required. The Corporation acknowledges and
understands that a delay in the issuance of the Common Stock pursuant to the
provisions hereof or payment under Subsection (d)(i) below could result in
economic loss to the holders of the 6% Preferred. As compensation to any
holder when the Corporation has failed with respect to such holder to comply
with the Corporation's obligations under Subsection (a) above or under
Subsection (d)(i) below with regard to any payments due, and not as a
penalty, the Corporation shall pay to such holder liquidated damages an
amount equal to two percent (2%) of the total Purchase Price of 6% Preferred
and any Common Stock then held by the holder for the first thirty (30) day
period after the date on which the Common Stock should have been issued by
the Corporation (i.e., the end of the three (3) business day period described
in Subsection (b)), plus amount equal to two percent (2%) of the total
Purchase Price of 6% Preferred and any Common Stock then held by the holder
for each subsequent thirty (30) day period (pro-rated as to a periods of less
than thirty (30) days). Such amounts shall be paid to the holder immediately
by cashier's check or wire transfer in immediately available funds to such
account as shall be designated in writing by the holder.
3
<PAGE>
(d) Determination of Conversion Price.
(i) The "Conversion Price" for purposes of hereof shall be
equal to eighty percent (80%) of the average closing bid price of the Common
Stock as reported by NASDAQ during the five (5) consecutive trading days
preceding the conversion date (but not including such date); provided,
however, that in no event may the Conversion Price be more than four dollars
and fifty cents ($4.50) per share (the "Maximum Conversion Price") or less
than two dollars ($2.00) per share of Common Stock (the "Minimum Conversion
Price"). If, but for this Section 4(d)(i), the Conversion Price would have
been below two dollars ($2.00) per share, the Company shall pay the holder by
delivering to holder a Promissory Note, in the form attached hereto as
Schedule II and incorporated herein by reference, bearing the principal
amount equal to the difference between (A) the number of shares of Common
Stock that would have been issued at the amount the Conversion Price would
have been but for this Section 4(d)(i) multiplied by 100% of the closing bid
price of the Common Stock on the conversion date as determined in accordance
with the Subsection (d) (the latter amount being referred to herein as the
"Conversion Date Price"), minus (B) the number of shares of Common Stock
actually issued pursuant to the conversion multiplied by the Conversion Date
Price.
(ii) The "closing bid price" of the Common Stock on a trading
day shall be the closing bid price of the Common Stock on the NASDAQ Small
Cap Market or any other principal securities price quotation system or market
on which prices of the Common Stock are reported. The term "trading day"
means a day on which trading is reported on the principal quotation system or
market on which prices of the Common Stock are reported.
(iii) If, during the period of consecutive trading days provided
for above, the Corporation shall declare or pay any dividend on the Common
Stock payable in Common Stock or in rights to acquire Common Stock, or shall
effect a stock split or reverse stock split or a combination, consolidation
or reclassification of the Common Stock, the Conversion Price, Maximum
Conversion Price and Minimum Conversion Price shall be proportionately
decreased or increased, as appropriate, to give effect to such event
(e) Distributions. If the Corporation shall at any time or from time
to time make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution payable
in securities of the Corporation or any of its subsidiaries other than
additional shares of Common Stock, then in each such event provision shall be
made so that the holders of 6% Preferred shall receive, upon the conversion
thereof, the securities of the Corporation which they would have received had
they been the owners on the date of such event of the number of Share of
Common Stock issuable to them upon conversion.
f) Certificates as to Adjustments. Upon the occurrence of any
adjustment or readjustment of the Conversion Price, the Maximum Conversion
Price and Minimum Conversion Price to this Section 4, the Corporation at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and cause the independent public accountants regularly
employed to audit the all statements of the Corporation to verify such
computation and prepare and furnish to each holder of 6% Preferred a
certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjusment is based. The
Corporation shall, upon the written request at any time of any holder of 6%
Preferred, furnish or cause to be furnished to such holder a like certificate
prepared by the Corporation setting forth (i) such adjustments and
readjustments and (ii) the number of other securities and the amount, if any,
of other property which at the time would be received upon the conversion of
6% Preferred with respect to each share of Common Stock received upon such
conversion.
4
<PAGE>
(g) Notice of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
right convertible into or entitling the holder thereof to receive additional
shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property,
or to receive any other right, the Corporation shall mail to each holder of
6% Preferred at least ten (10) days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution, security or right and the amount and
character of such dividend, distribution, security or right.
(h) Issue Taxes. The Corporation shall pay any and all issue and
other taxes, excluding any income, franchise or similar taxes, that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of 6% Preferred pursuant hereto; provided, however, that
the Corporation shall not be obligated to pay any transfer taxes resulting
from any transfer requested by any holder in connection with any such
conversion.
(i) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the 6% Preferred, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the 6% Preferred, and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the 6%
Preferred, the Corporation will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain any requisite
shareholder approval.
(j) Fractional Shares. No fractional shares shall be issued upon the
conversion of any share or shares of 6% Preferred. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than one
share of 6% Preferred by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair market
value of such fraction on the date of conversion (as determined in good faith
by the Board of Directors of the Corporation).
(k) Notices. Any notice required by the provisions of this Section
to be given to the holders of shares of 6% Preferred shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at its address appearing on the books of the Corporation.
(1) Reorganization or Merger. In case of any reorganization or any
reclassification of the capital stock of the Corporation or any consolidation
or merger of the Corporation with or into any other corporation or
corporations or a sale of all or substantially all of the assets of the
Corporation to any other person, and the holders of 6% Preferred do not elect
to treat such transaction as a liquidation, dissolution or winding up as
provided in Section 2 hereof, then, as part of such reorganization,
consolidation, merger or sale, provision shall be made so that each share of
6% Preferred shall thereafter be convertible into the number of shares of
stock or other securities or property (including cash) to which a holder of
the number of shares of Common Stock deliverable upon conversion of such
share of 6% Preferred would have been entitled upon the record of (or date
of, if no record date is fixed) such event and, in any case, appropriate
adjustment (as determined by the Board of Directors) shall be made in the
application of the provisions herein set forth with respect to the rights and
in of the holders of the 6% Preferred to the end that the provisions set
forth herein shall thereafter be applicable, as nearly as equivalent as is
practicable, in relation to any shares of stock or the securities or property
(including cash) thereafter deliverable upon the conversion of the shares of
6% Preferred.
5
<PAGE>
5. Re-issuance of Certificates. In the event of a conversion (or,
if applicable, redemption) of 6% Preferred in which less than all of the
shares of 6% Preferred of a particular certificate are converted or redeemed,
as the case may be, the Corporation shall promptly without delay cause to be
issued and delivered to the holder of such certificate, a certificate
representing the remaining shares of 6% Preferred which have not been so
converted or redeemed.
6. Other Provisions. For all purposes of this Resolution, the term
"date of issuance" and the terms "Closing" or "Closing Date" shall mean the
day on which Share of the 6% Preferred are first issued by the Corporation.
Any provision herein which conflicts with or violates any applicable usury
law shall be deemed modified to the extent necessary to avoid such conflict
or violation. The term "NASDAQ" herein refers to the principal market on
which the Common Stock of the Corporation is traded. If the Common Stock is
listed on a securities exchange, or if another market becomes the principal
market on which the Common Stock is traded or through which price quotations
for the Common Stock are reported, the term "NASDAQ" shall be deemed to refer
to such exchange or other principal market.
7. Restrictions and Limitations. The Corporation shall not
undertake the following actions without the consent of the holders of a
majority of the 6% Preferred: (i) modify its Articles of Organization or
Bylaws so as to amend or change any of the rights, preferences, or privileges
of the 6% Preferred, (ii) authorize or issue any other preferred equity
security senior to or on a parity with the 6% Preferred, as to dividends,
liquidation preferences, conversion rights, redemption rights or other
rights, preferences or privileges for a period of thirty (30) days after
Closing, as applicable or (iii) purchase or otherwise acquire for value any
Common Stock or other equity security of the Corporation either junior or
senior to or on a parity with the 6% Preferred while there exists any
arrearage in the payment of cumulative dividends hereunder other than
redemptions of stock from terminating employees pursuant to contractual
rights in favor of the Corporation.
8. Voting Rights. Except as provided herein or as provided for by
law, the 6% Preferred shall have no voting rights.
9. Attorneys' Fees. Any holder of 6% Preferred shall be entitled to
recover from the Corporation the reasonable attorneys' fees and expenses
incurred by such holder in connection with enforcement by such holder of any
obligation of the Corporation hereunder.
10. No Adverse Actions. The Corporation shall not in any manner,
whether by amendment of the Articles of Organization (including, without
limitation, any vote establishing a class or series of stock), merger,
reorganization, re-capitalization, consolidation, sales of assets, sale of
stock, tender offer, dissolution or otherwise, take any action, or permit any
action to be taken, solely or primarily for the purpose of increasing the
value of any class of stock of the Corporation if the effect of such action
is to reduce the value or security of the 6% Preferred.
6
<PAGE>
SCHEDULE II
PROMISSORY NOTE (the "Note")
Date: ___________________, 199___
Maker: PHC, Inc.
Maker's Mailing Address: 200 Lake Street - Suite 102
Peabody, Massachusetts 01960
Payee:
Place for Payment:
Principal Amount: $ __________________________
Annual Interest Rate on Unpaid Principal From Date: Eight percent (8%).
Annual Past Due Interest Rate on Unpaid Principal from Maturity to Payment:
Fifteen percent (15%). Terms of Payment: Principal and interest shall be due and
payable in six (6)
equal consecutive monthly payments of $___________ (based on a six (6)
month amortization) with the first payment being due and payable on the first
day of ____________________.
The Maker promises to pay to the order of Payee at the place for payment and
according to the terms of payment the outstanding principal and accrued
interest at the rates stated above. All unpaid amounts owing on this Note
shall be due by the final scheduled payment date of _______________.
Additional Provisions:
If Maker defaults in the payment of this Note, or in any instrument
securing or collateral to it, then Payee may declare the unpaid principal
balance of this Note and all accrued interest immediately due and payable.
Maker and each surety, endorser, and guarantor or other party liable for the
payment of any sums of money payable on this Note severally waive all demands
for payment, presentations for payment, notices of dishonor, notices of
intention to accelerate maturity, notices of acceleration of maturity,
protests, and notices of protest, to the extent permitted by law.
If this Note or any instrument securing or collateral to it is given to
an attorney for collection or enforcement, or if suit is brought for
collection or enforcement, or if it is collected or enforced through probate,
bankruptcy, or other judicial proceeding, then Maker shall pay Payee all
costs of collection and enforcement, including reasonable attorneys fees and
court costs, in addition to other amounts due.
Interest on the debt evidenced by this Note shall not exceed the
maximum amount of non-usurious interest that may be contracted for, taken,
reserved, charged or received under law, any interest in excess of that
maximum amount shall be credited on the principal of the debt or, if that has
been paid, refunded. On any acceleration or required or permitted
prepayment, any such excess shall be canceled automatically as of the
acceleration or prepayment or, if already paid, credited on the principal of
the debt or, if the principal of the debt has been paid, refunded. This
provision overrides other provisions in this and all other instruments
concerning the debt.
PHC, INC.
PROMISSORY NOTE
Page 1
<PAGE>
When the context requires, singular nouns and pronouns include the
plural.
This Note is to be governed and construed in accordance with the laws
of the State of Texas.
MAKER, FOR GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND
SUFFICIENCY OF WHICH ARE HEREBY ACKNOWLEDGED, (I) HEREBY IRREVOCABLY SUBMITS
TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT AND OTHER COURTS OF
THE UNITED STATES SITTING IN TEXAS FOR THE PURPOSES OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND (U) HEREBY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY
CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT,
THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR
THAT THE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. MAKER CONSENTS TO
PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY
THEREOF TO MAKER AT THE ADDRESS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE
GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS
PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW.
Executed as of date first above written.
PHC, Inc., a Massachusetts corporation
By: _______________________________________
Name of
Authorized Officer: ___________________________
Title: ______________________________________
PHC, INC.
PROMISSORY NOTE
Page 2
<PAGE>
Exhibit 4.22
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN
VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS
OF THIS WARRANT.
Shares Issuable Upon Exercise: Up to 50,000 shares of the Class A Common
Stock, $.01 par value, of PHC, Inc.
WARRANT AGREEMENT
THIS WARRANT AGREEMENT dated as of June 4, 1997 is entered into by PHC,
Inc. (the "Company") and ProFutures Special Equities Fund, L.P. (the
"Holder").
W I T N E S S E T H:
WHEREAS, the Board of Directors has of the Company has authorized the
issuance to the Holder of the warrant (the "Warrant") of the Company
represented by this Warrant Agreement, which Warrant entitled the Holder to
purchase, upon the terms and conditions hereinafter set forth, shares of the
Company's Class A common stock, $0.01 per value per share (the "Class A
Common Stock").
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
ARTICLE I
GRANT OF WARRANT
For value received, this Warrant Agreement entitles the Holder to
subscribe for and purchase up to 50,000 shares of Class A Common Stock, at a
price per share of $2.75 (the "Warrant Price"). As used herein, the term
"Shares" shall mean the Company's Class A Common Stock, or any stock into or
for which such Class A Common Stock shall have been or may hereafter be
converted or exchanged pursuant to the Articles of Organization of the
Company as from time to time amended as provided by law and in such articles
(hereinafter the "Charter"), and the term "Grant Date" shall mean June 4,
1997. The number of shares of Class A Common Stock purchasable pursuant to
the rights granted hereunder and the purchase price for such shares of Class
A Common Stock are subject to adjustment pursuant to the provisions contained
in this Warrant Agreement.
<PAGE>
ARTICLE II
EXERCISE OF WARRANT; EXERCISE PRICE
Section 2.1 Term. Subject to the provisions of this Warrant Agreement,
the purchase right represented by this Warrant Agreement is exercisable, in
whole or in part, at any time and from time to time from and after the Grant
Date and on or prior to June 4,, 2002 (the "Exercise Period").
Section 2.2 Method of Exercise. The purchase right represented by this
Warrant Agreement may be exercised by the holder hereof, in whole or in part
and from time to time, by the surrender of this Warrant (with the Form of
Election attached hereto as Exhibit A duly executed) at the principal office
of the Company and by the payment to the Company by certified or bank check
or by wire transfer, of an amount equal to the Warrant Price multiplied by
the number of shares then being purchased (the "Exercise Price").
Section 2.3 Issuance of Shares of Common Stock. As soon as reasonably
practicable after the exercise of all or part of the purchase right
represented by this Warrant Agreement, the Company shall (provided that it
has received the Form of Election duly executed, accompanied by payment of
the Exercise Price pursuant to Section 2.2 hereof for each of the shares of
Class A Common Stock to be purchased) cause certificates for the number of
shares of Class A Common Stock to be issued in respect of this Warrant
Agreement to be delivered to or upon the order of the Holder, registered in
such name as may be designated by such holder; provided that if the Class A
Common Stock is to be registered in the name of any entity or person other
than the Holder, the Company may require evidence of compliance by the Holder
with all applicable securities laws.
ARTICLE III
RESERVATION AND AVAILABILITY OF COMMON STOCK;
ADJUSTMENTS; REGISTRATION
Section 3.1 Reservation of Common Stock. The Company covenants and
agrees that it will cause to be kept available out of its authorized and
unissued Class A Common Stock, or its authorized and issued Class A Common
Stock held in its treasury, the number of shares of Class A Common Stock that
will be sufficient to permit the exercise in full of this Warrant Agreement.
Section 3.2 Common Stock to be Duly Authorized and Issued, Fully Paid
and Nonassessable. The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all shares of Class A Common
Stock delivered upon exercise of this Warrant Agreement shall, at the time of
delivery of the certificates for such shares, be duly and validly authorized
and issued and fully paid and non-assessable shares.
<PAGE>
Section 3.3 Common Stock Record Date. Each person or entity in whose
name any certificate for shares of Class A Common Stock is issued upon the
exercise of this Warrant Agreement shall for all purposes be deemed to have
become the holder of record of the shares of Class A Common Stock represented
thereby on, and such certificate shall be dated, if practicable, the date
upon which the Form of Election was duly executed and payment of the
aggregate Exercise Price was made pursuant to Section 2.2 hereof. Prior to
the exercise of this Warrant Agreement, the Holder shall not be entitled to
any rights of a stockholder of the Company with respect to the shares of
Class A Common Stock for which this Warrant Agreement shall be exercisable,
including, without limitation, the right to vote, to receive dividends or
other distributions or to exercise any preemptive rights and shall not be
entitled to receive any notice of any proceedings of the Company, except as
provided herein.
Section 3.4 Adjustment of Warrant Price and Number of Shares. The
number and kind of securities purchasable upon the exercise of the Warrant
Agreement and the Warrant Price shall be subject to adjustment from time to
time upon the occurrence of certain events, as follows:
3.4 (a) Reclassification. In case of any reclassification, change or
conversion of the Company's Class A Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination), the Company, shall execute a
new Warrant Agreement (in form and substance reasonably satisfactory to the
Holder) providing that the Holder of this Warrant Agreement shall have the
right to exercise such new Warrant Agreement and upon such exercise and
payment of the then applicable Warrant Price to receive, in lieu of each
Share theretofore issuable upon exercise of this Warrant Agreement, the kind
and amount of shares of stock, other securities, money and property
receivable upon such reclassification or change by a holder of one share of
Class A Common Stock. Such new Warrant Agreement shall provide for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 3.4. The provisions of this Section
3.4 (a) shall similarly apply to successive reclassifications and changes.
3.4 (b) Subdivision or Combination of Shares. If the Company at any
time while this Warrant Agreement remains outstanding and unexpired shall
subdivide or combine its Class A Common Stock, the Warrant Price and the
number of Shares issuable upon exercise hereof shall be equitably adjusted.
3.4 (c) Stock Dividends. If the Company at any time while this
Warrant Agreement is outstanding and unexpired shall pay a dividend payable
in shares of Class A Common Stock (except any distribution specifically
provided for in the foregoing Sections 3.4 (a) and (b)), then the Warrant
Price shall be adjusted, from and after the date of determination of
shareholders entitled to receive such dividend or distribution, to that price
determined by multiplying the Warrant Price in effect immediately prior to
such date of determination by a fraction (a) the numerator of which shall be
the total number of shares of Class A Common Stock outstanding immediately
prior to such dividend or distribution, and (b) the denominator of which
shall be the total number of shares of Class A Common Stock outstanding
immediately after such dividend or distribution and the number of Shares
subject to this Warrant Agreement shall be appropriately adjusted.
<PAGE>
3.5 Registration of Shares. The Company covenants and agrees that it
will use its best efforts to ensure that all shares of Class A Common Stock
deliverable upon exercise in full of the purchase right represented by this
Warrant Agreement are registered under the Securities Act of 1933, as amended
(the "Act") at the same time as the Registrable Shares issuable on the
conversion of the Series A Convertible Preferred Stock issued to the Holder.
3.6 No Impairment. The Company will not, by amendment of its Charter
or through any reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions
of this Warrant Agreement and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder of this
Warrant Agreement against impairment.
3.7 Notices of Record Date. In the event of any taking by the Company of a
record of its shareholders for the purpose of determining shareholders who
are entitled to receive payment of any dividend or other distribution, or for
the purpose of determining shareholders who are entitled to vote in
connection with any proposed merger or consolidation of the Company with or
into any other corporation, or any proposed sale, lease or conveyance of all
or substantially all of the assets of the Company, or any proposed
liquidation, dissolution or winding up of the Company, the Company shall mail
to the holder of this Warrant Agreement, at least fifteen (15) days prior to
the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or vote,
and the amount and character of such dividend, distribution or vote.
ARTICLE IV
HOLDER REPRESENTATIONS, WARRANTIES AND COVENANTS
The Holder represents and warrants to and covenants with the Company as
follows:
Section 4.1 Representations. It understands the risks of investing in
the Company and can afford a loss of its entire investment. It is acquiring
the Warrant for investment for its own account and not with the view to, or
for resale in connection with any distribution thereof. It understands that
the Warrant and the shares of Class A Common Stock issuable upon exercise
thereof have not been registered under the Act, or any state blue sky laws,
by reason of specified exemptions from the registration provisions of the Act
and such laws. It acknowledges that the Warrant and the shares of Common
Stock issuable upon exercise thereof must be held indefinitely unless they
are subsequently registered under the Act or an exemption from such
registration is available. It has been advised or is aware of the provisions
of Rule 144 promulgated under the Act, which permits the resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions and that such Rule may not be available for resale of the shares
issuable upon the exercise of the Warrant. It has had an opportunity to (i)
discuss the Company's business, management and financial affairs with its
management (ii) review the financial statements relating to the Company's
last two fiscal years and (iii) review the Company's facilities.
Section 4.2 Restrictions on Transferability. Neither the Warrant, nor
the shares of Class A Common Stock received upon exercise thereof, shall be
transferable, except upon the conditions specified in and in accordance with
the terms of this Article IV or until such time as an effective registration
statement covering the shares issuable upon the exercise of this Warrant has
been filed with the Securities and Exchange Commission (the "Commission").
Section 4.3 Restrictive Legend. Each certificate representing shares
of the Company's Class A Common Stock issuable upon exercise of the Warrant,
or any other securities issued in respect of the Class A Common Stock issued
upon exercise of the Warrant, upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event, shall be stamped or
otherwise imprinted with a legend in substantially the following form (in
addition to any legend required under applicable state securities laws)
unless and until such shares have been registered under the Act.:
THE SHARES SHARES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE TRANSFERRED
IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS
THEREUNDER OR THE PROVISIONS OF THIS WARRANT.
Section 4.4 Restrictions on, and Notice of, Proposed Transfers. The
Holder agrees that prior to any proposed transfer of this Warrant or any of
the shares of Class A Common Stock issuable upon exercise of this Warrant
(collectively, the "Restricted Securities"), in the absence of an effective
registration statement filed with the Commission covering the shares of Class
A Common Stock issuable upon exercise of the Warrant, the Holder shall give
written notice to the Company of its intention to effect such transfer. Each
such notice shall describe the manner and circumstances of the proposed
transfer in sufficient detail, and shall be accompanied by a written opinion
of legal counsel who shall be reasonably satisfactory to the Company,
addressed to the Company and reasonably satisfactory in form and substance to
the Company's counsel, to the effect that the proposed transfer of the
Restricted Securities may be effected without registration under the Act or
under any applicable state or other securities laws.
ARTICLE V
MISCELLANEOUS
Section 5.1 Notices. Notices or demands relating to this Warrant
Agreement shall be sufficiently given or made if sent by facsimile,
first-class mail, postage prepaid, addressed as follows, or telecopied, or
delivered by nationally-recognized overnight or other courier:
If to the Holder: ProFutures Special Equities Fund, L.P.
1310 Highway 620 South
Suite 200
Austin TX 77734
If to the Company: PHC, Inc.
200 Lake Street
Peabody, MA 01960
Attention: Bruce A. Shear
Fax (508) 536-2677
copy to: Roslyn G. Daum, Esq.
Choate, Hall & Stewart
Exchange Place
Boston, MA 02109
Fax: (617) 248-4000
Section 5.2 Successors. All the covenants and provisions of this
Warrant Agreement by or for the benefit of the Company or the Holder shall
bind and inure to the benefit of their respective successors and assigns
hereunder; provided that this Warrant Agreement may be assigned by the Holder
only with the prior written consent of the Company, and without such consent
any attempted transfer shall be null and void.
Section 5.3 MASSACHUSETTS CONTRACT. THIS WARRANT AGREEMENT AND THE WARRANT,
AND ALL QUESTIONS RELATING TO THE INTERPRETATION, CONSTRUCTION AND
ENFORCEABILITY OF THIS WARRANT AGREEMENT AND THE WARRANT, SHALL BE GOVERNED
IN ALL RESPECTS BY THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
Section 5.4 Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Warrant Agreement may not be amended, modified
or supplemented, other than by a written instrument executed by the Company
and the Holder.
Section 5.5 Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances,
is held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any
way impaired thereby, it being intended that all of the rights and privileges
of the Company the Holder shall be enforceable to the fullest extent
permitted by law.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be duly executed and delivered, all as of the date and year
first above written.
PHC, INC.
By:__________________________________
Name: Bruce A. Shear
Title: President
PROFUTURES SPECIAL EQUITIES FUND, L.P.
By: ProFutures Fund Management, Inc.,
a General Partner
By:________________________________
Name: Gary D. Halbert
Title: President
DS1.344543.1
<PAGE>
EXHIBIT A
Form of Election
To: PHC, Inc.
200 Lake Street
Peabody, MA 01960
Attention: Bruce A. Shear
1. The undersigned hereby elects to purchase ______ shares of Class
A Common Stock PHC, Inc. pursuant to the terms of the attached Warrant
Agreement, and tenders herewith payment of the Exercise Price of such shares
in full.
2. Please issue a certificate or certificates representing the
shares deliverable upon the exercise set forth in paragraph 1 in the name of
the undersigned or, subject to compliance with the restrictions on transfer
set forth in Article IV of the Warrant Agreement, in such other name or names
as are specified below:
_____________________________________
(Name)
_____________________________________
_____________________________________
_____________________________________
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that
the undersigned has no present intention of distributing or reselling such
shares until and unless such shares are registered under the Securities Act
of 1933.
_____________________________________
Signature
______________
Date
0584401-0000
DSI.344543.1
