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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 [FEE REQUIRED] for the fiscal year ended June 30, 1998
[ ] Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 [NO FEE REQUIRED] for the transition period from to
Commission file number: 0-23524
PHC, INC.
(Name of small business issuer in its charter)
MASSACHUSETTS 04-2601571
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 LAKE STREET, SUITE 102, PEABODY, MA 01960
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (978) 536-2777 (New area code)
Securities registered under Section 12(b) of the Act:
NONE.
Securities registered under Section 12(g) of the Act:
Units (each unit consisting of one share of CLASS A COMMON
STOCK AND ONE CLASS A WARRANT)
(Title of class)
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
CLASS A WARRANTS TO PURCHASE ONE SHARE OF CLASS A COMMON STOCK
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The issuer's revenues for the fiscal year ended June 30, 1998 were $ 21,246,189.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of September 15, 1998, was $4,615,671. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At September 15, 1998, 4,935,267 shares of the issuer's Class A Common Stock and
727,328 shares of the issuer's Class B Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
PHC, Inc. (the "Company") is a national health care company specializing in
the treatment of substance abuse, which includes alcohol and drug dependency and
related disorders, and in the provision of psychiatric services. The Company
currently operates two substance abuse treatment facilities: Highland Ridge
Hospital, located in Salt Lake City, Utah, ("Highland Ridge"); and Mount Regis
Center, located in Salem, Virginia, near Roanoke ("Mount Regis") and eleven
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;" North Point-Pioneer,
Inc. ("NPP") which operates nine 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 BSC-NY, Inc. ("BSC") which provides management and
administrative services to psychotherapy and psychological practices in the
greater New York City metropolitan area. Additionally, BSC provides billing and
administrative services to the Company's Joint Venture with Lexington Healthcare
Group, Inc., Behavioral Rehab Services of Connecticut, Inc.
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. BSC is a manager of psychological service providers
with contracts at over 35 long-term care facilities. 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.
In May, 1998 the Company closed Good Hope Center, a substance abuse
treatment facility located in West Greenwich, Rhode Island ("Good Hope") and
entered into an agreement terminating the lease for the facility. Under the
agreement the Company is obligated to pay approximately $125,000. The Company
estimates that it will incur aggregate costs of closing this facility, in
addition to the lease agreement cost, of approximately $120,000. In June, 1998
the Company's sub acute long-term care facility, Franvale Nursing and
Rehabilitation Center ("Franvale"), in Braintree, Massachusetts was closed in a
State Receivership action which was precipitated when the Company caused the
owner of the Franvale facility, Quality Care Centers of Massachusetts, Inc., to
institute a proceeding under Chapter 11 of the Federal Bankruptcy Code. All
patients have been transferred from Franvale and the assets of the facility are
being liquidated. For additional information see 'Business-Closed and
Discontinued Operations-Franvale.'
The Company intends to limit its business operations to behavioral health
and substance abuse facilities providing services to particular markets through
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 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" and "Pioneer Behavioral
Health." 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's executive offices are located at 200 Lake Street,
Suite 102, Peabody, Massachusetts, 01960 and its telephone number is (978)
536-2777.
PSYCHIATRIC SERVICES INDUSTRY
Substance Abuse Facilities
Industry Background
The demand for substance abuse treatment services increased rapidly in the
last decade. The Company believes that the increased demand is related to
clinical advances in the treatment of substance abuse, greater societal
willingness to acknowledge the underlying problems as treatable illnesses,
improved health insurance coverage for addictive disorders and chemical
dependencies and governmental regulation which requires certain employers to
provide information to employees about drug counseling and employee assistance
programs.
To contain costs associated with behavioral health issues in the 1980s,
many private payors instituted managed care programs for reimbursement, which
included pre-admission certification, case management or utilization review and
limits on financial coverage or length of stay. These cost containment measures
have encouraged outpatient care for behavioral problems, resulting in a
shortening of the length of stay and revenue per day in inpatient chemical abuse
facilities. The Company believes that it has addressed these cost containment
measures by specializing in treating relapse-prone patients with poor prognoses
who have failed in other treatment settings. These patients require longer
lengths of stay and come from a wide geographic area. The Company continues to
develop alternatives to inpatient care including partial day and evening
programs in addition to on site and off site outpatient programs.
The Company believes that because of the apparent unmet need for certain
clinical and medical services, its strategy has been successful despite national
trends towards outpatient treatment, shorter inpatient stays and rigorous
scrutiny by managed care organizations.
Company Operations
The Company has been able to secure insurance reimbursement for longer-term
inpatient treatment as a result of its success with poor prognosis patients. The
Company's two substance abuse facilities work together to refer patients to the
center that best meets the patient's clinical and medical needs. Each facility
caters to a slightly different patient population including high-risk,
relapse-prone chronic alcoholics, drug addicts, minority groups and dual
diagnosis patients (those suffering from both substance abuse and psychiatric
disorders). The Company concentrates on providing services to insurers, managed
care networks and health maintenance organizations for both adults and
adolescents. The Company's clinicians often work directly with managers of
employee assistance programs to select the best treatment facility possible for
their clients.
Each of the Company's facilities operates a case management program for
each patient including a clinical and financial evaluation of a patient's
circumstances to determine the most cost-effective modality of care from among
outpatient treatment, detoxification, inpatient, day care, specialized relapse
treatment and others. In addition to any care provided at one of the Company's
facilities, the case management program for each patient includes aftercare.
Aftercare may be provided through the outpatient services provided by a
facility. Alternatively, the Company may arrange for outpatient aftercare, as
well as family and mental health services, through its numerous affiliations
with clinicians located across the country once the patient is discharged.
In general, the Company does not accept patients who do not have either
insurance coverage or adequate financial resources to pay for treatment. Each of
the Company's substance abuse facilities does, however, provide treatment free
of charge to a small number of patients each year who are unable to pay for
treatment, but who meet certain clinical criteria and who are believed by the
Company to have the requisite degree of motivation for treatment to be
successful. In addition, the Company provides follow-up treatment free of charge
to relapse patients who satisfy certain criteria. The number of patient days
attributable to all patients who receive treatment free of charge in any given
fiscal year is less than 5%.
The Company believes that it has benefited from an increased awareness of
the need to make substance abuse treatment services accessible to the nation's
workforce. For example, subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as The Drug Free Workplace Act) (the "Drug Free Workplace Act"),
requires employers who are Federal contractors or Federal grant recipients to
establish drug free awareness programs to inform employees about available drug
counseling, rehabilitation and employee assistance programs and the consequences
of drug abuse violations. In response to the Drug Free Workplace Act, many
companies, including many major national corporations and transportation
companies, have adopted policies that provide for treatment options prior to
termination of employment.
Although the Company does not provide federally approved mandated drug
testing, the Company treats employees who have been referred to the Company as a
result of compliance with the Drug Free Workplace Act, particularly from
companies that are part of the gaming industry as well as safety sensitive
industries such as railroads, airlines, trucking firms, oil and gas exploration
companies, heavy equipment companies, manufacturing companies and health
services.
HIGHLAND RIDGE
Highland Ridge is a 34-bed alcohol and drug treatment hospital which the
Company has been operating since 1984. It is the oldest free-standing substance
abuse hospital in Utah. Highland Ridge is accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") and is licensed by the Utah
Department of Health. Highland Ridge is recognized nationally for its excellence
in treating substance abuse disorders.
Most patients are from Utah and surrounding states. Individuals typically
access Highland Ridge's services through professional referrals, family members,
employers, employee assistance programs or contracts between the Company and
health maintenance organizations located in Utah.
Highland Ridge was the first private for-profit hospital to address
specifically the special needs of chemically dependent women in Salt Lake
County. In addition, Highland Ridge has contracted with Salt Lake County to
provide medical detoxification services targeted to women. The hospital also
operates a specialized continuing care support group to address the unique needs
of women and minorities.
A pre-admission evaluation, which involves an evaluation of psychological,
cognitive and situational factors is completed for each prospective patient. In
addition, each prospective patient is given a physical examination upon
admission. Diagnostic tools, including those developed by the American
Psychological Association, the American Society of Addiction Medicine and the
Substance Abuse Subtle Screening Inventory are used to develop an individualized
treatment plan for each client. The treatment regimen involves an
interdisciplinary team which integrates the twelve-step principles of self-help
organizations, medical detoxification, individual and group counseling, family
therapy, psychological assessment, psychiatric support, stress management,
dietary planning, vocational counseling and pastoral support. Highland Ridge
also offers extensive aftercare assistance at programs strategically located in
areas of client concentration throughout the United States. Highland Ridge
maintains a comprehensive array of professional affiliations to meet the needs
of discharged patients and other individuals not admitted to the hospital for
treatment.
Highland Ridge periodically conducts or participates in research projects.
Highland Ridge was the site of a recent research project conducted by the
University of Utah Medical School. The research explored the relationship
between individual motivation and treatment outcomes. The research was regulated
and reviewed by the Human Subjects Review Board of the University of Utah and
was subject to federal standards that delineated the nature and scope of
research involving human subjects. Highland Ridge benefited from this research
by expanding its professional relationships within the medical school community
and by applying the findings of the research to improve the quality of services
the Company delivers.
SPECIALIZED TREATMENT SERVICE
In the spring of 1994, the Company began to operate a crisis hotline
service under contract with a major transportation client. The hotline, Pioneer
Development Support Services, or PDS2 ("PDS2"), is a national, 24-hour telephone
service which supplements the services provided by the client's Employee
Assistance Programs. The services provided include information, crisis
intervention, critical incidents coordination, employee counselor support,
client monitoring, case management and health promotion. The hotline is staffed
by counselors who refer callers to the appropriate professional resources for
assistance with personal problems. Five major transportation companies
subscribed to these services as of June 30, 1998. This operation is physically
located in Highland Ridge Hospital, but services are provided by staff dedicated
to PDS2. PDS2 is currently operated by the parent entity, PHC, Inc.
MOUNT REGIS
Mount Regis is a 25-bed, free-standing alcohol and drug treatment center
located in Salem, Virginia, near Roanoke. The center, which was acquired in
1987, is the oldest of its kind in the Roanoke Valley. Mount Regis is accredited
by the JCAHO, and licensed by the Department of Mental Health, Mental
Retardation and Substance Abuse Services of the Commonwealth of Virginia. In
addition, Mount Regis operates Changes, a free standing outpatient clinic. The
Changes clinic provides structured intensive outpatient treatment for patients
who have been discharged from Mount Regis and for patients who do not need the
formal structure of a residential treatment program. The program is licensed by
the Commonwealth of Virginia and approved for reimbursement by major insurance
carriers.
The programs at Mount Regis are designed to be sensitive to needs of women
and minorities. The majority of Mount Regis clients are from Virginia and
surrounding states. In addition, because of its relatively close proximity and
accessibility to New York, Mount Regis has been able to attract an increasing
number of referrals from New York-based labor unions. Mount Regis has
established programs which allow the Company to better treat dual diagnosis
patients (those suffering from both substance abuse and psychiatric disorders),
cocaine addiction and relapse-prone patients. The multi-disciplinary case
management, aftercare and family programs are designed to prevent relapse.
General Psychiatric Facilities
Introduction
The Company believes that its proven ability to provide high quality,
cost-effective care in the treatment of substance abuse will enable it to grow
in the related behavioral health field of psychiatric treatment. The Company's
main advantage is its ability to provide an integrated delivery system of
inpatient and outpatient care. As a result of integration, the Company is better
able to manage and track patients.
The Company's inpatient psychiatry services are offered at Harbor Oaks. The
Company currently operates nine outpatient psychiatric facilities.
The Company's philosophy at these facilities is to provide the most
appropriate and efficacious care with the least restrictive modality of care.
Case management is handled by an attending physician and a case manager with
continuing oversight of the patient as the patient receives care in different
locations or programs. The integrated delivery system allows for better patient
tracking and follow-up, and fewer repeat procedures and therapeutic or
diagnostic errors. Each new patient receives a thorough diagnostic write-up and
a full history is taken. In addition, new patients also receive a full physical
examination after which an individualized treatment program is designed which
may include inpatient and/or outpatient treatment at one or more of the
company's facilities.
Patients are referred from managed health care organizations, state
agencies, individual physicians and by patients themselves. The patient
population at these facilities ranges from children as young as 5 years of age
to senior citizens. The psychiatric facilities treat a larger percentage of
female patients than the substance abuse facilities.
HARBOR OAKS
Harbor Oaks Hospital is a 64 bed psychiatric hospital located in New
Baltimore, Michigan, approximately 20 miles northeast of Detroit, which was
acquired by the Company in September, 1994. Harbor Oaks Hospital is licensed by
the Michigan Department of Commerce and is accredited by JCAHO. Harbor Oaks
provides inpatient psychiatric care, partial hospitalization and outpatient
treatment to children, adolescents and adults. Harbor Oaks Hospital has serviced
clients from Macomb, Oakland and St. Clair Counties and has now expanded its
coverage area to include Wayne, Sanilac and Livingston Counties.
Until March, 1998, Harbor Oaks Hospital worked 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. The contract with New Life was terminated on May 22, 1998 by mutual
agreement.
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 an initial period of 30 days to six months.
A case review is done for any patient still in the program at six months, and
each subsequent six month period thereafter, to determine if additional
treatment is required. On May 1, 1998 the State authorized the addition of four
beds to the adjudicated residential unit and on June 26, 1998 the State
authorized an additional eight beds for a total of 20 beds currently available
in this unit.
Harmony Healthcare
Harmony Healthcare, located in Las Vegas, Nevada, provides outpatient
psychiatric care to children, adolescents and adults in the local area. Harmony
also operates employee assistance programs for railroads, health care companies
and several large casino companies including Boyd Gaming Corporation, the MGM
Grand, the Mirage and Treasure Island resorts with a rapid response program to
provide immediate assistance 24 hours a day.
Total Concept EAP
Total Concept, an outpatient clinic located in Shawnee Mission, Kansas,
provides psychiatric and substance abuse treatment to children, adolescents and
adults and manages employee assistance programs for local businesses, gaming,
railroads and managed health care companies.
North Point-Pioneer, Inc.
NPP consists of five psychiatric clinics in Michigan. The clinics provide
outpatient psychiatric and substance abuse treatment to children, adolescents
and adults operating under the name Pioneer Counseling Center. The five clinics
are located in close proximity to the Harbor Oaks facility which provides more
efficient integration of inpatient and outpatient services, a larger coverage
area and the ability to share personnel which results in cost savings.
Pioneer Counseling of Virginia, Inc.
PCV provides outpatient psychiatric services to adults, adolescents and
children through a physicians' practice in Salem and Blacksburg 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.
Additionally, BSC provides billing and administrative services for the Company's
Joint Venture with Lexington Healthcare Group, Inc., Behavioral Rehab Services
of Connecticut, Inc.
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Operating Statistics
The following table reflects selected financial and statistical information
for all psychiatric services.
Year Ended June 30,
1998 1997 1996
____ ____ ____
Inpatient*
Net patient service revenues $ 13,640,801 $ 13,557,703 $13,000,822
Net revenues per patient day(1) $ 476 $ 414 $ 385
Average occupancy rate(2) 51.7% 58.8% 63.4%
Total number of licensed beds 123 172 172
at end of period
Source of Revenues:
Private(3) 86.9% 91.6% 90.0%
Government(4) 13.1% 8.4% 10.0%
Partial Hospitalization and Outpatient
Net Revenues:*
Individual $ 4,705,454 $ 5,629,760 $ 3,021,486
Contract $ 1,423,098 $ 1,459,580 $ 503,365
Sources of revenues:
Private 94.0% 98.4% 93.9%
Government 6.0% 1.6% 6.1%
Other
Psychiatric services
PDSS(5) $ 763,086 $ 629,761 $ 233,164
Practice Management(6) $ 713,750 $ 650,852 $ 0
* Includes Good Hope Center revenue of:
Inpatient $ 1,012,679 1,300,745 $ 2,119,052
Outpatient $ 331,057 $ 457,018 $ 451,265
(1) Net revenues per patient day equals net patient service revenues
divided by total patient days.
(2) Average occupancy rates were obtained by dividing the total number of
patient days in each period by the number of beds available in such
period.
(3) Private pay percentage is the percentage of total patient revenue
derived from all payors other than Medicare and Medicaid.
(4) Government pay percentage is the percentage of total patient revenue
derived from the Medicare and Medicaid programs. (5) PDSS, Pioneer
Development and Support Services, provides clinical support, referrals
management and professional services for a number of the Company's
national contracts. (6) Practice Management revenue is produced
through BSC-NY.
Closed and Discontinued Operations
Franvale
The Company engaged Oasis Management Company ("Oasis") on November 1, 1996
to June 30, 1997 to provide management services to Franvale. On February 19,
1997, the Company's Franvale Nursing and Rehabilitation Center ("Franvale") was
cited for serious patient care and safety deficiencies by the Massachusetts
Department of Public Health as the result of a routine survey. A civil penalty
of $3,050 per day was imposed which was reduced to $2,250 per day on March 12,
1997. After an appeal the fine was reduced to $90,545 in total. At the time of
the original citation, the Company was notified by the Department of Public
Health and by the federal agency, HCFA, that Franvale would be terminated from
the Medicare and Medicaid programs unless Franvale was in substantial compliance
with regulatory requirements by March 14, 1997. Franvale submitted a plan of
correction to the Department of Public Health and on March 12, 1997, as the
result of a resurvey by the Department of Public Health, a new statement of
deficiencies was issued, which contained a significant number of violations but
recharacterized the level of seriousness of the deficiencies to a lower degree
of violation and which extended the threatened date of termination to April 30,
1997.
As a result of the new statement of deficiencies, the Department of Public
Health had precluded the Company from admitting new patients to its Franvale
facility until at least April 30, 1997. However, on April 11, 1997, the Company
received authority to admit new patients on a case by case basis. Previous
patients were readmitted to the Franvale facility from a hospital only after a
case by case review by the Department of Public Health. The Company was
obligated to notify the attending physician of each resident of Franvale who was
found to have received substandard care of the deficiency notice and was
obligated also to notify the Massachusetts board which licenses the
administrator of Franvale.
On April 19, 1997 the Department of Public Health, Division of Health Care
Quality completed a follow-up survey of the Franvale Nursing Home. As a result
of this survey it was determined that all deficiencies cited from the April 17,
1997 visit had been corrected and the restrictions on Franvale's ability to
admit patients were lifted.
The Company replaced the management team at Franvale and expended
significant sums for staffing and programmatic improvements in order to bring
the facility into substantial compliance at the earliest possible date. The
Company conducted an intensive staff review which resulted in a total
reorganization. The new staff was provided with in-service training.
On January 29, 1998 Franvale was again cited for patient care and safety
deficiencies by the Massachusetts Department of Public Health as a result of a
routine survey. A civil penalty of $224,250 was imposed for the period of time
that the facility was not in compliance. At the time of the 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 if the
facility was not in substantial compliance with regulatory requirements by
February 21, 1998. As a result of this statement of deficiencies Franvale was
precluded from readmitting patients or admitting new patients. As of February
13, 1998 the ban from readmission was removed, however, Franvale was still
unable to admit new patients until after the resurvey was completed and the
facility was found to be in substantial compliance with Federal requirements.
On April 14, 1998 the State completed the resurvey of Franvale to determine
if the facility had corrected all patient care and safety deficiencies cited by
the Massachusetts Department of Public Health in its January 29, 1998 routine
survey. As a result of the resurvey the facility was found to be in substantial
compliance with regulatory requirements. In its letter of April 23, 1998 the
State Department of Public Health advised the facility that "all deficiencies
were found to have been corrected" and the facility "is now in substantial
compliance ...with the federal regulations applicable to long term care
facilities". The Department of Public Health also advised the facility in this
letter that it was withdrawing its recommendation to the Health Care Finance
Administration (HCFA) that the facility certification be terminated, and
recommending the denial of payment for new admissions and any civil monetary
penalties imposed on the facility cease as of the date the facility alleged that
it was in substantial compliance, which was March 29, 1998.
Despite the successful survey as documented in the Department's letter, the
notice continues by advising the facility that the "limitation on admissions
previously imposed ... shall remain in effect, irrespective of whether HCFA
accepts the state's recommendation to rescind its pending Medicaid termination
action, on the grounds that the Department has initiated and there is currently
pending a license revocation action against the facility.
On February 12, 1998, the Company entered into an Asset Purchase Agreement
with Lexington Healthcare Group, Inc. to sell substantially all the assets and
liabilities of Franvale Nursing and Rehabilitation Center. The inability of
Franvale to admit new patients and the State's pending license revocation made
completion of the sale an impossibility.
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 correcting the cited deficiencies, continued facility cash flow
deficit of approximately $80,000 monthly, the stall of the sale of Franvale and
the probability that the State would not lift the admission freeze on the
facility the Company concluded that it should file for protection under Chapter
11 of the United States Bankruptcy Code for the wholly owned subsidiary Quality
Care Centers of Massachusetts, Inc. which operates Franvale Nursing and
Rehabilitation Center.
On May 26, 1998 Franvale Nursing and Rehabilitation Center, filed for
reorganization under Chapter 11 of the United States bankruptcy Code in the
Eastern Division of the District of Massachusetts at Boston, Massachusetts. The
case was assigned to C J Kenner. On May 27, 1998 on motion of Franvale, the
court authorized the appointment of a Trustee and appointed Joseph Braunstein as
the Chapter 11 Trustee. On May 29, 1998, the Bankruptcy Court terminated the
Chapter 11 proceeding determining that there was no likelihood of reorganization
since the prospective acquirer of the facility was now imposing certain terms
unacceptable to all interested parties and that the transfer of patients and
liquidation of assets could be as readily effectuated in a state court
receivership under the aegis of the Massachusetts Health Care Statutes and
accordingly dismissed the Chapter 11 case. On June 1, 1998, on the Petition of
the Attorney General of the Commonwealth of Massachusetts on behalf of the
Department of Public Health with the acquiescence of Franvale, Robert Griffin
was appointed by J. Kottmyer as Receiver to transfer the patients and close the
facility expeditiously.
Subsequent to year end the Company's Bankruptcy Attorney was notified that
effective September 30, 1998 the patient care receivership for Quality Care
Centers of Massachusetts, Inc. had been terminated. On October 5, 1998, in
response to the termination of the State Receivership, the Company filed for
protection under Chapter 7 of the United States bankruptcy Code in the Eastern
Division of the District of Massachusetts at Boston, Massachusetts. On October
7, 1998 the court appointed Mark G. DeGiacomo as the Chapter 7 Trustee.
As a consequence of Franvale's bankruptcy and subsequent receivership, a
number of claims have been asserted against the Company or may be asserted
against the Company in the future. To date, such claims are as follows:
The Commonwealth of Massachusetts may institute a claim seeking to recover
any expenses incurred but not recovered by the Commonwealth as a consequence of
Franvale's receivership. The Commonwealth has a receivership statute that allows
the Commonwealth to seek indemnification for receivership expenses from
"licensee[s], persons responsible for the affairs of the licensee, or the
owner." Under Commonwealth law, the Commonwealth could seek to hold the Company
liable as a "licensee" or "a person responsible for the affairs of the licensee
[Franvale]." Management believes that there are defenses to any such claim. At
this time this does not appear to be a material issue, however, since Franvale's
collectible accounts receivable are far in excess of the operating expenses and
the receiver's fees that will be incurred during the receivership. The
Commonwealth may also seek to recover the penalties assessed against Franvale
for the licensing problems referred to above.
In September 1998, the Company and Franvale were each served with subpoenas
in connection with an on-going investigation of Franvale being conducted by the
Attorney General of the Commonwealth of Massachusetts. While the investigation
apparently is in a preliminary phase, the focus appears to be the quality of
patient care provided by Franvale during the period of early 1997 until the
facility was placed into receivership in June 1998. The Company is cooperating
fully with the investigation and currently is engaged in producing documents
requested in the subpoenas. The Company does not believe that it has violated
any laws.
The Company has been named as a defendant in a proceeding captioned
Healthcare Services Group, Inc. v. Quality Care Centers of Massachusetts, Inc.
and PHC, Inc., C.A. No. 98-132 (Sup. Ct., Suffolk Co., MA). The plaintiff, a
supplier of housekeeping and laundry services to Franvale, recently filed a
motion to add the Company as a party defendant. The plaintiff has alleged two
causes of action against the Company in the Substitute First Amended Complaint.
In Count III (Accord and Satisfaction), Plaintiff seeks $51,845.61 for the
Company's alleged breach of an agreement to pay plaintiff the money owed to it
by Franvale. In Count IV (Guaranty), plaintiff alleges that the Company agreed
to pay Franvale's debt but did not do so and plaintiff seeks a judgment of
$67,412.60. The Court has not yet ruled on the plaintiff's motion to add the
Company as a defendant and the Company has not been formally served with
process. If the Company is joined as a defendant, it intends vigorously to
contest the plaintiff's claims. At this time it is not possible to evaluate the
likelihood of an unfavorable outcome or to predict the Company's potential loss.
Based on the ad damnum clause of the Substitute First Amended Complaint, the
maximum potential loss to the Company is alleged to be $67,412.60, plus costs
and interest from the date of demand.
The Company has been named as a defendant in a proceeding captioned The
Hartford Provision Company v. PHC, Inc., Civil Action No.9886 CV 0395 (District
Court Department of the Trial Court, Peabody Division, Mass.). Hartford alleges
that it provided food products and other goods to Franvale pursuant to the
Company's Credit Application and Guaranty Agreement. Hartford claims that
Franvale has a balance due and owing of $25,579.16. Count I alleges breach of
contract and Count II alleges violation of G.L. c. 93A, Massachusetts' unfair
and deceptive trade practices act. The Company filed a Motion to Dismiss Count
II for failure to allege anything other than a simple breach of contract action.
With regard to Count I, Hartford has thus far been unable to produce the written
contract with the Company's signature on it, as they allege. The Company denies
any liability and asserts that the goods were provided to Franvale and that the
Company never signed any Credit Application and it intends to vigorously contest
Plaintiff's claims.
The liquidation of the assets and liabilities of Franvale may result in a
non-cash financial statement gain of approximately $2,000,000 during the year
ending June 30, 1999.
Good Hope Center
Good Hope Center is a 49-bed substance abuse treatment facility located in
West Greenwich, Rhode Island which, until May, 1998 was operated by the
Company's subsidiary PHC of Rhode Island, Inc.
The Good Hope Center operated at a loss for the past two years because of a
decline in census, length of stay and lower reimbursements from third party
payors. Efforts to increase length of stay and improve market share were
unsuccessful requiring the close of the facility.
In May, 1998 the Company closed Good Hope Center and entered into an
agreement terminating the lease for the facility. This agreement releases PHRI
from the remaining 16 years on the Good Hope Center property lease in exchange
for approximately $35,000 of the PHRI net fixed assets and a total payment of
approximately $125,000 over the next seven months. The Company estimates that it
will incur aggregate costs of closing this facility, in addition to the lease
agreement cost, of approximately $120,000 which has been provided for in the
Company's June 30, 1998 results of operations.
Blacksburg Clinic
Subsequent to year end the Company decided to close the Blacksburg Clinic
and consolidate the Blacksburg resources and operations with the Salem Clinic
operations to enhance profitability of Pioneer Counseling of Virginia, Inc. The
write down of assets and anticipated costs related to the closing of the
Blacksburg clinic are reflected in the accompanying June 30, 1998 Financial
Statements.
Operating Statistics
The following table reflects closed and discontinued operations:
For the Year Ended
June 30,
1998 1997 1996
____ ____ ____
Discontinued Operations-
Franvale:
Income (Loss) from $(2,220,296) $(1,958,756) $(1,216,832)
operations
Closed Operations
Good Hope Center:
Income (Loss) from $(1,540,772) $ (642,119) $ (661,645)
operations
Blacksburg Clinic
Income (Loss) from $ (122,806) -- --
operations
The Company expects that approximately $245,000 in additional cash
expenditure will be incurred through the closure of Good Hope Center. This
amount includes approximately $125,000 to terminate the lease, $50,000 in
payment to former employees for earned time and severance pay and $70,000 in
collection and miscellaneous expenses which has been provided for in the
Company's June 30, 1998 results of operations.
Business Strategy
The Company's objective is to become a leading national provider of
treatment services, specializing in substance abuse and psychiatric care.
The Company focuses its marketing efforts on "safety-sensitive" industries.
This focus results in customized outcome oriented programs that the Company
believes produce overall cost savings to the patients and/or client
organizations. The Company intends to leverage experience gained from providing
services to customers in certain industries which it believes will enhance its
selling efforts within these certain industries.
Marketing And Customers
The Company markets its substance abuse, inpatient and outpatient
psychiatric health services both locally and nationally, primarily to safety
sensitive industries, including transportation, oil and gas exploration, heavy
machinery and equipment, manufacturing and healthcare services. Additionally,
the Company markets its services in the gaming industry both in Nevada and
nationally.
The Company employs 10 individuals dedicated to marketing among the
Company's facilities. Each facility performs marketing activities in its local
region. The National Marketing Director of the Company, coordinates the majority
of the Company's national marketing efforts. In addition, employees at certain
facilities perform national marketing activities independent of the National
Marketing Director. The Company, with the support of its owned integrated
outpatient systems and management services, plans to pursue more at-risk
contracts and outpatient, managed health care fee-for-service contracts. In
addition to providing excellent services and treatment outcomes, the Company
will continue to negotiate pricing policies to attract patients for long-term
intensive treatment which meet length of stay and clinical requirements
established by insurers, managed health care organizations and the Company's
internal professional standards.
The Company's inpatient services are complimented by an integrated system
of comprehensive outpatient mental health clinics and physician practices owned
or managed by the Company. These clinics and medical practices are strategically
located in Nevada, Virginia, Kansas City, Michigan, Utah and New York. They make
it possible for the Company to offer wholly integrated, comprehensive, mental
health services for corporations and managed care organizations on an at-risk or
exclusive fee-for-service basis. Additionally, the Company operates Pioneer
Development and Support Services (PDS2) located in the Highland Ridge facility
in Salt Lake City, Utah. PDS2 provides clinical support, referrals, management
and professional services for a number of the Company's national contracts. It
gives the Company the capacity to provide a complete range of fully integrated
mental health services.
The Company has been successful in securing a number of national accounts
with a variety of corporations including: Boyd Gaming, Canadian Rail, Conrail,
CSX, the IUE, MCC, MGM, The Mirage, Station Casinos, Union Pacific Railroad,
Union Pacific Railroad Hospital Association, VBH, and others.
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.
Revenue Sources And Contracts
The Company has entered into relationships with numerous employers, labor
unions and third-party payors to provide services to their employees and members
for the treatment of substance abuse and psychiatric disorders. In addition, the
Company admits patients who seek treatment directly without the intervention of
third parties and whose insurance does not cover these conditions in
circumstances where the patient either has adequate financial resources to pay
for treatment directly or is eligible to receive free care at one of the
Company's facilities. Most of the Company's psychiatric patients either have
insurance or pay at least a portion of treatment costs. Free treatment provided
each year amounts to less than 5% of the Company's total patient days.
Each contract is negotiated separately, taking into account the insurance
coverage provided to employees and members, and, depending on such coverage, may
provide for differing amounts of compensation to the Company for different
subsets of employees and members. The charges may be capitated, or fixed with a
maximum charge per patient day, and, in the case of larger clients, frequently
result in a negotiated discount from the Company's published charges. The
Company believes that such discounts are appropriate as they are effective in
producing a larger volume of patient admissions. When non-contract patients are
treated by the Company, they are billed on the basis of the Company's standard
per diem rates and for any additional ancillary services provided to them by the
Company.
Quality Assurance And Utilization Review
The Company has established comprehensive quality assurance programs at all
of its facilities. These programs are designed to ensure that each facility
maintains standards that meet or exceed requirements imposed upon the Company
with the objective of providing high-quality specialized treatment services to
its patients. To this end, the Company's inpatient facilities are accredited by
the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") and
the Company's outpatient facilities comply with the standards of National
Commission Quality Assurance ("NCQA") although the facilities are not NCQA
certified. The Company's professional staff, including physicians, social
workers, psychologists, nurses, dietitians, therapists and counselors, must meet
the minimal requirements of licensure related to their specific discipline, in
addition to each facility's own internal quality assurance criteria. The Company
participates in the federally mandated National Practitioners Data Bank which
monitors professional accreditation nationally.
In response to the increasing reliance of insurers and managed care
organizations upon utilization review methodologies, the Company has adopted a
comprehensive documentation policy to satisfy relevant reimbursement criteria.
Additionally, the Company has developed an internal case management system which
provides assurance that services rendered to individual patients are medically
appropriate and reimbursable. Implementation of these internal policies has been
integral to the success of the Company's strategy of providing services to
relapse-prone, higher acuity patients.
Government Regulation
The Company's business and the development and operation of the Company's
facilities are subject to extensive federal, state and local government
regulation. In recent years, an increasing number of legislative proposals have
been introduced at both the national and state levels that would effect major
reforms of the health care system if adopted. Among the proposals under
consideration are reforms to increase the availability of group health
insurance, to increase reliance upon managed care, to bolster competition and to
require that all businesses offer health insurance coverage to their employees.
The Company cannot predict whether any such legislative proposals will be
adopted and, if adopted, what effect, if any, such proposals would have on the
Company's business.
In addition, both the Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions, all
of which may materially increase or decrease the rate of program payments to
health care facilities. Since 1983, Congress has consistently attempted to limit
the growth of federal spending under the Medicare and Medicaid programs and will
likely continue to do so. Additionally, congressional spending reductions for
the Medicaid program involving the issuance of block grants to states is likely
to hasten the reliance upon managed care as a potential savings mechanism of the
Medicaid program. As a result of this reform activity the Company can give no
assurance that payments under such programs will in the future remain at a level
comparable to the present level or be sufficient to cover the costs allocable to
such patients. In addition, many states, including the Commonwealth of
Massachusetts and the State of Michigan, are considering reductions in state
Medicaid budgets.
Health Planning Requirements
Some of the states in which the Company operates, and many of the states
where the Company may consider expansion opportunities, have health planning
statutes which require that prior to the addition or construction of new beds,
the addition of new services, the acquisition of certain medical equipment or
certain capital expenditures in excess of defined levels, a state health
planning agency must determine that a need exists for such new or additional
beds, new services, equipment or capital expenditures. These state determination
of need or certificate of need ("DoN") programs are designed to enable states to
participate in certain federal and state health related programs and to avoid
duplication of health services. DoN's typically are issued for a specified
maximum expenditure, must be implemented within a specified time frame and often
include elaborate compliance procedures for amendment or modification, if
needed. Several states, including the Commonwealth of Massachusetts, have
instituted moratoria on some types of DoN's or otherwise stated an intent not to
grant approvals for certain health services. Such moratoria may adversely affect
the Company's ability to expand in such states, but may also provide a barrier
to entry to potential competitors.
Licensure and Certification
All of the Company's facilities must be licensed by state regulatory
authorities. The Company's Harbor Oaks facility is certified for participation
as a provider in the Medicare and Medicaid programs.
The Company's initial and continued licensure of its facilities, and
certification to participate in the Medicare and Medicaid programs, depends upon
many factors, including accommodations, equipment, services, patient care,
safety, personnel, physical environment, the existence of adequate policies,
procedures and controls and the regulatory process regarding the facility's
initial licensure. Federal, state and local agencies survey facilities on a
regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participating in
government programs. Such surveys include review of patient utilization and
inspection of standards of patient care. The Company will attempt to ensure that
its facilities are operated in compliance with all such standards and
conditions. To the extent these standards are not met, however, the license of a
facility could be restricted, suspended or revoked, or a facility could be
decertified from the Medicare or Medicaid programs.
Medicare Reimbursement
Currently the only facility of the Company that receives Medicare
reimbursement is Harbor Oaks. For the fiscal year ended June 30, 1997 11.12% of
revenues for Harbor Oaks were derived from Medicare programs.
The Medicare program generally reimburses psychiatric facilities pursuant
to its prospective payment system ("PPS"), in which each facility receives an
interim payment of its allowable costs during the year which is later adjusted
to reflect actual allowable direct and indirect costs of services based upon the
submission of a cost report at the end of each year. However, current Medicare
payment policies allow certain psychiatric service providers an exemption from
PPS. In order for a facility to be eligible for exemption from PPS, the facility
must comply with numerous organizational and operational requirements.
PPS-exempt providers are cost reimbursed, receiving the lower of reasonable
costs or reasonable charges. The Medicare program fiscal intermediary pays a per
diem rate based upon prior year costs, which may be retroactively adjusted upon
the submission of annual cost reports.
The Harbor Oaks facility is currently PPS-exempt. The amount of its
cost-based reimbursement may be limited by the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA") and regulations promulgated thereunder.
Generally, TEFRA limits the amount of reimbursement a facility may receive to a
target amount per discharge, adjusted annually for inflation. This target amount
is based upon a facility's reasonable Medicare operating cost divided by
Medicare discharges, plus a per diem allowance for capital costs, during its
base year of operations. It is not possible to predict the ability of Harbor
Oaks to remain PPS-exempt or to anticipate the impact of TEFRA upon the
reimbursement received by Harbor Oaks in future periods.
In order to receive Medicare reimbursement, each participating facility
must meet the applicable conditions of participation set forth by the federal
government relating to the type of facility, its equipment, its personnel and
its standards of medical care, as well as compliance with all state and local
laws and regulations. In addition, Medicare regulations generally require that
entry into such facilities be through physician referral. The Company must offer
services to Medicare recipients on a non-discriminatory basis and may not
preferentially accept private pay or commercially insured patients.
Medicaid Reimbursement
Currently the only facility of the Company that receives reimbursement
under any state Medicaid program is Harbor Oaks. A portion of Medicaid costs are
paid by states under the Medicaid program and the federal matching payments are
not made unless the state's portion is made. Accordingly, the timely receipt of
Medicaid payments by a facility may be affected by the financial condition of
the relevant state.
Harbor Oaks is a participant in the Medicaid program administered by the
State of Michigan. Reimbursement is received on a per diem basis, inclusive of
ancillary costs. The rate is determined by the state and is adjusted annually
based on cost reports filed by the Company.
Fraud and Abuse Laws
Various federal and state laws regulate the business relationships and
payment arrangements between providers and suppliers of health care services,
including employment or service contracts, and investment relationships. These
laws include the fraud and abuse provisions of the Medicare and Medicaid
statutes as well as similar state statutes (collectively, the "Fraud and Abuse
Laws"), which prohibit the payment, receipt, solicitation or offering of any
direct or indirect remuneration intended to induce the referral of patients, the
ordering, arranging, or providing of covered services, items or equipment.
Violations of these provisions may result in civil and criminal penalties and/or
exclusion from participation in the Medicare, Medicaid and other
government-sponsored programs. The federal government has issued regulations
which set forth certain "safe harbors," representing business relationships and
payment arrangements that can safely be undertaken without violation of the
federal Fraud and Abuse Laws. Failure to fall within a safe harbor does not
constitute a per se violation of the federal fraud and abuse laws. The Company
believes that its business relationships and payment arrangements either fall
within the safe harbors or otherwise comply with the Fraud and Abuse Laws.
Employees
As of September 15, 1998, the Company had 329 employees of which 10 were
dedicated to marketing, 104 (19 part time) to finance and administration and
215 (73 part time) to patient care. All of the Company's 329 employees are
leased from International Personnel Resources, LTD. ("IPR"), a national employee
leasing firm. The Company has elected to lease its employees to provide more
favorable employee health benefits at lower cost than would be available to the
Company as a single employer and to eliminate certain administrative tasks which
otherwise would be imposed on the management of the Company. The agreement
provides that IPR will administer payroll, provide for compliance with workers'
compensation laws, including procurement of workers' compensation insurance and
administering claims, and procure and provide designated employee benefits. The
Company retains the right to reject the services of any leased employee and IPR
has the right to increase its fees at any time upon thirty days' written notice
or immediately upon any increase in payroll taxes, workers' compensation
insurance premiums or the cost of employee benefits provided to the leased
employees.
The Company believes that it has been successful in attracting skilled and
experienced personnel; competition for such employees is intense, however, and
there can be no assurance that the Company will be able to attract and retain
necessary qualified employees in the future. None of the Company's employees are
covered by a collective bargaining agreement. The Company believes that its
relationships with its employees are good.
INSURANCE
Each of the Company's facilities maintains separate professional liability
insurance policies. Mount Regis, Harbor Oaks, Harmony Healthcare, Total Concept,
NPP, BSC and PCV have coverage of $1,000,000 per claim and $3,000,000 in the
aggregate. Highland Ridge has limits of $1,000,000 per claim and $6,000,000 in
the aggregate. Good Hope has coverage of $2,000,000 per claim and $6,000,000 in
the aggregate. In addition, these entities maintain general liability insurance
coverage in similar amounts. The Company's long-term care facility maintained
general and professional liability coverage of $2,000,000, with a limit of
$1,000,000 per claim and an aggregate of $5,000,000 excess coverage. PCV's two
doctors are currently covered by their own malpractice policies.
The Company maintains $1,000,000 of directors and officers liability
insurance coverage and $1,000,000 of general liability insurance coverage. The
Company believes, based on its experience, that its insurance coverage is
adequate for its business and that it will continue to be able to obtain
adequate coverage.
ITEM 2. DESCRIPTION OF PROPERTY.
Executive Offices
The Company's executive offices are located in Peabody, Massachusetts. The
Company's lease in Peabody covers approximately 3,600 square feet for a 60-month
term which expires August 10, 1999 and includes an option to renew. The current
annual payment under the lease is $35,721 and increases to $37,507 in the final
year. The Company also leases a small amount of adjacent space. The Company
believes that this facility will be adequate to satisfy its needs for the
foreseeable future.
Highland Ridge Hospital
The Highland Ridge premises consists of approximately 16,072 square feet of
space occupying two full stories of a three-story building. The Company is in
the final 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
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. Until July, 1998 Mount
Regis/Changes occupied approximately 1,750 square feet of office space leased
from Pioneer Counseling of Virginia, Inc. in Salem, Virginia. In July the Mount
Regis/Changes operations were moved to Mount Regis Center. The Company believes
that these premises are adequate for its current and anticipated needs.
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
$1,600,000 mortgage on this property.
The Company owns the Pioneer Counseling of Virginia building which consists
of 7,500 square feet of office space located in Salem, Virginia. Pioneer
currently leases 1,500 square feet to Blankenship Opticians, an unrelated party
and until July 1998 leased 1,750 square feet to Mount Regis/Changes. The Pioneer
Counseling of Virginia property is subject to an outstanding mortgage in favor
of Dillon & Dillon Associates with an outstanding balance of $521,000 at fiscal
year ended June 30, 1998. Since October 1, 1997 the company also leases 3,188
square feet of space in Blacksburg, Virginia at an annual rent of $66,700.
Subsequent to year end the Company decided to combine the Blacksburg operations
with the Salem operations to enhance profitability.
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.
ITEM 3. LEGAL PROCEEDINGS.
For information regarding the bankruptcy and subsequent receivership of
Franvale and litigation that has arisen as a result thereof, see
'Business-Closed and Discontinued Operations--Franvale.'
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 1998.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company as of June 30, 1998 are as
follows:
Name Age Position
Bruce A. Shear................ 43 Director, President and Chief Executive
Officer
Robert H. Boswell............. 49 Executive Vice President
Paula C. Wurts. .............. 49 Controller, Assistant Clerk and Assistant
Treasurer
Gerald M. Perlow, M.D.(1)(2).. 60 Director and Clerk
Donald E. Robar (1)(2)....... 61 Director and Treasurer
Howard W. Phillips........... 68 Director
William F. Grieco............ 44 Director
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
All of the directors hold office until the annual meeting of stockholders
next following their election, or until their successors are elected and
qualified. The Compensation Committee reviews and sets executive compensation.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. There are no family relationships among any of the
directors or officers of the Company.
Information with respect to the business experience and affiliations of the
directors and officers of the Company is set forth below.
BRUCE A. SHEAR has been President, Chief Executive Officer and a Director
of the Company since 1980 and Treasurer of the Company from September 1993 until
February, 1996. From 1976 to 1980 he served as Vice President, Financial
Affairs, of the Company. Mr. Shear has served on the Board of Governors of the
Federation of American Health Systems for over ten years. Mr. Shear received an
M.B.A. from Suffolk University in 1980 and a B.S. in Accounting and Finance from
Marquette University in 1976.
ROBERT H. BOSWELL has served as the Executive Vice President of the Company
since 1992. From 1989 until the spring of 1994 Mr. Boswell served as the
Administrator of the Company's Highland Ridge Hospital facility where he is
based. Mr. Boswell is principally involved with the Company's substance abuse
facilities. From 1981 until 1989, he served as the Associate Administrator at
the Prevention Education Outpatient Treatment Program--the Cottage Program,
International. Mr. Boswell graduated from Fresno State University in 1975 and
from 1976 until 1978 attended Rice University's doctoral program in philosophy.
Mr. Boswell is a Board Member of the National Foundation for Responsible Gaming
and the Chair for the National Center for Responsible Gaming.
PAULA C. WURTS has served as the Controller of the Company since 1989 and
as Assistant Treasurer since 1993 and as Assistant Clerk since January, 1996.
Ms. Wurts served as the Company's Accounting Manager from 1985 until 1989. Ms.
Wurts received an Associate's degree in Accounting from the University of South
Carolina in 1980, a B.S. in Accounting from Northeastern University in 1989 and
passed the examination for Certified Public Accountants. She received a Master's
Degree in Accounting from Western New England College in 1996.
GERALD M. PERLOW, M.D. has served as a Director of the Company since May
1993 and as Clerk since February, 1996. Dr. Perlow is a cardiologist in private
practice in Lynn, Massachusetts, and has been Associate Clinical Professor of
Cardiology at the Tufts University School of Medicine since 1972. Dr. Perlow is
a Diplomat of the National Board of Medical Examiners and the American Board of
Internal Medicine (with a subspecialty in cardiovascular disease) and a Fellow
of the American Heart Association, the American College of Cardiology, the
American College of Physicians and the Massachusetts Medical Center. From 1987
to 1990, Dr. Perlow served as the Director, Division of Cardiology, at
AtlantiCare Medical Center in Lynn, Massachusetts. From October 30, 1996 to
March 1, 1997, Dr. Perlow served as President and Director of Shliselberg
Physician Services, P.C. formerly Perlow Physicians, P.C. which has a management
contract with BSC. Dr. Perlow currently holds no ownership interest in
Shliselberg Physician Services, P.C. Dr. Perlow received compensation of $8,333
for the period. Dr. Perlow received a B.A. from Harvard College in 1959 and an
M.D. from Tufts University School of Medicine in 1963.
DONALD E. ROBAR has served as a Director of the Company since 1985 and as
the Treasurer since February, 1996. He served as the Clerk of the Company from
1992 to 1996. Dr. Robar has been a professor of Psychology since 1961, most
recently at Colby-Sawyer College in New London, New Hampshire. Dr. Robar
received an Ed.D. from the University of Massachusetts in 1978, an M.A. from
Boston College in 1968 and a B.A. from the University of Massachusetts in 1960.
HOWARD W. PHILLIPS has served as a Director of the Company since August 27,
1996 and has been employed by the Company as a public relations specialist since
August 1, 1995. From 1982 until October 31, 1995, Mr. Phillips was the Director
of Corporate Finance for D.H. Blair Investment Corp. From 1969 until 1981, Mr.
Phillips was associated with Oppenheimer & Co. where he was a partner and
Director of Corporate Finance. Mr. Phillips currently is a member of the Board
of Directors of Food Court Entertainment Network, Inc., an operator of shopping
mall television networks, and Telechips Corp., a manufacturer of visual phones.
WILLIAM F. GRIECO has served as a Director of the Company since February
18, 1997. Since November of 1995, he has served as Senior Vice President and
General Counsel for Fresenius Medical Care North America. From 1989 until
November of 1995, Mr. Grieco was a partner at Choate, Hall & Stewart. Mr. Grieco
is a member of the Board of Directors of Fresenius National Medical Care
Holdings, Inc. Mr. Grieco received a BS from Boston College in 1975, an MS in
Health Policy and Management from Harvard University in 1978 and a JD from
Boston College Law School in 1981.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Units, Class A Common Stock and Class A Warrants have been
traded on the NASDAQ National Market under the symbols "PIHCU," "PIHC" and
"PIHCW," respectively, since the Company's initial public offering which was
declared effective on March 3, 1994. There is no public trading market for the
Company's Class B and Class C Common Stock. The following table sets forth, for
the periods indicated, the high and low sale price of the Company's Class A
Common Stock, as reported by NASDAQ.
1997 HIGH LOW
First Quarter............... $ 9 5/8 $ 6 1/2
Second Quarter.............. $ 7 1/8 $ 4 5/8
Third Quarter............... $ 5 5/8 $ 1 3/4
Fourth Quarter.............. $ 4 3/8 $ 2 1/8
1998
First Quarter............... $ 3 9/16 $ 2 1/4
Second Quarter.............. $ 3 $ 1 7/8
Third Quarter............... $ 2 13/16 $ 1 7/8
Fourth Quarter.............. $ 2 7/16 $ 1 5/8
1999
First Quarter (through September
15, 1998)................ $ 2 $ 5/8
On September 15, 1998, the last reported sale price of the Class A Common
Stock was $ .938 On September 15, 1998 there were 450 holders of record of the
Company's Class A Common Stock and 314 holders of record of the Company's Class
B Common Stock. Since the Company failed to meet earnings targets as stipulated
in its March 1994 prospectus, The Company's Class C Common Stock was canceled
and retired on September 28, 1997.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. While
there are currently no restrictions on the Company's ability to pay dividends,
the Company anticipates that in the future, earnings, if any, will be retained
for use in the business or for other corporate purposes, and it is not
anticipated that cash dividends in respect of Common Stock will be paid in the
foreseeable future. Any decision as to the future payment of dividends will
depend on the results of operations and financial position of the Company and
such other factors as the Company's Board of Directors, in its discretion, deems
relevant.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion and analysis of the financial condition and
results of operations of the Company for the years ended June 30, 1998 and 1997.
It should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein. During the fiscal years several
businesses were acquired or closed which makes comparability of period results
difficult.
Overview
The Company presently provides health care services through two substance
abuse treatment centers, a psychiatric hospital and nine outpatient psychiatric
centers (collectively called "treatment facilities"). The profitability of the
Company is largely dependent on the level of patient census 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. The extent of any
regulatory changes and their impact on the Company's business is unknown.
Results of Operations
Years Ended June 30, 1998 and 1997
The Company experienced a significant loss for fiscal year ended June 30,
1998 including increased expenses incurred related to the closure and buy out of
the lease at PHC of Rhode Island, Inc., approximately $500,000, the final
write-down of receivables of the California facility, approximately $100,000,
the write down of approximately 10% of the amount due to BSC-NY, Inc.,
approximately $380,000, from the related Professional Corporation due to cash
flow problems and slow collections, an additional increase in reserve for bad
debts excluding the above of approximately $950,000 and, although the actual
closure of the Blacksburg, Virginia clinic happened subsequent to year end, the
effect of the closure and buy out of the lease of the Blacksburg Virginia,
approximately $140,000, is also reflected in the June 30, 1998 financial
statements. Adjustments relating to the foregoing matters were primarily
recorded in the fourth quarter of fiscal 1998. There are also additional losses
for Franvale Nursing and Rehabilitation Center since the Company was unable to
complete the sale of the facility as originally planned when operations were
reported as discontinued (see "Business - Closed and Discontinued Operations -
Franvale" for additional details related to the sale of the facility).
The environment the Company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the Company recorded an increase in its accounts receivable
reserve in the year ended June 30, 1997 and has continued with a more stringent
reserve policy through the year ended June 30, 1998 including a significant
increase in reserve amounts during the fourth quarter of 1998. The company also
instituted a more aggressive collection policy which has begun to produce
results.
Total patient care revenue from all facilities, excluding Franvale which is
reported as discontinued operations, decreased 3% to $21,246,189 for the year
ended June 30, 1998 from $21,927,655 for the year ended June 30, 1997. This
decline in revenue is due primarily to the decline in census and closure of Good
Hope Center in Rhode Island. Net inpatient care revenue from psychiatric
services increased slightly to $13,640,801 for the fiscal year ended June 30,
1998 compared to $13,557,703 for the year ended June 30, 1997 and net outpatient
care revenue decreased 13.5% to $6,128,552 for the year ended June 30, 1998 from
$7,089,340 for the year ended June 30, 1997. Revenues from Practice Management
and Pioneer Development and Support Services ("PDSS") increased 15% to
$1,476,836 for the year ended June 30, 1998 from $1,280,613 for the year ended
June 30, 1997.
Total patient care expenses for all facilities excluding Franvale increased
3% to $10,706,639 for the year ended June 30, 1998 from $10,346,111 for the year
ended June 30, 1997. This increase in patient care expenses is largely a result
in increases in outpatient and capitated rate services provided which have a
higher percentage of total expenses related directly to patient care. Total
Administrative expenses for all facilities excluding Franvale increased 8% to
$9,341,013 for the year ended June 30, 1998 from $8,622,946 for the year ended
June 30, 1997. Approximately 50% of this increase is due to the accrual of
employee earned time benefits, approximately 14% of this increase is due to the
costs related to the closing of the Blacksburg Clinic and approximately 8% of
this increase is due to additional accounting and legal cost related to the
registration of securities.
Year 2000 Compliance
The Company has contracted with its Information Systems Vendor to upgrade
its current accounts receivable software to accommodate a four digit year and
bill, track and age receivables accordingly. This software is expected to be
installed in test form by December 31, 1998. The Company has also contracted
with another company to provide case management software which is year 2000
compliant. This software has already been installed at Pioneer Development and
Support Services in Utah and is currently being modified to meet the needs of
Harmony Healthcare in Nevada. The Company has already upgraded Network software
at some locations and is currently upgrading hardware to accommodate the
software upgrade at all other locations.
The Company is currently in the process of contacting each third party
payor of accounts receivable, financial institution, major supplier of essential
products and utility to request the status of their year 2000 compliance.
To date the Company has expended approximately $26,000 on items relating to
the year 2000 issues and anticipates approximately $150,000 in additional
expenses relating to the upgrade of Company's computer and telephone systems.
Liquidity and Capital Resources
For the two fiscal years ended June 30, 1998, the Company met its cash flow
needs through accounts receivable financing and by issuing debt and equity
securities as follows:
<PAGE>
DATE TRANSACTION TYPE NUMBER PROCEEDS MATURITY TERMS STATUS
OF DATE
SHARES
11/96 Warrant issued 25,000 10/7/2001 $2.00 outstanding
as payment of exercise
commission on price as
on adjusted
Convertible 7/97
Debentures issued for
services
11/96 Convertible $3,125,000 12/31/98 7% Converted
Debentures Interest 8/97
per Yr.
2/97 Warrant issued 3,000 2/18/2002 $2.80 per outstanding
in exchange for 1.25
investor shares
relations adjusted
services for
dilution
issued for
services
3/97 Warrant issued 160,000 3/31/2002 exercise outstanding
in exchange for price
Investor $2.62
Relations issued for
services services
3/97 Warrants issued 150,000 3/31/2002 $2.00 outstanding
in lieu of cash exercise
for a penalty price
on the late issued in
registration lieu of
of Convertible payment of
Debentures penalty
Preferred Stock
5/97 Convertible 1,000 $1,000,000 05/31/99 6% Interest Converted
Preferred Stock per Yr. 6/97
convertible through
at 80% of 5 8/97
day average
bid price.
<PAGE>
DATE TRANSACTION TYPE NUMBER PROCEEDS MATURITY TERMS STATUS
OF DATE
SHARES
6/97 Warrant issued 50,000 06/04/2000 exercise outstanding
in conjunction price $2.75
with the
Private
Placement of
Convertible
Preferred Stock
5/97
9/97 Common Stock 172,414 $500,000 N/A Issued with Common
warrants at a Stock
3.3% Sold
discount
9/97 Warrant issued 86,207 09/30/2002 exercise outstanding
as part of the price $2.90
units in the
Private
Placement of
Common Stock
9/97 Warrant issued 150,000 05/31/2002 exercise outstanding
in exchange for price $2.50
cash and
financial
advisory
services
12/97 Mortgage advance $500,000 10/31/2001 Prime outstanding
Plus 5%
3/98 Warrant issued 3,000 03/10/2003 exercise outstanding
as a penalty price $2.90
for late
registration
of Private
Placement
Common Stock
3/98 Note Payable $350,000 11/10/98 Prime outstanding
as Plus 3.5 %
extended
3/98 Warrants issued 52,500 03/10/2003 exercise outstanding
as price
additional $2.38
interest on
3/98 debt
3/98 Common Stock 227,347 $534,265 N/A N/A N/A
issued to the
former owners
of BSC-NY, Inc.
for the earn
out agreement
in lieu of cash
3/98 Convertible 950 $950,000 03/18/2000 6% outstanding
Preferred Stock Interest
per Yr.
convertible
at 80% of 5
day average
bid price.
3/98 Warrants issued 49,990 03/18/2001 exercise outstanding
in price $2.31
connection with
the Private
Placement of
Convertible
Preferred Stock
on
3/98
5/98 Note Payable - $50,000 on 12% outstanding
Related Party demand annual
interest
rate
6/98 Note Payable - $50,000 on 12% outstanding
Related Party demand annual
interest
rate
Subsequent to year end the Company met its cash flow needs through accounts
receivable financing and by issuing debt and equity securities as follows:
7/98 Warrants 52,500 07/10/2003 exercise outstanding
issued price $1.81
as
additional
interest
on
extension of
3/98 debt
7/98 Warrants 20,000 07/10/2003 exercise outstanding
issued price $1.81
as
additional
interest
on
extension of
3/98 debt
8/98 Warrants 50,000 8/15/2001 exercise outstanding
issued for price $1.75
services
8/98 Note Payable - $100,000 on 12% outstanding
Related Party demand annual
interest
rate
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 decreased 15.9% to $8,126,972 during the year ended June 30, 1998 from
$9,671,763 at June 30, 1997. This decrease in accounts receivable is primarily
due to the write off of uncollectable California receivables, the write down of
Good Hope Center accounts receivable with the close of the facility and the
overall increase in reserve for bad debts. The Company continues to closely
monitor its accounts receivable balances and implement procedures and policies,
including more aggressive collection techniques, to manage accounts receivable
growth and keep it consistent with growth in revenues. In February 1998 the
Company entered into an accounts receivable funding revolving credit agreement
with Healthcare Financial Partners-Funding II, L.P. ("HCFP"), on behalf of five
of its subsidiaries, which provides for funding of up to $4,000,000 based on
outstanding receivables. The outstanding balance on this receivables financing
on June 30, 1998 was approximately $1,680,000.
The Company believes that it will meet future financing needs through the
accounts receivable funding to sustain existing operations for the foreseeable
future. The Company also intends to renew the expansion of its operations
through the acquisition or establishment of additional treatment facilities
after the close of Franvale is completed and the residual costs of Good Hope
Center are final. The Company's expansion plans will be dependent upon obtaining
adequate financing as opportunities arise.
The liquidation of the assets and liabilities of Franvale may result in a
non-cash financial statement gain of approximately $2,000,000 during the year
ending June 30, 1999.
ITEM 7. FINANCIAL STATEMENTS.
AT PAGE
Index................................................. F-1
Independent auditors' reports......................... F-2, F-3
Consolidated balance sheets........................... F-4
Consolidated statements of operations................. F-5
Consolidated statements of changes in stockholders'
equity................................................ F-6
Consolidated statements of cash flows................. F-7
Consolidated notes to financial statements............ F-8
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons
Information required by Item 401 and Item 405 of Regulation S-B is
contained in Part I of this report.
Compliance With Section 16(A) Of The Exchange Act
In fiscal year 1998, both Mr. Boswell and Ms. Wurts each failed to file a
Form 4 within the prescribed time limits relating to shares of Class A Common
Stock issued to all employees on March 30, 1998.
ITEM 10. Executive compensation. Employment agreements
The Company has not entered into any employment agreements with its
executive officers. The Company has acquired a $1,000,000 key man life insurance
policy on the life of Bruce A. Shear.
Executive Compensation
Two executive officers of the Company received compensation in the 1998
fiscal year which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 1998,1997, and 1996:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
(a) (b) (c) (d) (e) (g) (i)
Name and Other Securities All Other
Principal Year Salary Bonus Annual Underlying Compensation
Position ($) ($) Compensation Options/SARs ($)
($) (#)
Bruce A. Shear 1998 $309,167(1) -- $8,363(2) 50,000 $51,256
President and 1997 $294,167(1) -- $12,633(3) -- --
Chief Executive 1996 $294,063(1) -- $10,818(4) -- --
Officer
Robert H. Boswell 1998 $102,750 -- $6,931(5) 15,000 $14,149
Executive Vice 1997 $ 92,750 -- $6,000(6) 5,000 $6,821
President 1996 $ 80,667 $1,000 $23,750(7) 5,000 $11,250
(1) The last Board approved increase was effective July 1, 1995 to a base
salary of $310,000.
(2) This amount represents (i) $1,341 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii) $4,768 in
premiums paid by the Company with respect to life insurance for the benefit of
Mr. Shear, and (iii) $2,254 personal use of a Company car held by Mr. Shear
(3) This amount represents (i) $2,687 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii) $6,769 in
premiums paid by the Company with respect to life insurance for the benefit of
Mr. Shear, and (iii) $3,177 personal use of a Company car held by Mr. Shear.
(4) 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.
(5) This amount represents (i) $6,000 automobile allowance, (ii) $408
contributed by the Company to the Company's Executive Employee Benefit Plan on
behalf of Mr. Boswell, (iii) $408 in other benefits paid by the Company on
behalf of Mr. Boswell and (iv) $115 in Class A Common Stock issued to employees.
(6) This amount represents (i) an automobile allowance
(7) This amount represents (i) $3,750 automobile allowance, and (ii)
$20,000 net gain from the exercise of options and subsequent sale of stock.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
services as members of the Board. Directors who are not employees of the Company
receive $2,500 stipend per year and $1,000 for each Board meeting they attend.
In addition, directors of the Company are entitled to receive certain stock
option grants under the Company's Non-Employee Director Stock Option Plan (the
"Director Plan"). In fiscal year 1998 two members of the board of directors of
the Company served on a board of directors of another entity. Mr. Phillips is a
member of the Board of Directors of Food Court Entertainment Network, Inc., an
operator of shopping mall television networks, and Telechips Corp., a
manufacturer of visual phones and Mr. Grieco is a member of the Board of
Directors of Fresenius National Medical Core Holdings, Inc. No other executive
officers or directors of the Company served on a board of directors of any other
entity.
COMPENSATION COMMITTEE
The Compensation Committee consists of Mr. Donald Robar and Dr. Gerald
Perlow. The compensation Committee did not meet during fiscal 1998. Mr. Shear
does not participate in discussions concerning, or vote to approve, his salary.
Stock Plan
The Company's Stock Plan was adopted by the Board of Directors on August
26, 1993 and approved by the stockholders of the Company on November 30, 1993.
The Stock Plan provides for the issuance of a maximum of 300,000 shares of the
Class A Common Stock of the Company pursuant to the grant of incentive stock
options to employees and the grant of nonqualified stock options or restricted
stock to employees, directors, consultants and others whose efforts are
important to the success of the Company.
The Stock Plan is administered by the Board of Directors. Subject to the
provisions of the Stock Plan, the Board of Directors has the authority to select
the optionees or restricted stock recipients and determine the terms of the
options or restricted stock granted, including: (i) the number of shares, (ii)
option exercise terms, (iii) the exercise or purchase price (which in the case
of an incentive stock option cannot be less than the market price of the Class A
Common Stock as of the date of grant), (iv) type and duration of transfer or
other restrictions and (v) the time and form of payment for restricted stock 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.
During the fiscal year ended June 30, 1998, the Company issued additional
options to purchase 204,000 shares of Class A Common Stock under the 1993 Stock
Plan at a price per share ranging from $2.00 to $5.63. Generally, options are
exercisable upon grant for 25% of the shares covered with an additional 25%
becoming exercisable on each of the first three anniversaries of the date of
grant.
During the fiscal year ended June 30, 1997, 13,375 shares of Class A Common
Stock were issued through the exercise of options by employees and 100 shares
were issued to a former employee. During the fiscal year ended June 30, 1998 no
options were exercised.
On November 17, 1997 the Board of Directors voted to amend the 1993 Stock
Plan to increase the number of shares of Class A Common Stock available for
issuance thereunder from 300,000 shares to 400,000 shares. This amendment was
presented to and approved by the Stockholders at the annual meeting on December
26, 1997.
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. 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
or 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. The second offering period
commenced on February 1, 1997 and ended on January 31, 1998. Twenty four
employees purchased an aggregate of 14,743 shares of Class A Common Stock. A new
offering commenced on February 1, 1998 and will end on January 31, 1999. There
are twenty-one employees participating in the third offering under this plan.
On November 17, 1997 the Board of Directors voted to amend The Plan to
increase the number of shares of Class A Common Stock available for issuance
thereunder from 100,000 shares to 150,000 shares. This amendment was presented
to and approved by the Stockholders at the annual meeting on December 26, 1997.
Non-Employee Director Stock Plan
The Company's Non-Employee Director Stock Plan (the "Director Plan") was
adopted by the directors on October 18, 1995 and approved by the Stockholders of
the Company on December 15, 1995. Non-qualified options to purchase a total of
30,000 shares of Class A Common Stock are available for issuance under the
Director Plan.
The Director Plan is administered by the Board of Directors or a committee
of the Board. Under the Director Plan, each director of the Company who was a
director at the time of adoption of the Director Plan and who was not a current
or former employee of the Company received an option to purchase that number of
shares of Class A Common Stock as equals 500 multiplied by the years of service
of such director as of the date of the grant. At the first meeting of the Board
of Directors subsequent to each annual meeting of stockholders, each
non-employee director is granted under the Director Plan an option to purchase
2,000 shares of the Class A Common Stock of the Company. The option exercise
price is the fair market value of the shares of the Company's Class A Common
Stock on the date of grant. The options are non-transferable and become
exercisable as follows: 25% immediately and 25% on each of the first, second and
third anniversaries of the grant date. If an optionee ceases to be a member of
the Board of Directors other than for death or permanent disability, the
unexercised portion of the options, to the extent unvested, immediately
terminate, and the unexercised portion of the options which have vested lapse
180 days after the date the optionee ceases to serve on the Board. In the event
of death or permanent disability, all unexercised options vest and the optionee
or his or her legal representative has the right to exercise the option for a
period of 180 days or until the expiration of the option, if sooner.
On January 23, 1996, options to purchase a total of 5,500 shares of Class A
Common Stock were issued under the Director Plan at an exercise price of $6.63
per share. On February 18, 1997, options to purchase a total of 6,000 shares of
Class A Common Stock were issued under the Director Plan at an exercise price of
$3.50 per share. On January 22, 1998, options to purchase a total of 6,000
shares of Class A Common Stock were issued under the Director Plan at an
exercise price of $2.06. As of May 31, 1998, none of these options had been
exercised.
On November 17, 1997 the Board of Directors voted to amend the Director
Plan to increase the number of shares of Class A Common Stock available for
issuance thereunder from 30,000 shares to 50,000 shares. This amendment was
presented to and approved by the Stockholders at the annual meeting on December
26, 1997.
The following table provides information about options granted to the named
executive officers during fiscal 1998 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Name Granted (#) in Fiscal ($/Share) Date
Year
_______________________________________________________________________________
Bruce A. Shear...... 50,000 22.0% $2.63 8/1/2002
Robert H. Boswell... 10,000 4.4% $2.63 8/1/2002
5,000 2.2% $2.00 11/24/2002
The following table provides information about options exercised by the
named executive officers during fiscal 1998 and the number and value of options
held at the end of fiscal 1998.
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Shares Underlying In-the-Money
Acquired Value Unexercised Options/SARs at
Name on Exercise Realized Options/SARs at FY-End ($)
(#) ($) FY-End (#) Exercisable/
Exercisable/ Unexercisable
Unexercisable
_______________________________________________________________________________
Bruce A. Shear........ -- -- 12,500/37,500 $0/$0
Robert H. Boswell..... -- -- 47,600/34,000 $0/$0
ISSUANCE OF RESTRICTED STOCK
On December 17, 1993, the Company issued 11,250 and 19,750 shares of the
Company's Class A Common Stock to certain directors and officers of the Company,
respectively, at a purchase price of $4.00 per share. The shares of restricted
stock were issued pursuant to the Company's Stock Plan. Each purchaser paid to
the Company 25% of the purchase price for his or her shares in cash, and the
balance with a non-recourse note. The notes bear interest at 6% per year, are
payable quarterly in arrears, and became due March 31, 1997. To secure the
payment obligation under the non-recourse notes, shares paid for with these
notes have been pledged to the Company. See "Certain Transactions." The notes
reached maturity on March 31, 1997. Two employees were in default. Mark Cowell
forfeited 6,925 shares and Joan Chamberlain forfeited 1,731 shares which are
currently held as treasury stock. In March, 1998 the Company issued 5,880 shares
of treasury stock to employees. The company still holds the remaining 2,776
shares as treasury stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of shares of the Company's Class A Common Stock and Class B Common Stock (the
only classes of capital stock of the Company currently outstanding) as of August
15, 1998 by (i) each person known by the Company to beneficially own more than
5% of any class of the Company's voting securities, (ii) each director of the
Company, (iii) each of the named executive officers as defined in 17 CFR
228.402(a)(2) and (iv) all directors and officers of the Company as a group.
Unless otherwise indicated below, to the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to their shares
of Common Stock, except to the extent authority is shared by spouses under
applicable law. In preparing the following table, the Company has relied on the
information furnished by the persons listed below:
Name and Address Amount and Percent
Title of Class of Beneficial Owner Nature of
of Beneficial Class
Owner (11)
Class A Common Stock... Gerald M. Perlow 19,750(1) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 13,875(2) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Bruce A. Shear 36,000(3) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Robert H. Boswell 43,587(4) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 41,504(5) *
P. O. Box 2047
East Hampton, NY
11937
William F. Grieco 63,280(6)(7) 1.3%
115 Marlborough
Street
Boston, MA 02116
J. Owen Todd 59,280(7) 1.2%
c/o Todd and Weld
1 Boston Place
Boston, MA 02108
All Directors and 240,420(8) 4.9%
Officers as a Group
(8 persons)
Class B Common Stock Bruce A. Shear 671,259(10) 92.3%
(9)................... c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and 671,259 92.3%
Officers as a Group
(8 persons)
* Less than 1%.
(1) Includes 9,750 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $2.06 to $6.63 per share.
(2) Includes 12,375 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $2.06 to $6.63 per share.
(3) Includes 25,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price of $2.63 per
share. Excludes an aggregate of 59,280 shares of Class A Common Stock owned
by the Shear Family Trust and the NMI Trust, of which Bruce A. Shear is a
remainder beneficiary.
(4) Includes an aggregate of 36,500 shares of Class A Common Stock issuable
pursuant to currently exercisable stock options at an exercise price range
of $2.00 to $3.50 per share.
(5) Includes 37,504 shares issuable upon the exercise of a currently
exercisable Unit Purchase Option for 18,752 Units, at a price per unit of
$5.60, of which each unit consists of one share of Class A Common Stock and
one warrant to purchase an additional share of Class A Common Stock at a
price per share of $7.50 and 4,000 shares issuable pursuant to currently
exercisable stock options having an exercise price range of $2.06 to $3.50
per share.
(6) Includes 4,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of
$2.06 to $3.50 per share
(7) Messrs. Todd and Grieco are the two trustees of the Trusts which
collectively hold 59,280 shares of the Company's outstanding Common Stock.
Gertrude Shear, Bruce A. Shear's mother, is the lifetime beneficiary of the
Trusts. In addition to the shares held by the Trusts, to the best of the
Company's knowledge, Gertrude Shear currently owns less than 1% of the
Company's outstanding Class B Common Stock.
(8) Includes an aggregate of 110,625 shares issuable pursuant to currently
exercisable stock options. Of those options, 4,125 have an exercise price
of $6.63 per share, 68,250 have an exercise price of $3.50 per share,
35,000 have an exercise price of $2.63 and 2,000 have an exercise price of
$2.06 and 1,250 have an exercise price of $2.00. Also includes 37,504
shares issuable upon the exercise of the Unit Purchase Option as described
in (5).
(9) Each share of Class B Common Stock is convertible into one share of Class A
Common Stock automatically upon any sale or transfer thereof or at any time
at the option of the holder. (10) Includes 56,369 shares of Class B Common
Stock pledged to Steven J. Shear of 2 Addison Avenue, Lynn, Massachusetts
01902, Bruce A. Shear's brother, to secure the purchase price obligation of
Bruce A. Shear in connection with his purchase of his brother's stock in
the Company in December 1988. In the absence of any default under this
obligation, Bruce A. Shear retains full voting power with respect to these
shares. (11) Represents percentage of equity of class, based on numbers of
shares listed under the column headed "Amount and Nature of Beneficial
Ownership". Each share of Class A Common Stock is entitled to one vote per
share and each share of Class B Common Stock is entitled to five votes per
share on all matters on which stockholders may vote (except that the
holders of the Class A Common Stock are entitled to elect two members of
the Company's Board of Directors and holders of the Class B Common Stock
are entitled to elect all the remaining members of the Company's Board of
Directors).
Based on the number of shares listed under the column headed "Amount and
Nature of Beneficial Ownership," the following persons or groups held the
following percentages of voting rights for all shares of common stock combined
as of August 15, 1998:
Bruce A. Shear ...........................39.28%
J. Owen Todd.............................. 0.7%
William F. Grieco......................... 0.7%
All Directors and Officers as a Group
(8 persons)...........................40.23%
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Related Party Indebtedness
For approximately the last ten years, Bruce A. Shear, a director and the
President and Chief Executive Officer of the Company, and persons affiliated and
associated with him have made a series of unsecured loans to the Company and its
subsidiaries to enable them to meet ongoing financial commitments. The
borrowings generally were entered into when the Company did not have financing
available from outside sources and, in the opinion of the Company, were entered
into at market rates given the financial condition of the Company and the risks
of repayment at the time the loans were made. As of June 30, 1998, the Company
owed an aggregate of $159,496 to related parties.
During the period ended June 30, 1998, the Company paid Mr. Shear and
affiliates approximately $126,950 in principal and accrued interest under
various notes. As of June 30, 1998, the Company owed Bruce A. Shear $39,496 on a
promissory note, which is dated March 31, 1994, matures on December 31, 1998 and
bears interest at the rate of 8% per year, payable quarterly in arrears, and
requires repayments of principal quarterly in equal installments and Tot Care,
Inc., an affiliate of Bruce A. Shear, $100,000 on promissory notes dated May 28,
1998 and June 9, 1998 which bear interest at the rate of 12% per year and are
payable on demand.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibit in the Exhibit Table of Item 601 of Regulation S-B. The
Company will furnish to any stockholder, upon written request, any exhibit
listed below upon payment by such stockholder to the Company at the Company's
reasonable expense in furnishing such exhibit.
Exhibits Index
Exhibit No. Description
3.1 Restated Articles of Organization of the Registrant, as amended.
(Filed as exhibit 3.1 to the Company's Registration Statement on
March 2, 1994).
3.1.1 Articles of Amendment filed with the Commonwealth of Massachusetts
on January 28, 1997. (Filed as exhibit 3.1.1 to the Company's
Quarterly Report on form 10QSB, filed with the Securities and
Exchange Commission on May 15, 1997. Commission file number
0-23524).
3.2 By-laws of the Registrant, as amended. (Filed as exhibit 3.2 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 333-71418).
3.3 Certificate of Vote of Directors establishing a Series of a Class
of stock dated June 3, 1997. (Filed as exhibit 3.3 to the
Company's Registration Statement Pre-Effective Amendment on form
SB2A, filed with the Securities and Exchange Commission on June
12, 1998. Commission file number 333-25231).
4.1 Form of Warrant Agreement. (Filed as exhibit 4.1 to the Company's
Registration Statement on March 2, 1994).
4.2 Form of Unit Purchase Option. (Filed as exhibit 4.4 to the
Company's Registration Statement on March 2, 1994).
4.3 Form of warrant issued to Robert A. Naify, Marshall Naify, Sarah
M. Hassanein and Whitney Gettinger. (Filed as exhibit 4.6 to the
Company's Registration Statement on Form 3 dated March 12, 1996.
Commission file number 333-71418).
4.4 Form of Warrant Agreement by and among the Company, American Stock
Transfer & Trust Company and AmeriCorp Securities, Inc. executed
in connection with the Private Placement. (Filed as exhibit 4.8 to
the Company's Registration Statement on Form 3 dated March 12,
1996. Commission file number 333-71418).
4.5 Form of Warrant Agreement issued to Alpine Capital Partners, Inc.
to purchase 25,000 Class A Common shares dated October 7, 1996.
(Filed as exhibit 4.15 to the Company's Current Report on Form
8-K, filed with the Securities and Exchange Commission November 5,
1996. Commission file number 0-23524).
4.6 Form of Warrant Agreement issued to Barrow Street Research, Inc.
to purchase 3,000 Class A Common shares dated February 18, 1997.
(Filed as exhibit 4.17 to the Company's Registration Statement on
Form SB-2 dated April 15, 1997. Commission file number 333-25231).
4.7 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. Filed as an exhibit to the Company's
Registration Statement on Form SB-2 dated April 15, 1997.
Commission file number 333-25231).
4.8 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. for 50,000 shares of Class A Common Stock
dated 6/4/97. (Filed as exhibit 4.22 to the Company's Registration
Statement on Form SB-2 dated April 15, 1997. Commission file
number 333-25231).
4.9 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. for up to 86,207 shares of Class A Common
Stock dated 09/19/97. (Filed as exhibit 4.25 to the Company's
report on Form 10KSB, filed with the Securities and Exchange
Commission on October 14, 1997. Commission file number 0-23524).
4.10 Transfer from Seacrest Capital Securities of PHC, Inc. and
securities to Summit Capital Limited dated 12/19/97. (Filed as
exhibit 4.26 to the Company's report on Form 10KSB, filed with the
Securities and Exchange Commission on October 14, 1997.
Commission file number 0-23524).
4.11 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, LP for 3,000 shares of Class A Common Stock. (Filed
as exhibit 4.27 to the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on April 29, 1998.
Commission file number 0-23524).
4.12 Subscription Agreements and Warrants for Series B Convertible
Preferred Shares and Warrants by and between PHC, Inc., ProFutures
Special Equities Fund, L.P., Gary D. Halbert, John F. Mauldin and
Augustine Fund, L.P. dated March 16, 1998. (Filed as exhibit 4.28
to the Company's Current Report on Form 8-K, filed with the
Securities and Exchange Commission on April 29, 1998. Commission
file number 0-23524).
4.13 Notice and Agreement of Termination of Lease and Option to
Purchase; Bill of Sale; Assignment of Licenses; Promissory Note;
and Guaranty by and between NMI Realty, Inc. and PHC of Rhode
Island, Inc. dated May 31, 1998. (Filed as exhibit 4.28 to the
Company's Current Report on Form 8-K/A, filed with the Securities
and Exchange Commission on June 5, 1998. Commission file number
0-23524).
4.14 Warrant to purchase up to 52,500 shares of Class A Common Stock by
and between PHC, Inc., and HealthCare Financial Partners, Inc.
dated March 10, 1998. (Filed as an exhibit to the Company's
Registration Statement on Form SB-2 dated July 24, 1998.
Commission file number 333-59927).
4.15 Warrant to purchase up to 52,500 shares of Class A Common Stock by
and between PHC, Inc., and HealthCare Financial Partners, Inc.
dated July 10, 1998. (Filed as an exhibit to the Company's
Registration Statement on Form SB-2 dated July 24, 1998.
Commission file number 333-59927).
*4.16 Warrant Agreement by and between Joan Finsilver and PHC, Inc.
dated 07/31/98 for 60,000 shares common stock. (Replaces exhibit
4.23 to the Company's report on Form 10KSB filed with the
Securities and Exchange Commission on October 14, 1997.
Commission file number 0-23524).
*4.17 Warrant Agreement by and between Brean Murray & Co., and PHC,
Inc. dated 07/31/98 for 90,000 shares common stock. (Replaces
exhibit 4.23 to the Company's report on Form 10KSB filed with the
Securities and Exchange Commission on October 14, 1997.
Commission file number 0-23524).
*4.18 Warrant Agreement by and between HealthCare Financial Partners,
Inc. and its subsidiaries (collectively "HCFP") and PHC, Inc. dated
July 10, 1998 - Warrant No. 3 for 20,000 shares of Class A Common
Stock.
*4.19 Warrant Guaranty Agreement for Common Stock Purchase Warrants
issuable by PHC, Inc. dated August 14, 1998 for Warrants No 2 and
No. 3.
10.1 1993 Stock Purchase and Option Plan of PHC, Inc., as amended
December 26, 1997. (Filed as exhibit 10.1 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 333-71418).
10.2 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. (Filed as exhibit
10.6 to the Company's Registration Statement on Form SB-2 dated
March 2, 1994. Commission file number 33-71418).
10.3 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.
(Filed as exhibit 10.14 to the Company's Registration Statement on
Form SB-2 dated March 2, 1994. Commission file number 33-71418).
10.4 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.
Filed as exhibit 10.29 to the Company's annual report on Form
10KSB, filed with the Securities and Exchange on October 2, 1995.
Commission file number 0-23524).
10.5 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.
(Filed as exhibit 10.30 to the Company's Registration Statement on
Form SB-2 dated March 2, 1994. Commission file number 333-71418).
10.6 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 (filed as
exhibit 10.33 to Form SB-2 dated March 2, 1994). Assignment and
Assumption of Limited Partnership Interest, by and between PHC of
Virginia Inc. and each assignor dated as of June 30, 1994. (Filed
as exhibit 10.57 to Form 10KSB on September 28, 1994).
10.7 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.
(Filed as exhibit 10.34 to the Company's Registration Statement on
Form SB-2 dated March 2, 1994. Commission file number 333-71418).
10.8 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. (Filed as exhibit 10.52 to
the Company's Registration Statement on Form SB-2 dated March 2,
1994. Commission file number 333-71418).
10.9 Note of PHC, Inc. in favor of Bruce A. Shear, dated March 31,
1994, in the amount of $110,596. (Filed as exhibit 10.56 to the
Company's annual report on Form 10KSB, filed with the Securities
and Exchange Commission on September 28, 1994. Commission file
number 0-23524).
10.10 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. (Filed as exhibit 10.61 to the Company's annual report
on Form 10KSB, filed with the Securities and Exchange Commission
on September 28, 1994. Commission file number 0-23524).
10.11 Lease and Option Agreement, by and between NMI Realty, Inc. and
PHC of Rhode Island, Inc., dated March 16, 1994 (Filed as an
exhibit to the Company's annual report on Form 10KSB, filed with
the Securities and Exchange Commission on September 28, 1994.
(Commission file number 0-23524 as amended on May 31, 1998, - see
exhibit 10.64 filed herewith).
10.12 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. (Filed as exhibit 10.67 to the Company's annual report
on Form 10KSB, filed with the Securities and Exchange Commission
on September 28, 1994. Commission file number 0-23524) as amended
on May 31, 1998 (see exhibit 10.64 filed herewith).
10.13 Lease Agreement by and between Conestoga Corp. and PHC, Inc.,
dated July 11, 1994. (Filed as exhibit 10.69 to the Company's
annual report on Form 10KSB, filed with the Securities and
Exchange Commission on September 28, 1994. Commission file number
0-23524).
10.14 Renewal of Lease Addendum between Palmer Wells Enterprises and PHC
of Utah, Inc., executed February 20, 1995. (Filed as exhibit 10.73
to the Company's annual report on Form 10KSB, filed with the
Securities and Exchange on October 2, 1995. Commission file number
0-23524).
10.15 1995 Employee Stock Purchase Plan. (Filed as exhibit 10.74 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 333-71418).
10.16 1995 Non-Employee Director Stock Option Plan. Filed as exhibit
10.75 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 333-71418).
10.17 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. (Filed as exhibit
10.76 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 333-71418).
10.18 Secured Promissory Note in the amount of $750,000 by and between
PHC of Nevada, Inc. and LINC Anthem Corp. (Filed as exhibit 10.77
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 333-71418).
10.19 Stock Pledge by and between PHC, Inc. and Linc Anthem Corporation
(Filed as exhibit 10.81 to the Company's report on Form 10KSB,
filed with the Securities and Exchange Commission on September 28,
1994).
10.20 Custodial Agreement by and between LINC Anthem Corporation and
PHC, Inc. and Choate, Hall and Stewart dated July 25, 1996.
(Filed as exhibit 10.85 to the Company's quarterly report on Form
10QSB, filed with the Securities and Exchange Commission on
February 25, 1997. Commission file number 0-23524).
10.21 Loan and Security Agreement by and between Northpoint-Pioneer Inc.
and LINC Anthem Corporation dated July 25, 1996. (Filed as
exhibit 10.86 to the Company's quarterly report on Form 10QSB,
filed with the Securities and Exchange Commission on December 5,
1996. Commission file number 0-23524).
10.22 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. (Filed as
exhibit 10.87 to the Company's quarterly report on Form 10QSB,
filed with the Securities and Exchange Commission on December 5,
1996. Commission file number 0-23524).
10.23 Stock Pledge and Security Agreement by and between PHC, Inc. and
LINC Anthem Corporation. (Filed as exhibit 10.88 to the Company's
quarterly report on Form 10QSB, filed with the Securities and
Exchange Commission on December 5, 1996. Commission file number
0-23524).
10.24 Secured Promissory Note of North Point-Pioneer, Inc. in favor of
LINC Anthem Corporation dated July 25, 1996 in the amount of
$500,000. (Filed as exhibit 10.89 to the Company's quarterly
report on Form 10QSB, filed with the Securities and Exchange
Commission on December 5, 1996. Commission file number 0-23524).
10.25 Lease Agreement by and between PHC, Inc. and 94-19 Associates
dated October 31, 1996 for BSC-NY, Inc. (Filed as exhibit 10.90 to
the Company's quarterly report on Form 10QSB, filed with the
Securities and Exchange Commission on December 5, 1996. Commission
file number 0-23524).
10.26 Note by and between PHC Inc. and Yakov Burstein in the amount of
$180,000. (Filed as exhibit 10.91 to the Company's quarterly
report on Form 10QSB, filed with the Securities and Exchange
Commission on December 5, 1996. Commission file number 0-23524).
10.27 Note by and between PHC, Inc. and Irwin Mansdorf in the amount of
$570,000. (Filed as exhibit 10.92 to the Company's quarterly
report on Form 10QSB, filed with the Securities and Exchange
Commission on December 5, 1996. Commission file number 0-23524).
10.28 Employment Agreement by and between BSC-NY, Inc. and Yakov
Burstein dated November 1, 1996. (Filed as exhibit 10.93 to the
Company's quarterly report on Form 10QSB, filed with the
Securities and Exchange Commission on December 5, 1996. Commission
file number 0-23524).
10.29 Consulting Agreement by and between BSC-NY, Inc. and Irwin
Mansdorf dated November 1, 1996. (Filed as exhibit 10.94 to the
Company's quarterly report on Form 10QSB, filed with the
Securities and Exchange Commission on December 5, 1996. Commission
file number 0-23524).
10.30 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. (Filed as exhibit 10.95 to the
Company's quarterly report on Form 10QSB, filed with the
Securities and Exchange Commission on December 5, 1996. Commission
file number 0-23524).
10.31 Employment Agreement by and between Perlow Physicians, P.C. and
Yakov Burstein dated November 1, 1996. (Filed as exhibit 10.98 to
the Company's quarterly report on Form 10QSB, filed with the
Securities and Exchange Commission on December 5, 1996. Commission
file number 0-23524).
10.32 Agreement for Purchase and Sale of Assets by and between Clinical
Associates and Clinical Diagnostics and PHC, Inc., BSC-NY, Inc.,
Perlow Physicians, P.C., Irwin Mansdorf, and Yakov Burstein dated
October 31, 1996. (Filed as exhibit 10.99 to the Company's
quarterly report on Form 10QSB, filed with the Securities and
Exchange Commission on December 5, 1996. Commission file number
0-23524).
10.33 Consulting Agreement by and between Perlow Physicians, P.C. and
Irwin Mansdorf dated November 1, 1996. (Filed as exhibit 10.100 to
the Company's quarterly report on Form 10QSB, filed with the
Securities and Exchange Commission on December 5, 1996. Commission
file number 0-23524).
10.34 First Amendment to Lease Agreement and Option Agreement by and
between NMI Realty, Inc. and PHC of Rhode Island, Inc. dated
December 20, 1996. (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 333-71418). As amended
on May 31, 1998. (Filed as exhibit 10.64 to the Company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission
file number 333-59927).
10.35 Mortgage by and between PHC of Michigan, Inc. and HCFP Funding
Inc. dated January 13, 1997 in the amount of $2,000,000. (Filed as
exhibit 10.106 to the Company's quarterly report on Form 10QSB,
filed with the Securities and Exchange Commission on February 25,
1997 Commission file number 0-23524).
10.36 Employment Agreement for Dr. Himanshu Patel; Employment Agreement
for Dr. Mukesh Patel; and Fringe Benefit Exhibit for both of the
Patels' Employment Agreements. (Filed as exhibit 10.107 to the
Company's quarterly report on Form 10QSB, filed with the
Securities and Exchange Commission on February 25, 1997.
Commission file number 0-23524).
10.37 Unconditional Guaranty of Payment and performance by and between
PHC, Inc. in favor of HCFP. (Filed as exhibit 10.112 to the
Company's quarterly report on Form 10QSB, filed with the
Securities and Exchange Commission on February 25, 1997.
Commission file number 0-23524).
10.38 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. (Filed as exhibit 10.113 to the Company's quarterly
report on Form 10QSB, filed with the Securities and Exchange
Commission on February 25, 1997 Commission file number 0-23524).
10.39 Employment Agreement by and between Perlow Physicians P.C. and
Nissan Shliselberg, M.D dated March, 1997. (Filed as exhibit
10.114 to the Company's Registration Statement on Form SB-2 dated
April 15, 1997. Commission file number 333-25231).
10.40 Option and Indemnity Agreement by and between PHC, Inc. and Nissan
Shliselberg, M.D dated February, 1997. (Filed as exhibit 10.115 to
the Company's Registration Statement on Form SB-2 dated April 15,
1997. Commission file number 333-25231).
10.41 Secured Term Note by and between PHC of Michigan, Inc. and
Healthcare Financial Partners - Funding II, L.P. in the amount of
$1,100,000 dated March, 1997. (Filed as exhibit 10.116 to the
Company's Registration Statement on Form SB-2 dated April 15,
1997. Commission file number 333-25231).
10.42 Mortgage between PHC of Michigan, Inc. and Healthcare Financial
Partners - Funding II, L.P. in the amount of $1,100,000 dated
March, 1997 for Secured Term Note. (Filed as exhibit 10.117 to the
Company's Registration Statement on Form SB-2 dated April 15,
1997. Commission file number 333-25231).
10.43 Submission of Lease between PHC, Inc. and Conestoga Corporation
dated 11/09/95 for space at 200 Lake Street, Suite 101b, Peabody,
MA 01960. (Filed as exhibit 10.119 to the Company's Registration
Statement on Form SB-2 dated April 15, 1997. Commission file
number 333-25231).
10.44 Master Equipment Lease Agreement by and between PHC, Inc. and LINC
Capital Partners dated March 18, 1997 in the amount of $200,000.
(Filed as exhibit 10.121 to the Company's Registration Statement
on Form SB-2 dated April 15, 1997. Commission file number
333-25231).
10.45 Agreement between Family Independence Agency and Harbor Oaks
Hospital effective January 1, 1997. (Filed as exhibit 10.122 to
the Company's report on Form 10KSB, filed with the Securities and
Exchange Commission on October 14, 1997. Commission file number
0-23524).
10.46 Master Contract by and between Family Independence Agency and
Harbor Oaks Hospital effective January 1, 1997. (Filed as exhibit
10.122 to the Company's report on Form 10KSB, filed with the
Securities and Exchange Commission on October 14, 1997.
Commission file number 0-23524).
10.47 Deed, Deed of Trust and Deed Trust Note in the amount of $540,000
by and between Dillon and Dillon Associates and Pioneer Counseling
of Virginia, Inc. (Filed as exhibit 10.124 to the Company's
report on Form 10KSB, filed with the Securities and Exchange
Commission on October 14, 1997. Commission file number 0-23524).
10.48 Financial Advisory Agreement, Indemnification Agreement and Form
of Warrant by and between Brean Murray & Company and PHC, Inc.
dated 06/01/97. (Filed as exhibit 10.125 to the Company's report
on Form 10KSB, filed with the Securities and Exchange Commission
on October 14, 1997. Commission file number 0-23524).
10.49 Secured Term Note; Mortgage; Environmental Indemnity; Agreement
Guaranty by PHC, Inc.; and Amendment No. 2 Loan and Security
Agreement by and between Healthcare Financial; and PHC, Inc. of
Michigan dated December, 1997. (Filed as exhibit 10.129 to the
Company's Registration Statement on Form SB-2 dated January 8,
1997. Commission file number 333-25231).
10.51 Promissory Note of Quality Care Center of Massachusetts, Inc. in
favor of CMS Therapies dated December 17, 1997 in the amount of
$312,468.94. (Filed as exhibit 10.131 to the Company's 10QSB dated
February 17, 1998).
10.52 First Amendment to Sale and Purchase Agreement by and between LINC
Financial Services, Inc., LINC Finance Corporation VII and PHC of
Rhode Island dated January 20, 1995 and Sale and Purchase
Agreement dated March 6, 1995. (Filed as exhibit 10.132 to the
Company's 10QSB dated February 17, 1998).
10.55 Agreement by and between PHC, Inc., and Irwin Mansdorf and Yakov
Burstein dated March 2, 1998. (Filed as exhibit 10.135 to the
Company's Current Report on Form 8-K, filed with the Securities
and Exchange Commission. Commission file number 0-23524 on April
29, 1998).
10.56 Secured Bridge Loan to be made to PHC, Inc. by HCFP Funding II,
Inc. in the amount of $350,000 dated March 10, 1998. (Filed as
exhibit 10.136 to the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission. Commission file
number 0-23524) on April 29, 1998).
10.57 First Amendment to Mortgage between PHC of Michigan, Inc. and HCFP
Funding, Inc. (Filed as Exhibit 10.137 to the Company's 10QSB
filed on May 15, 1998).
10.58 Secured Unconditional Guaranty of Payment and performance by and
between BSC-NY, Inc. and HCFP Funding II, Inc. in the amount of
$350,000. (Filed as an exhibit to the Company's Registration
Statement on Form SB-2 dated July 24, 1998. Commission file
number 333-59927).
10.59 Loan and Security Agreement by and among HCFP Funding, Inc., and
PHC of Michigan, Inc., PHC of Utah, Inc., PHC of Virginia, Inc.,
PHC of Rhode Island, Inc., and Pioneer Counseling of Virginia,
Inc. dated as of February 18, 1998. (Filed as an exhibit to the
Company's Registration Statement on Form SB-2 dated July 24,
1998. Commission file number 333-59927).
10.60 Credit Line Deed of Trust by and between PHC of Virginia, Inc.,
and HCFP Funding II, Inc. dated July, 1998. (Filed as an exhibit
to the Company's Registration Statement on Form SB-2 dated July
24, 1998. Commission file number 333-59927).
10.61 Amendment No. 1 to Secured Bridge Note dated July 10, 1998 by and
between PHC, Inc. and HCFP Funding II, Inc. (Filed as an exhibit
to the Company's Registration Statement on Form SB-2 dated July
24, 1998. Commission file number 333-59927).
10.62 Promissory Note for $50,000 dated May 18, 1998 by and between PHC,
Inc. and Tot Care, Inc. (Filed as an exhibit to the Company's
Registration Statement on Form SB-2 dated July 24, 1998.
Commission file number 333-59927).
10.63 Promissory Note for $50,000 dated June 9, 1998 by and between PHC,
Inc. and Tot Care, Inc. (Filed as an exhibit to the Company's
Registration Statement on Form SB-2 dated July 24, 1998.
Commission file number 333-59927).
10.64 Letter Agreement dated May 31, 1998 by and between NMI Realty,
Inc. and PHC of Rhode Island, Inc. to terminate the Lease and
Option Agreement entered into March 16, 1994. (Filed as an exhibit
to the Company's Registration Statement on Form SB-2 dated July
24, 1998. Commission file number 333-59927).
*10.65 Amendment No. 1 to Loan and Security Agreement in the amount of
$4,000,000.00 by and among HCFP Funding, Inc., and PHC of
Michigan, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., PHC of
Rhode Island, Inc., and Pioneer Counseling of Virginia, Inc. dated
as of February 18, 1998.
16.1 Letter on Change in Independent Public Accountants. (Filed as an
exhibit to the Company's report on Form 10KSB, filed with the
Securities and Exchange Commission on September 28, 1994 and as
exhibit 16.1 in the Company's Current Report on Form 8-K, filed
with the Securities and Exchange Commission. (Commission file
number 0-23524 on April 29, 1998).
21.1 List of Subsidiaries. (Filed as an exhibit to the Company's
Registration Statement on Form SB-2 dated July 24, 1998.
Commission file number 333-59927).
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995.
(b) REPORTS ON FORM 8-K.
A Report on Form 8-K was filed by the Company on June 5, 1998 reporting
that the Company's subsidiary Quality Care Centers of Massachusetts, Inc. which
operates the Franvale Nursing and Rehabilitation Center filed for protection
under Chapter 11 and Chapter 7 of the Bankruptcy Code. The Court dismissed these
filing's and subsequently placed the facility into State Receivership to
facilitate the orderly closing of the facility.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHC, INC.
Date: October 13, 1998 By: /S/ BRUCE A. SHEAR
Bruce A. Shear,
President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/s/ BRUCE A. SHEAR President, Chief October 13. 1998
Bruce A. Shear Executive Officer and
Director (principal
executive officer)
/s/ PAULA C. WURTS Controller and Assistant October 13. 1998
Paula C. Wurts Treasurer (principal
financial and accounting
officer)
/s/ GERALD M. PERLOW Director October 13. 1998
Gerald M. Perlow
/s/ DONALD E. ROBAR Director October 13, 1998
Donald E. Robar
/s/ HOWARD PHILLIPS Director October 13, 1998
Howard Phillips
/s/ WILLIAM F. GRIECO Director October 13, 1998
William F. Grieco
PHC, INC. AND SUBSIDIARIES
Contents
Consolidated Financial Statements
Independent auditors' reports F-2, F3
Consolidated balance sheets F-4
Consolidated statements of operations F-5
Consolidated statements of changes in stockholders' F-6
equity
Consolidated statements of cash flows F-7
Consolidated notes to financial statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheet of PHC, Inc. and
subsidiaries as of June 30, 1998 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PHC,
Inc. and subsidiaries at June 30, 1998 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Boston, Massachusetts
September 18, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheet of PHC, Inc. and
subsidiaries as of June 30, 1997 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of PHC,
Inc. and subsidiaries at June 30, 1997 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
September 19, 1997
F3
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
1998 1997
____ ____
ASSETS (Notes C and D)
Current assets:
Cash and cash equivalents (Note A) $ 227,077 $ 844,471
Accounts receivable, net of allowance for
doubtful accounts of $3,488,029 at June 30,
1998 and $1,942,602 at June 30, 1997
(Notes A, L and M) 7,441,972 9,066,763
Prepaid expenses 156,695 346,091
Other receivables and advances 127,064 249,218
Deferred income tax asset (Note F) 515,300 515,300
Other receivables, related party (Note K) 64,065 80,000
__________ __________
Total current assets 8,532,173 11,101,843
Accounts receivable, noncurrent 685,000 605,000
Other receivables, noncurrent, related party,
net of allowance for doubtful accounts of
$382,000 in 1998 (Note K) 2,941,402 2,983,177
Other receivables 426,195 134,284
Property and equipment, net (Notes A, B and D) 2,128,273 3,525,195
Deferred income tax asset (Note F) 154,700 154,700
Deferred financing costs, net of amortization of
$18,065 and $83,026 at June 30, 1998 and 1997,
respectively 53,608 60,575
Goodwill, net of accumulated amortization of
$307,707 and $208,133 at June 30,
1998 and 1997, respectively (Note A) 2,011,613 1,644,252
Other assets (Note A) 167,004 214,150
__________ __________
Total assets $17,099,968 $20,423,176
LIABILITIES
Current liabilities:
Accounts payable $ 2,346,213 $ 2,529,126
Notes payable - related parties (Note E) 159,496 51,600
Current maturities of long-term debt (Note C) 1,107,167 560,914
Revolving credit note 1,683,458 1,789,971
Current portion of obligations under capital
leases (Note D) 67,492 97,038
Accrued payroll, payroll taxes and benefits 729,194 303,731
Accrued expenses and other liabilities 1,004,763 672,154
Net current liabilities of discontinued
operations (Note A and I) 1,232,394 334,349
__________ __________
Total current liabilities 8,330,177 6,338,883
__________ __________
Long-term debt, less current maturities (Note C) 2,850,089 3,021,540
Obligations under capital leases (Note D) 93,747 1,434,816
Notes payable - related parties (Note E) -- 23,696
Convertible debentures ($3,125,000 less discount
$390,625) -- 2,734,375
Net long term liabilities of discontinued operations
(Note A and I) 1,409,143 1,145,285
__________ __________
Total noncurrent liabilities 4,352,979 8,359,712
__________ __________
Total liabilities 12,683,156 14,698,595
__________ __________
Commitments and contingent liabilities
(Notes A, D, G, H, J, and K)
STOCKHOLDERS' EQUITY (Notes H, J and K)
Convertible Preferred stock, $.01 par value; 1,000,000
shares authorized, 950 and 500 shares issued and
outstanding June 30,1998 and June 30, 1997
respectively (liquidation preference $950,000) 10 5
Class A common stock, $.01 par value; 20,000,000 shares
authorized, 4,935,267 and 2,877,836 shares issued
June 30,1998 and 1997, respectively 49,353 28,778
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 727,328 and 730,360 issued and outstanding
June 30, 1998 and 1997, respectively, convertible
into one share of Class A common stock 7,273 7,304
Class C common stock, $.01 par value; 200,000 shares
authorized, no shares outstanding June 30, 1998
and 199,816 shares issued and outstanding
June 30, 1997 -- 1,998
Additional paid-in capital 15,295,895 10,398,630
Treasury stock, 2,776 and 8,656 common shares at cost
June 30, 1998 and June 30, 1997, respectively (12,122) (37,818)
Accumulated deficit (10,923,597) (4,674,316)
____________ ___________
Total stockholders' equity 4,416,812 5,724,581
Total liabilities and stockholders' equity $17,099,968 $20,423,176
____________ ___________
See notes to financial statements
F-4
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended June 30,
1998 1997
____ ____
Revenues:
Patient care, net (Note A) $ 19,649,353 $20,700,616
Management fees (Note K) 833,750 597,278
Other 763,086 629,761
____________ ___________
Total revenue 21,246,189 21,927,655
____________ ___________
Operating expenses:
Patient care expenses 10,706,639 10,346,111
Cost of management contracts 467,065 324,440
Provision for doubtful accounts 3,684,452 2,593,573
Administrative expenses 9,341,013 8,622,946
____________ ___________
Total operating expenses 24,199,169 21,887,070
____________ ___________
Income (loss) from operations (2,952,980) 40,585
____________ ___________
Other income (expense):
Interest income 391,353 199,976
Interest expense (1,289,642) (1,441,030)
Other income, net 58,583 490,019
Gain from operations held for sale
(Note I) -- 26,853
____________ ___________
Total other expense, net (839,706) (724,182)
____________ ___________
Loss before income taxes (3,792,686) (683,597)
Income taxes (Note F) 219,239 197,311
____________ ___________
Loss from continuing operations (4,011,925) (880,908)
Loss from discontinued operations
(Notes A and I) (2,220,296) (1,958,756)
____________ ___________
Net loss $ (6,232,221) $ (2,839,664)
____________ ___________
Basic and Diluted Loss per common
share:
Continuing Operations $ (.77) $ (.27)
Discontinued Operations (.42) (.60)
Total $ (1.19) $ (.87)
____________ ___________
Basic and Diluted Weighted average
number of shares outstanding 5,237,168 3,270,175
See notes to financial statements. F-5
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Class B Class C
Common Stock Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount Shares Amount
Balance - June 30,
1996 2,293,568 $ 22,936 812,237 $ 8,122 199,816 $ 1,998
Costs related to
private placements
Issuance of shares
with acquisitions 229,500 2,295
Exercise of options 13,475 135
Payment of notes
receivable
Conversion of shares 81,877 818 (81,877) (818)
Issuance of employee
stock purchase
plan shares 9,452 94
Issuance of shares
in connection
with consulting
agreement 20,000 200
Issuance of warrants
with convertible
debentures
Cancellation of
notes receivable
Payment of notes
receivable
Issuance of
preferred stock,
Series A 1,000 $10
Adjustment related
to beneficial
conversion
feature of
convertible
preferred
stock and
convertible
debentures
Conversion of
preferred
stock Series A 229,964 2,300 (500) (5)
Dividend on
preferred stock
Net loss, year
ended June 30,
1997 ________ ________ _______ _______ ________ ________ ______ ______
Balance - June 30,
1997 2,877,836 28,778 730,360 7,304 199,816 1,998 500 5
Costs related to
private placements
Conversion of debt 1,331,696 13,317
Conversion of
preferred
stock Series A 246,305 2,463 (500) (5)
Issuance of shares
with acquisition 41,024 410
Issuance private
placement shares 172,414 1,724
Conversion of shares 3,032 31 (3,032) (31)
Cancel Class C
Common Stock (199,816) (1,998)
Issue warrants for
services
Issuance of shares
with consulting
agreement 20,870 209
Issuance of Shares
with earn out
agreement 227,347 2,274
Issuance of
employee stock
purchase plan
shares 14,743 147
Issuance of
preferred stock
Series B 950 10
Warrant issued with
debt
Treasury stock
issued to employees
Dividends on
preferred stock
Net Loss - year
ended June 30, 1998
Balance - June 30,
1998 4,935,267 $49,353 727,328 $7,273 0 $0 950 $10
________ ________ _______ _______ ________ ________ ______ ______
See notes to financial statements.
<PAGE>
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity
Additional
Paid-in Notes Treasury Shares Accumulated
Capital, Receivable Shares Amount Deficit Total
Common for Stock
Stock
___________ ___________ _________ ________ _________ _________
Balance - June 30,
1996 $ 8,078,383 $ (63,928) $(1,630,322) $6,417,189
Costs related to
private placements (141,295) (141,295)
Issuance of shares
with acquisitions 838,524 840,819
Exercise of options 59,709 59,844
Payment of notes
receivable 662 662
Conversion of shares -0-
Issuance of employee
stock purchase
plan shares 30,530 30,624
Issuance of shares in
connection with
consulting agreement 79,800 80,000
Issuance of warrants
with convertible
debentures 125,000 125,000
Cancellation of notes
receivable 37,818 8,656 $(37,818) -0-
Payment of notes
receivable 25,448 25,448
Issuance of preferred
stock Series A 999,990 1,000,000
Adjustment related to
beneficial conversion
feature of convertible
preferred stock and
convertible debentures 330,284 (200,000) 130,284
Conversion of preferred
stock Series A (2,295) -0-
Dividend on preferred
stock (4,330) (4,330)
Net loss, year ended
June 30, 1997 (2,839,664) (2,839,664)
___________ ___________ _________ ________ _________ _________
Balance - June 30,
1997 10,398,630 -0- 8,656 (37,818) (4,674,316) 5,724,581
Costs related to
private placements (164,257) (164,257)
Conversion of debt 2,696,789 2,710,106
Conversion of
preferred stock
Series A (2,458) 0
Issuance of shares
with acquisition 79,605 80,015
Issuance Private
Placement shares 498,276 500,000
Conversion of Shares -0-
Cancel Class C Common
Stock 1,998 -0-
Issue warrants for
services 184,523 184,523
Issuance of shares
with consulting
agreement 36,249 36,458
Issuance of shares
with earn out
agreement 531,991 534,265
Issuance of employee
stock purchase
plan shares 35,750 35,897
Issuance of preferred
stock Series B 949,990 950,000
Warrant issued with
debt 48,809 48,809
Treasury stock issued
to employees (5,880) 25,696 25,696
Dividends on
Preferred Stock (17,060) (17,060)
Net Loss-year ended
June 30, 1998 (6,232,221) (6,232,221)
Balance - June 30,
1998 $15,295,895 $ -0- 2,776 $(12,122)$(10,923,597) $ 4,416,812
___________ ___________ _________ ________ _________ _________
See notes to financial statements
</TABLE>
F-6
<PAGE>
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended June 30,
1998 1997
____ ____
Cash flows from operating activities:
Net loss $(6,232,221) $(2,839,664)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 674,162 469,118
Beneficial conversion feature of
convertible debt -- 130,284
Compensatory stock options and stock
and warrants issued for obligations 269,790 205,000
Changes in:
Accounts receivable 1,544,791 (2,929,003)
Prepaid expenses and other
current assets 257,173 (349,017)
Other assets (405,559) 196,339
Net assets of operations held for
sale -- 56,682
Accounts payable (182,913) 884,299
Accrued expenses and other
liabilities 758,072 (143,943)
Net liabilities of discontinued
operations 1,161,903 1,299,795
Net cash used in operating
activities (2,154,802) (3,020,110)
___________ ___________
Cash flows from investing activities:
Acquisition of property and equipment
and intangibles (212,492) (682,425)
Loan receivable 152,749 (3,063,177)
___________ ___________
Net cash used in investing
activities (59,743) (3,745,602)
___________ ___________
Cash flows from financing activities:
Revolving debt, net (106,513) 1,789,981
Proceeds from borrowings 950,000 2,767,373
Payments on Debt (557,883) (696,886)
Deferred financing costs 6,967 21,498
Preferred Stock Dividends (17,060)
Issuance of Capital Stock 1,321,640 944,173
Convertible Debt -- 2,500,000
___________ ___________
Net cash provided by
financing activities 1,597,151 7,326,139
Net increase (decrease) in cash and cash
equivalents (617,394) 560,427
Beginning balance of cash and cash equivalents 844,471 284,044
___________ ___________
Ending balance of cash and cash equivalents $ 227,077 $ 844,471
___________ ___________
Supplemental cash flow information:
Cash paid during the period for:
Interest $1,567,763 $ 1,279,862
Income taxes $ 130,290 $86,414
<PAGE>
Supplemental disclosures of noncash
investing and financing activities:
Stock issued for acquisitions and earn-out
agreement $614,280 $840,819
Capital leases 83,082 284,048
Conversion of preferred stock 500,000 500,000
Beneficial conversion feature of preferred
stock 0 200,000
Warrant Valuations 233,332 0
Conversion of Debt to Common Stock 2,710,106 0
See notes to financial statements F-7
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation:
PHC, Inc. ("PHC" or the "Company") operates substance abuse treatment
centers in several locations in the United States, a psychiatric hospital in
Michigan and psychiatric outpatient facilities in Nevada, Kansas and Michigan.
PHC also manages a psychiatric practice in New York, operates an outpatient
facility through a physicians practice, and operates behavioral health centers.
PHC of Utah, Inc. ("PHU") and PHC of Virginia, Inc. ("PHV") 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 five 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 K). Pioneer Counseling of
Virginia, Inc. ("PCV"), an 80% owned subsidiary provides outpatient services
through a physicians practice (see Note K). Quality Care Centers of
Massachusetts, Inc. ("Quality Care") operated a long-term care facility known as
the Franvale Nursing and Rehabilitation Center (see Note I). The consolidated
financial statements include PHC and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Until May 31, 1998, the Company operated Good Hope Center, a substance
abuse treatment facility in West Greenwich, Rhode Island ("Good Hope"). Until
June 1, 1998 the Company also operated a subacute long-term care facility,
Franvale Nursing and Rehabilitation Center ("Franvale"), in Braintree
Massachusetts. On June 1, 1998 Franvale was placed into state receivership. All
financial information for Franvale is reported in the accompanying financial
statements as discontinued operations. The liquidation of the assets and
liabilities of Franvale may result in a non-cash financial statement gain of
approximately $2,000,000 during the year ending June 30, 1999.
During the year ended June 30, 1998, the Company recorded an increase in
its accounts receivable reserve in line with its more aggressive reserve policy
established last year, reserved for the remaining accounts receivable balance
from a closed California facility and allowed for a higher reserve for the
closed Rhode Island facility.
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.
Medicaid reimbursements are currently based on established rates depending
on the level of care provided and are adjusted prospectively. Medicare
reimbursements are currently based on provisional rates that are adjusted
retroactively based on annual cost reports filed by the Company with Medicare.
The Company's cost reports to Medicare are routinely audited on an annual basis.
The Company periodically reviews its provisional billing rates and provides for
estimated Medicare adjustments. The Company believes that adequate provision has
been made in the financial statements for any adjustments that might result from
the outcome of Medicare audits.
F-8
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues and accounts receivable: (continued) The Company has $769,982 of
receivables from Medicaid and Medicare at June 30, 1998, which constitute a
concentration of credit risk should Medicaid and Medicare defer or be unable to
make reimbursement payments as due. This amount does not include receivables due
to Franvale Nursing and Rehabilitation which is reported as net current
liabilities of discontinued operations on the accompanying Balance Sheet.
Charity care amounted to approximately $504,000 and $725,000 for the years
ended June 30, 1998 and 1997, respectively and is classified as patient care
revenue and an equal amount of cost is charged to patient care expenses in the
statements of operations.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the assets using accelerated and straight-line
methods. The estimated useful lives are as follows:
Estimated
Assets Useful Life
______ ___________
Buildings 39 years
Furniture and equipment 3 through 10 years
Motor vehicles 5 years
Leasehold improvements Term of lease
Other assets:
Other assets are primarily deposits and covenants not to compete. Covenants
not to compete are amortized over the life of the underlying agreement using the
straight line method.
Goodwill, net of accumulated amortization:
The excess of the purchase price over the fair market value of net assets
acquired are being amortized on a straightline basis over twenty years.
Basic and diluted loss per share:
Net loss per share is computed by dividing net loss applicable to common
stock by the weighted average number of shares of common stock for each fiscal
year excluding Class C Common Shares.
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128, Earnings per share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive affects of options, warrants and convertible securities. Dilutive
earnings per share is similar to the previously reported fully diluted earnings
per share.
F-9
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Estimates and assumptions:
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.
Cash equivalents:
Cash equivalents are short-term highly liquid investments with maturities of
less than three months, when purchased.
Fair value of financial instruments:
The carrying amounts of cash, trade receivables, other current assets, accounts
payable, notes payable and accrued expenses approximate fair value.
Impairment of long-lived assets:
During the year ended June 30, 1998 the Company wrote off the carrying value of
goodwill for PHC of Rhode Island, Inc., approximately $ 23,000, and wrote off
equipment and the land and building assets related to the capital lease from
that facility which was closed May 31, 1998 aggregating approximately $1,240,000
in total assets less the liability of approximately $1,300,000, in an agreement
to release the company from the lease. The company also wrote down the remaining
balance of accounts receivable from a closed California facility, approximately
$92,000, and the equipment, goodwill and additional closing costs recorded for
the Blacksburg facility, approximately $136,000, which is being closed in fiscal
year 1999 to consolidate operations in the Salem, Virginia facility to improve
profitability. During the year ended June 30, 1997 the Company wrote off the
carrying value of the goodwill for PHC of Kansas, one of its subsidiaries in the
amount of approximately $50,000.
Stock-based compensation:
The Company accounts for its employee stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". In
October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value-based
method of accounting for stock-based compensation plans. The Company adopted the
disclosure only alternative which requires disclosure of the pro forma effects
on loss and loss per share as if SFAS No. 123 had been adopted, as well as
certain other information.
F-10
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised as follows:
June 30,
1998 1997
____ ____
Land $ 119,859 $ 119,859
Buildings 1,676,963 3,154,799
Furniture and equipment 839,972 855,226
Motor vehicles 41,444 50,889
Leasehold improvements 354,687 358,644
_________ __________
3,032,925 4,539,417
Less accumulated depreciation
and amortization 904,652 1,014,222
_________ __________
$2,128,273 $3,525,195
NOTE C - LONG-TERM DEBT
Long-term debt is summarized as follows:
June 30,
1998 1997
____ ____
Note payable with interest at 9% requiring monthly
payments of $1,150 through May 2001 $34,636 $44,816
Note payable due in monthly installments of $2,000
including imputed interest at 8%. Approximately
$21,000 of this obligation was canceled in
connection with the closing of GHC. -- 40,574
9% mortgage note due in monthly installments of $4,850,
including interest through July 1, 2012, when the
remaining principal balance is payable 478,582 492,996
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. Interest only payments have been made
since May 1998 per subsequent agreement. 374,190 547,092
Note payable due in monthly installments of $26,131
including interest at 11.5% through June 2000 when
the remaining principal balance is payable,
collateralized by all assets of NPP. Interest only
payments have been made since May 1998 per
subsequent agreement. 598,848 818,371
Note payable due in monthly installments of $5,558
including interest at 9.25% through May 2012 when
the remaining principal balance is payable,
collateralized by real estate 521,000 538,605
Term mortgage note payable with interest only payments
through March 1998 principal due in monthly
installments of $9,167 beginning April 1998 through
February 2001, a balloon payment of approximately
$1,300,000 plus interest is due March 2001, interest
at prime plus 5% (13.5% at June 30, 1998)
collateralized by all assets of PHM. 1,600,000 1,100,000
Note payable bearing interest at prime plus 3-1/2%
(12% at June 30, 1998) with the principal due
on November 10, 1998 collateralized by MRC's real
property and BSC's accounts receivable and
cross-collateralized with the revolving credit note
referred to below. 350,000 --
_________ __________
3,957,256 3,582,454
Less current maturities 1,107,167 560,914
_________ __________
Noncurrent maturities $2,850,089 $ 3,021,540
F-11
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE C - LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows as of June 30, 1998:
Year Ending
June 30, Amount
___________ ____________
1999 $ 1,107,167
2000 560,171
2001 1,863,216
2002 20,634
2003 22,570
Thereafter 383,498
____________
$ 3,957,256
The Company has a revolving credit note under which a maximum of $4,000,000 may
be outstanding at any time. At June 30, 1998 the outstanding balance was
$1,683,458. Advances are made based on a percentage of accounts receivable and
principal is payable upon receipt of proceeds of the accounts receivable.
Interest is payable monthly at prime plus 2.25% (10.75% at June 30, 1998). The
agreement is automatically renewable for one-year periods unless terminated by
either party. Upon expiration, all remaining principal and interest is due. The
notes are collateralized by substantially all of the assets of the Company's
subsidiaries excluding Franvale and guaranteed by PHC.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 1998, the Company was obligated under various capital leases for
equipment providing for monthly payments of approximately $7,000 for fiscal 1999
and terms expiring from July 1998 through February 2002.
The carrying value of assets under capital leases is as follows:
June 30,
1998 1997
____ ____
Building (Good Hope Center - Capital Lease) $ -- $1,477,800
Equipment and improvements 511,517 485,004
Less accumulated depreciation and amortization (225,703) (501,732)
_________ __________
$ 285,814 $1,461,072
_________ __________
F-12
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 1998:
Year Ending
June 30, Equipment
___________ _________
1999 $ 83,203
2000 59,897
2001 40,807
2002 3,138
Thereafter --
__________
Total future minimum lease payments 187,045
Less amount representing interest 25,806
__________
Present value of future minimum
lease payments 161,239
Less current portion 67,492
__________
Long-term obligations under
capital lease $ 93,747
__________
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows: June 30,
1998 1997
Note payable, President and principal stockholder,
interest at 8%, due in installments through
December 1998 $39,496 $ 55,296
Notes payable, Tot Care, Inc., Company owned by
the President and principal stockholder, interest
at 12% and payable on demand 100,000
Notes payable, other related parties, interest at
12% and payable on demand 20,000 20,000
________ _________
159,496 75,296
Less current maturities 159,496 51,600
________ _________
$ -0- $ 23,696
________ _________
F-13
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the accompanying
balance sheets:
Year Ended
June 30,
1998 1997
____ ____
Temporary differences attributable to:
Allowance for doubtful accounts $1,315,000 $1,007,000
Facility Closing Costs 85,000
Depreciation 225,000 147,000
Other 2,000 3,000
Operating loss carryforward 1,650,000 340,000
_________ _________
Total deferred tax asset 3,277,000 1,497,000
Less:
Valuation allowance (2,607,000) (827,000)
_________ _________
Subtotal 670,000 670,000
Current portion (515,300) (515,300)
_________ _________
Long-term portion $154,700 $154,700
_________ _________
The Company had no deferred tax liabilities at June 30, 1998 and 1997.
Income tax expense (benefit) is as follows:
Year Ended
June 30,
1998 1997
____ ____
Current state income taxes $ 219,239 $ 197,311
_________ __________
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,
1998 1997
Income tax benefit at statutory rate $(2,044,400) $ (898,400)
State income taxes, net of federal benefit 144,700 130,200
Increase in valuation allowance 1,780,000 827,000
Increase due to nondeductible items, primarily
penalties and travel and entertainment
expenses 161,231 12,000
Other 177,708 126,511
___________ __________
$219,239 $ 197,311
At June 30,1998 the Company had a net operating loss carryforward amounting to
approximately $4,865,000 which expires at various dates through 2013.
If the Company has significant sales of stock in future years, the utilization
of the net operating loss carryforward in any given year may be limited under
provisions of the Internal Revenue Code.
F-14
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
Operating leases:
The Company leases office and treatment facilities and furniture and equipment
under operating leases expiring on various dates through January 31, 2004. Rent
expense for the years ended June 30, 1998 and 1997 was approximately $882,000
and $752,000, respectively. Rent expense includes certain short term rentals
and, in 1998 additional rent expense associated with the closing of Good Hope
Center. Minimum future rental payments under noncancelable operating leases,
having remaining terms in excess of one year as of June 30, 1998 are as follows:
Year Ending
June 30, Amount
___________ _________
1999 $ 413,364
2000 280,974
2001 186,820
2002 120,061
2003 97,165
Thereafter 42,490
__________
$1,140,874
__________
Litigation:
In connection with the liquidation of Franvale, some vendors allege that there
are amounts due for services which are the obligation of PHC, Inc. At June 30,
1998 total claims pending amounted to approximately $93,000.
In September 1998, the Company and Franvale were each served with subpoenas in
connection with an on-going investigation of Franvale being conducted by the
Attorney General of the Commonwealth of Massachusetts. While the investigation
apparently is in a preliminary phase, the focus appears to be the quality of
patient care provided by Franvale during the period of early 1997 until the
facility was placed into receivership in June 1998. The Company is cooperating
fully with the investigation and currently is engaged in producing documents
requested in the subpoenas. The Company does not believe that it has violated
any laws.
Contingency:
In addition, the Commonwealth of Massachusetts may institute a claim against
PHC, Inc. to recover expenses incurred as a consequence of Franvale's
receivership. The Company believes that it has valid defenses to any such claim
and, in any event, it believes that there will be adequate assets remaining in
Franvale to satisfy any receivership expenses.
NOTE H - STOCK PLANS
[1] Stock plans:
The Company has three stock plans: a stock option plan, an employee stock
purchase plan and a nonemployee directors' stock option plan.
F-15
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE H - STOCK PLANS (CONTINUED)
[1] Stock plans: (continued)
The stock option plan provides for the issuance of a maximum of 400,000
shares of Class A common stock of the Company pursuant to the grant of
incentive stock options to employees or nonqualified stock options to
employees, directors, consultants and others whose efforts are important to
the success of the Company. Subject to the provisions of this plan, the
compensation committee has the authority to select the optionees and
determine the terms of the options including: (i) the number of shares,
(ii) option exercise terms, (iii) the exercise or purchase price (which in
the case of an incentive stock option will not be less than the market
price of the Class A common stock as of the date of grant), (iv) type and
duration of transfer or other restrictions and (v) the time and form of
payment for restricted stock upon exercise of options. The employee stock
purchase plan provides for the purchase of Class A common stock at 85
percent of the fair market value at specific dates, to encourage stock
ownership by all eligible employees. A maximum of 150,000 shares may be
issued under this plan.
The non-employee directors' stock option plan provides for the grant of
nonstatutory stock options automatically at the time of each annual meeting
of the Board. Through June 30, 1998, options for 17,500 shares were granted
under this plan. A maximum of 50,000 shares may be issued under this plan.
Each outside director is granted an option to purchase 2,000 shares of
Class A common stock at fair market value on the date of grant, vesting 25%
immediately and 25% on each of the first three anniversaries of the grant.
In February 1997, all 95,375 shares underlying the then outstanding
employee stock options were repriced to the current market price, using the
existing exercise durations.
Under the above plans, at June 30, 1998, 164,555 shares were available for
future grant or purchase.
The Company had the following activity in its stock option plans for fiscal
1998 and 1997:
Weighted-Average
Number Exercise
of Price
Shares Per Share
________ ________________
Option plans:
Balance - June 30, 1996 114,750 $5.56
Granted 125,500 $4.56
Repriced options:
Original (95,375) $5.99
Repriced 95,375 $3.50
Cancelled (21,400) $6.05
Exercised (13,475) $5.16
Balance - June 30, 1997 205,375 $4.27
Granted 210,000 $2.37
Cancelled (40,000) $3.21
Balance - June 30, 1998 375,375 $3.32
F-16
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE H - STOCK PLANS (CONTINUED)
[2] Stock-based compensation:
Options for 169,000 shares are exercisable as of June 30, 1998 at exercise
prices ranging from $2.00 to $6.63 and a weighted-average exercise price of
approximately $3.08 per share, with a weighted-average remaining
contractual life of approximately three years.
The exercise prices of options outstanding at June 30, 1998 range from
$2.00 to $6.63 per share and have a weighted-average exercise price of
approximately $3.03 per share, with a weighted-average remaining
contractual life of approximately four years.
Subsequent to June 30, 1998 223,875 of the outstanding stock options were
repriced to $1.25 and 50,000 were repriced to $1.50. Of the outstanding
stock options 101,500 are held by Directors and former employees and were
not repriced. The weighted average exercise price of the options that were
not repriced is $3.15.
The Company has adopted the disclosure-only provisions of SFAS No. 123, but
applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. There was no compensation
expense recognized in 1998 or 1997. If the Company had elected to recognize
compensation cost for the plans based on the fair value at the grant date
for awards granted, consistent with the method prescribed by SFAS No. 123,
net loss per share would have been changed to the pro forma amounts
indicated below:
Year Ended
June 30,
1998 1997
____ ____
Net loss As reported
Continuing Operations $(4,011,925) $ (880,908)
Discontinue Operations (2,220,296) (1,958,756)
Pro forma
Continuing Operations (4,140,252) (934,516
Discontinued Operations (2,220,296) (1,958,756)
Net loss per share As reported
Continuing Operations (.77) (.27)
Discontinued Operations (.42) (.60)
Pro forma
Continuing Operations (.79) (.28)
Discontinued Operations (.42) (.60)
The fair value of the Company's stock options used to compute pro forma net loss
and net loss per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998 and 1997: dividend yield of 0%; expected volatility of 30%;
a risk-free interest rate of between 5% and 7%; and an expected holding period
of five years.
The per share weighed-average grant-date fair value of options granted during
the years ended June 30, 1998 and 1997 was $.84 and $3.44, respectively.
F-17
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE I - OPERATIONS HELD FOR SALE AND DISCONTINUED OPERATIONS
On May 26, 1998, PHC, Inc.'s wholly owned subsidiary, Quality Care, which
operates Franvale filed for reorganization under Chapter 11. On May 29, 1998,
the Bankruptcy Court terminated the Chapter 11 proceeding determining that there
was no likelihood of reorganization since the prospective acquirer of the
facility was now imposing certain terms unacceptable to all interested parties
and that the transfer of patients and liquidation of assets could be as readily
effectuated in a state court receivership under the aegis of the Massachusetts
Health Care Statutes and accordingly dismissed the Chapter 11 case. On June 1,
1998, a receiver was appointed to transfer the patients and close the facility
expeditiously. The Company has recorded the losses of Franvale through May 31,
1998 in the accompanying financial statements.
Subsequent to year end the Company's Bankruptcy Attorney was notified that
effective September 30, 1998 the patient care receivership for Quality Care had
been terminated. On October 5, 1998, in response to the termination of the State
Receivership, the Company filed for protection under Chapter 7.
Although the full extent of the financial impact on PHC, Inc. cannot be
determined at this time, the management of PHC, Inc. does not believe that the
liquidation of the assets and liabilities of Quality Care will have a
substantial negative impact on PHC's financial position and results of
operations. The liquidation of the assets and liabilities of Franvale may result
in a non-cash financial statement gain of approximately $2,000,000 during the
year ending June 30, 1999. The Company is subject to a guarantee signed by PHC,
Inc. for furniture and equipment purchased by Quality Care during the fiscal
year ended June 30, 1996. The amount of this debt recorded by Quality Care in
the accompanying financial statements is approximately $148,000.
NOTE J - 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, 1998:
Number of Exercise Expiration
Description Units/Shares Price Date
___________ ______________ ______________ ______________
Bridge warrants 5,946 units $3.70 per unit September 1998
Unit purchase option 156,271 units $5.60 per unit March 1999
IPO warrants 1,772,073 shares $5.97 per share March 1999
Private placement warrants 737,170 shares $3.76 per share January 2001
Bridge warrants 36,573 shares $7.02 per share February 2001
Warrant for services 25,000 shares $2.00 per share October 2001
Warrant for services 3,753 shares $2.80 per share February 2002
Consultant warrant 160,000 shares $2.62 per share March 2002
Convertible debenture
warrants 150,000 shares $2.00 per share March 2002
Preferred stock warrant 50,000 shares $2.75 per share June 2000
Warrant for services 150,000 shares $2.50 per share May 2002
Private Placement 86,207 shares $2.90 per share September 2002
Private Placement 3,000 shares $2.90 per share March 2003
Debt Service 52,500 shares $2.38 per share March 2003
Private Placement 49,990 shares $2.31 per share March 2001
F-18
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE J - CERTAIN CAPITAL TRANSACTIONS
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 1998, the Company received $950,000 in exchange for the issuance of
Series B convertible preferred stock and warrants to purchase 49,990 shares of
Class A common stock. The warrants are exercisable at $2.31 per share and expire
in 2001. The number of shares of Class A common stock into which the preferred
stock may be converted is equal to 80% of the closing bid price of the Class A
common stock as reported by NASDAQ for the five trading days immediately
preceding the conversion. Cumulative preferred dividends are at the rate of $60
per share per year, payable quarterly. Dividends are payable in cash or in
shares of preferred stock at $1,000 per share. For the year ended June 30, 1998
and 1997 dividends amounted to $ 17,060 and $4,330 respectively. On July 1, 1998
the Company issued 13 shares of series B preferred stock in payment of dividends
payable for the fiscal year ended June 30, 1998.
As part of the Consultant Warrant agreement to purchase 160,000 shares as listed
in the table above, 80,000 may be canceled if certain stock prices, as defined
in the agreement, are not achieved by March 31, 1999 and June 30, 1999.
Under existing dilution agreements with other stockholders the issuance of
common stock under agreements other than the employee stock purchase and option
plans will increase the number of shares issuable and decrease the exercise
price of certain of the above warrant agreements based on the difference between
the then current market price and the price at which the new common stock is
being issued. The dilutive effect of transactions prior to June 30, 1998 are
reflected in the table above.
During fiscal 1998, the Class C common stock was canceled and retired because of
restrictions on the release of the stock, due to earnings targets which were not
achieved.
NOTE K - ACQUISITIONS
In September 1996, the Company purchased the assets of seven outpatient
behavioral health centers located in Michigan ("NPP"). The centers were
purchased for $532,559 and 15,000 shares of Class A common stock of PHC, Inc.
valued at $5.04 per share. The Company borrowed $900,000 (see Note C) to finance
the purchase and to provide working capital for the centers. The purchase price
was allocated as follows:
Office equipment $ 18,000
Covenants not to compete 20,000
Goodwill 597,746
Deposits 15,072
Liabilities assumed (42,659)
_________
$ 608,159
F-19
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE K - ACQUISITIONS
Concurrent with the asset purchase agreement, NPP entered into an employment
agreement with a former owner which requires an annual salary of $150,000 and an
annual bonus. The agreement is effective for four years and is automatically
extended for successive one year terms unless terminated. The salary and bonus
are subject to adjustment based on collected billings. NPP also entered into a
management agreement whereby $1,500 per month would be paid for five years to
the former owners. During fiscal 1998 in connection with the asset purchase
agreement, the Company issued 15,000 unregistered shares of Class A common stock
which was accounted for as additional purchase price
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, Shliselberg Physician Services, P.C. formerly Perlow Physicians, P.C.
("Perlow"), to acquire the assets of the medical practices theretofore serviced
by BSC. The Company advanced Perlow the funds to acquire those assets and at
June 30, 1998 Perlow owed the Company $3,292,428 which includes in addition to
acquisition costs, management fees of approximately $1,491,730 and interest on
the advances of approximately $481,119. During fiscal 1998 the Company
established a reserve against this receivable in the amount of $382,000. It is
expected that collections will be received over the next several years and
accordingly, these amounts have been classified as noncurrent. The Company has
no ownership interest in Perlow.
The purchase price of BSC was allocated as follows:
Goodwill $63,600
Equipment and other assets 20,000
_______
$83,600
The merger agreement requires additional purchase price to be paid by BSC to the
former owners of Behavioral Stress Centers, Inc. for the three years following
the merger date. The additional purchase price is based on the income of BSC
before taxes and is to be paid in PHC stock, at market value up to $200,000 and
the balance, if any, in cash. On March 26, 1998 the Company issued 227,347
shares of the Company's Class A Common Stock to the former owners of Behavioral
Stress Centers, Inc. now BSC-NY, Inc. in full payment for the earn-out due to be
paid to them for the year ended October 31, 1997 resulting in additional
goodwill. Of the 227,347 shares issued 127,924 were issued in lieu of cash and
are subject to a price guarantee of $2.35, payable in shares. The Company is
required to issue shares for the difference between the selling price and the
guarantee price if the selling price is less than $2.35. At September 15, 1998
the market price per share was $.938. Subsequent to year end a former owner sold
30,382 shares. If that owner sells the additional 320 shares he owns, the
Company will issue approximately $50,000 in additional shares of stock in
accordance to the price guarantee agreement.
BSC also entered into a management agreement with Perlow whereby management fees
are required of Perlow on a monthly basis over a five-year period with an
automatic renewal for an additional five-year period. The management fee was
calculated at 25% of the total monthly expenses of Perlow and effective January
1, 1998 the management agreement was amended to provide for a management fee of
20% of the total monthly expenses of Perlow.
F-20
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE K - ACQUISITIONS (CONTINUED)
On November 1, 1996, BSC entered into a lease agreement for its facilities. The
lease payments are due in equal monthly installments over a three year period
with an option to extend annually for three additional years. The lease is to be
paid by Perlow in accordance with the management agreement.
Summary, unaudited financial information for Perlow as of and for the year ended
June 30, 1998 is as follows:
Total assets $ 3,783,000
Stockholder's deficit $ (382,000)
Net revenue $ 3,110,000
Net loss $ (304,000)
Effective January 1, 1997, the Company entered into a Stock Exchange Agreement
with a Virginia corporation owned by two individuals to whom the Company has an
outstanding note payable. The corporation consists of private practices of
psychiatry. The Stock Exchange Agreement provided that in exchange for $50,000
in cash and 64,500 shares of restricted Class A common stock, the Company
received an 80% ownership interest in the Virginia corporation. The Company also
paid $80,444 in legal fees in connection with the Agreement. Concurrent with the
Stock Exchange Agreement the two owners of the Virginia corporation each
executed Employment Agreements with the Virginia corporation to provide
professional services and each was granted an option to purchase 15,000 shares
of Class A common stock at an exercise price of $4.87 per share. The options
expire on April 1, 2002. Each agreement requires an annual salary of $200,000
and expires in five years. Further, a Plan and Agreement of Merger was executed
whereby the Virginia corporation was merged into PCV.
On January 17, 1997 PCV entered into a purchase and sale agreement with an
unrelated general partnership, to purchase real estate with buildings and
improvements utilized by the Virginia Corporation for approximately $600,000 of
which $540,000 was paid through the issuance of a note (Note C).
In accordance with the above agreements the purchase price was allocated as
follows:
Land $ 50,600
Building 540,000
Covenant not to compete 50,000
Goodwill 285,038
____________
$ 925,638
____________
In accordance with the agreement the two owners will be paid a finders fee for
all subsequently acquired medical practices within a 200 mile radius of PCV and
those medical practices identified by the owners wherever the location. The
finders fee is payable in Class A common stock and in cash.
On October 1, 1997 PCV purchased the assets of a clinic located in Blacksburg,
Virginia in exchange for $50,000 in cash and 26,024 shares of Class A Common
Stock. The company entered into a lease with the former owners for the clinic
property and an employment agreement with one of the owners.
In accordance with the above agreements the purchase price was allocated as
follows:
Fixed Assets 10,000
Covenant not to compete 50,000
Goodwill 38,632
_________
$ 98,632
________
F-21
<PAGE>
PHC, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1998 and 1997
NOTE K - ACQUISITIONS (CONTINUED)
During fiscal 1998 the Company consolidated the operations of the Blacksburg
clinic with the Salem Virginia clinic to enhance profitability. The closure of
the Blacksburg clinic including the write down of related assets and buy out of
the lease is reflected in the June 30, 1998 financial statements.
Information is not available to present pro forma financial information relating
to the 1997 acquisitions. The Company so advised the Securities and Exchange
Commission and received a no action letter with respect to this matter. Had the
Blacksburg acquisition made during the fiscal year ended June 30, 1998 (October
1, 1997), been made as of July 1, 1997, the pro forma effect on the Company's
results of operations would have been immaterial and therefore are not shown.
NOTE L - SALE OF RECEIVABLES
The Company had a sale and purchase agreement whereby third-party receivables
were sold at a discount with recourse. The amount of receivables subject to
recourse at June 30, 1997 totaled approximately $577,000. Proceeds from the sale
of these receivables totaled approximately $3,000,000 for the year ended June
30, 1997. The purchase fees related to the agreement amount to approximately
$127,000 for the year ended June 30, 1997 and are included in interest expense
in the accompanying consolidated statement of operations. In February 1998 the
Company entered into a finance agreement with Healthcare Financial Partners,
Inc. to provide for receivables funding and liquidate the debt due to Finova
Capital from the above referenced sale and purchase agreement and provide
receivables funding for PHC of Virginia, Inc., PHC of Rhode Island, Inc. and
Pioneer Counseling of Virginia, Inc.
NOTE M - FOURTH QUARTER ADJUSTMENTS
The Company recorded significant adjustments in the fourth quarter of fiscal
1998 related to the closure of Good Hope Center, the write down of receivables
of the closed California facility, the write down of the amount due BSC from
Perlow, the closure of the Blacksburg facility and an increase in accounts
receivable reserves of the other facilities.
NOTE N - EVENTS SUBSEQUENT TO JUNE 30, 1998
On July 10, 1998 the Company issued warrants to purchase 52,500 and 20,000
shares of PHC, Inc. Class A Common Stock, exercisable at $1.81 per share, to
Healthcare Financial Partners, Inc. in conjunction with the payment extension
granted on the $350,000 financing provided to PHC, Inc.
On August 13, 1998 the Company borrowed $100,000 from Bruce A. Shear, President
and Principal Stockholder. This amount bears interest at 12% and is payable on
demand.
Subsequent to year end the Company issued a warrant to purchase 50,000 shares of
PHC, Inc. Class A Common Stock, exercisable at $1.75 per share. The warrant may
be canceled if certain stock prices, as defined in the agreement, are not
achieved.
F-22
<PAGE>
EXHIBIT INDEX
*4.16 Warrant Agreement by and between Joan Finsilver and PHC, Inc.
dated 07/31/98 for 60,000 shares common stock. (Replaces exhibit
4.23 to the Company's report on Form 10KSB filed with the
Securities and Exchange Commission on October 14, 1997.
Commission file number 0-23524).
*4.17 Warrant Agreement by and between Brean Murray & Co., and PHC,
Inc. dated 07/31/98 for 90,000 shares common stock. (Replaces
exhibit 4.23 to the Company's report on Form 10KSB filed with the
Securities and Exchange Commission on October 14, 1997.
Commission file number 0-23524).
*4.18 Warrant Agreement by and between HealthCare Financial Partners,
Inc. and its subsidiaries (collectively "HCFP") and PHC, Inc. dated
July 10, 1998 - Warrant No. 3 for 20,000 shares of Class A Common
Stock.
*4.19 Warrant Guaranty Agreement for Common Stock Purchase Warrants
issuable by PHC, Inc. dated August 14, 1998 for Warrants No 2 and
No. 3.
*10.65 Amendment No. 1 to Loan and Security Agreement in the amount of
$4,000,000.00 by and among HCFP Funding, Inc., and PHC of
Michigan, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., PHC of
Rhode Island, Inc., and Pioneer Counseling of Virginia, Inc. dated
as of February 18, 1998.
21.1 List of Subsidiaries. (Filed as an exhibit to the Company's
Registration Statement on Form SB-2 dated July 24, 1998.
Commission file number 333-59927).
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995.
<PAGE>
Exhibit 4.16
REPLACES WARRANT FOR 150,000 SHARES DATED JULY 31, 1997 APPENDIX B
FORM OF WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. 1
60,000 Shares
FOR VALUE RECEIVED, PHC, Inc. (the "Company"), hereby certifies that Joan M.
Finsilver, or a permitted assign thereof, is entitled to purchase from the
Company, at any time or from time to time commencing June 1, 1997, and prior
to 5:00 P.M., New York City time, on May 31, 2002, sixty thousand (60,000)
fully paid and nonassessable shares of the common stock, of the Company for
an aggregate purchase price of $150,000 (computed on the basis of US $2.50
per share). Upon issuance, 16,000 shares shall be fully vested and the
balance shall be 4,000 per month on the 1st of each month for the next 11
months beginning with the month of July 1997 provided that agreement between
Brean Murray and the Company dated June 1, 1997 remains in full force and
effect and has not been terminated by either party as of an application
vesting date. (Hereinafter, (i) said common stock, together with any other
equity securities which may be issued by the Company with respect thereto or
in substitution therefore, is referred to as the "Common Stock," (ii) the
shares of the Common Stock purchasable hereunder or under any other Warrant
(as hereinafter defined) are referred to as the "Warrant Shares," (iii) the
aggregate purchase price payable hereunder for the Warrant Shares is referred
to as the "Aggregate Warrant Price," (iv) the price payable hereunder for
each of the Warrant Shares is referred to as the "Per Share Warrant Price,"
(v) this Warrant, all identical warrants issued on the date hereof and all
warrants hereafter issued in exchange or substitution for this Warrant or
such other warrants are referred to as the "Warrants" and (vi) the holder of
this Warrant is referred to as the "Holder" and the holder of this Warrant
and all other Warrants are referred to as the "Holders"). The Aggregate
Warrant Price is not subject to adjustment. The Per Share Warrant Price is
subject to adjustment as hereinafter provided; in the event of any such
adjustment, the number of Warrant Shares shall be adjusted by dividing the
Aggregate Warrant Price by the Per Share Warrant Price in effect immediately
after such adjustment.
I. Exercise of Warrant.
A. Cashless Exercise
This Warrant may be exercised, in whole at any time or in part from
time to time, commencing June 1, 1997, and prior to 5:00 P.M., New York
City time, on May 31, 2002, by the Holder by the surrender of this
Warrant (with the subscription form at the end hereof duly executed) at
the address set forth in Subsection 9(a) hereof, together with proper
payment of the Aggregate Warrant Price, or the proportionate part
thereof if this Warrant is exercised in part. Payment for Warrant
Shares shall be made by certified or official bank check payable to the
order of the Company or the Warrant may be exercised by surrender of
the Warrant without payment of any other consideration, commission or
remuneration, by execution of the cashless exercise subscription form
(at the end hereof, duly executed). The number of shares to be issued
in exchange for the Warrant will be computed by subtracting the Warrant
Exercise Price from the closing bid price of the common stock on the
date of receipt of the cashless exercise subscription form, multiplying
that amount by the number of shares represented by the Warrant, and
dividing by the closing bid price as of the same date.
If this Warrant is exercised in part, this Warrant must be exercised
for a number of whole shares of the Common Stock, and the Holder is
entitled to receive a new Warrant Covering the Warrant Shares which
have not been exercised and setting forth the proportionate part of the
Aggregate Warrant Price applicable to such Warrant Shares. Upon such
surrender of this Warrant, the Company will (a) issue a certificate or
certificates in the name of the Holder for the largest number of whole
shares of the Common Stock to which the Holder shall be entitled and,
if this Warrant is exercised in whole, in lieu of any fractional share
of the Common Stock to which the Holder shall be entitled, pay to the
Holder cash in an amount equal to the fair value of such fractional
share (determined in such reasonable manner as the Board of Directors
of the Company shall determine), and (b) deliver the other securities
and properties receivable upon the exercise of this Warrant, or the
proportionate part thereof if this Warrant is exercised in part,
pursuant to the provisions of this Warrant.
II Reservation of Warrant Shares; Listing.
The Company agrees that, prior to the expiration of this Warrant, the
Company will at all times (a) have authorized and in reserve, and will
keep available, solely for issuance or delivery upon the exercise of
this Warrant, the shares of the Common Stock and other securities and
properties as from time to time shall be receivable upon the exercise
of this Warrant, free and clear of all restrictions on sale or transfer
and free and clear of all pre-emptive rights.
III. Protection Against Dilution.
A. If, at any time or from time to time after the date of this
Warrant, the Company shall issue or distribute to the holders of
shares of Common Stock evidences of its indebtedness, any other
securities of the Company or any cash, property or other assets
(excluding a subdivision, combination or reclassification, or
dividend or distribution payable in shares of Common Stock,
referred to in Subsection 3(b), and also excluding cash dividends
or cash distributions paid out of net profits legally available
therefor if the full amount thereof, together with the value of
other dividends and distributions made substantially concurrently
therewith or pursuant to a plan which includes payment thereof,
is equivalent to not more than 5% of the Company's net worth)
(any such nonexcluded event being herein called a "Special
Dividend"), the Per Share Warrant Price shall be adjusted by
multiplying the Per Share Warrant Price then in effect by a
fraction, the numerator of which shall be the then current market
price of the Common Stock (defined as the average for the thirty
consecutive business days immediately prior to the record date of
the daily closing price of the Common Stock as reported by the
NASDAQ system less the fair market value (as determined by the
Company's Board of Directors) of the evidences of indebtedness,
securities or property, or other assets issued or distributed in
such Special Dividend applicable to one share of Common Stock and
the denominator of which shall be such then current market price
per share of Common Stock. An adjustment made pursuant to this
Subsection 3(A) shall become effective immediately after the
record date of any such Special Dividend.
B. In case the Company shall hereafter (i) pay a dividend or make a
distribution on its capital stock in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a greater
number of shares, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares or (iv) issue by
reclassification of its Common Stock any shares of capital stock
of the Company, the Per Share Warrant Price shall be adjusted so
that the Holder of any Warrant upon the exercise hereof shall be
entitled to receive the number of shares of Common Stock or other
capital stock of the Company which he would have owned
immediately prior thereto. An adjustment made pursuant to this
Subsection 3(B) shall become effective immediately after the
record date in the case of a dividend or distribution and shall
become effective immediately after the effective date in the case
of a subdivision, combination or reclassification. If, as a
result of an adjustment made pursuant to this Subsection 3(B),
the Holder of any Warrant thereafter surrendered for exercise
shall become entitled to receive shares of two or more classes of
capital stock or shares of Common Stock and other capital stock
of the Company, the Board of Directors (whose determination shall
be conclusive and shall be described in a written notice to the
Holder of any Warrant promptly after such adjustment) shall
determine the allocation of the adjusted Per Share Warrant Price
between or among shares of such classes or capital stock or
shares of Common Stock and other capital stock.
C. Except as provided in Subsection 3(A) and 3(D), in case the
Company shall hereafter issue or sell any rights, options,
warrants or securities convertible into Common Stock entitling
the holders thereof to purchase Common Stock or to convert such
securities into Common Stock at a price per share (determined by
dividing (i) the total amount, if any, received or receivable by
the Company in consideration of the issuance or sale of such
rights, options, warrants or convertible securities plus the
total consideration, if any, payable to the Company upon exercise
or conversion thereof (the "Total Consideration") by (ii) the
number of additional shares of common stock issuable upon
exercise or conversion of such securities) less than the then
current Per Share Warrant Price in effect on the date of such
issuance or sale, the Per Share Warrant Price shall be adjusted
as of the date of such issuance or sale so that the same shall
equal the price determined by dividing (i) the sum of (a) the
number of shares of Common Stock outstanding on the date of such
issuance or sale multiplied by the Per Share Warrant Price plus
(b) the Total Consideration by (ii) the number of shares of
Common Stock outstanding on the date of such issuance or sale
plus the maximum number of additional shares of Common Stock
issuable upon exercise or conversion of such securities. The
provision of this section shall not apply to the issuance of any
shares of Common Stock on the exercise conversion or exchange of
any rights, options, warrants or convertible securities
outstanding on the date hereof or any such shares issued to
employees, directors, or consultants, pursuant to the Company's
Non-Employee Director Plan, Omnibus Stock Plan or Employee Stock
Purchase Plan based upon the number of options or shares
currently authorized under such plan increased by 50%.
D. In case of any capital reorganization or reclassification, or any
consolidation or merger to which the Company is a party other
than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to
another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (including any
exchange effected in connection with a merger of a third
corporation (including any exchange effected in connection with a
merger of a third corporation into the Company), the Holder of
this Warrant shall have the right thereafter to convert such
Warrant into the kind and amount of securities, cash or other
property which he would have owned or have been entitled to
receive immediately after such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance had
this Warrant been converted immediately prior to the effective
date of such reorganization, reclassification, consolidation,
merger, statutory exchange, sale or conveyance and in any such
case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section 3 with
respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth in this
Section 3 shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock
or other securities or be, in relation to any shares of stock or
other securities or property thereafter deliverable on the
conversion of this Warrant. The above provisions of this
Subsection 3(D) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The issuer of any
shares of stock or other securities or property thereafter
deliverable on the conversion of this Warrant shall be
responsible for all of the agreements and obligations of the
Company hereunder. Notice of any such reorganization,
reclassification, consolidation, merger, statutory exchange, sale
or conveyance and of said provisions so proposed to be made,
shall be mailed to the Holders of the Warrants not less than 30
days prior to such event. A sale of all or substantially all of
the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger
for the foregoing purposes.
E. No adjustment in the Per Share Warrant Price shall be required
unless such adjustment would require an increase or decrease of at
least $0.05 per share of Common Stock; provided, however, that any
adjustments which by reason of this Subsection 3(e) are not
required to be made shall be carried forward and taken into
account in any subsequent adjustment; provided further, however,
that adjustments shall be required and made in accordance with the
provisions of this Section 3 (other than this Subsection 3(e) not
later than such time as may be required in order to preserve the
tax-free nature of a distribution to the Holder of this Warrant or
Common Stock issuable upon exercise hereof. All calculations
under this Section 3 shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be. Anything in this
Section 3 to the contrary notwithstanding, the Company shall be
entitled to make such reductions in the Per Share Warrant Price,
in addition to those required by this Section 3, as it in its
discretion shall deem to be advisable in order that any stock
dividend, subdivision of shares or distribution of rights to
purchase stock or securities convertible or exchangeable for stock
hereafter made by the Company to its shareholders shall not be
taxable.
F. Whenever the Per Share Warrant Price is adjusted as provided in
this Section 3 and upon any modification of the rights of a Holder
of Warrants in accordance with this Section 3, the Company shall
promptly obtain, at its expense, a certificate of a firm of
independent public accountants of recognized standing selected by
the Board of Directors (who may be the regular auditors of the
Company) setting forth the Per Share Warrant Price and the number
of Warrant Shares after such adjustment or the effect of such
modification, a brief statement of the facts requiring such
adjustment or modification and the manner of computing the same
and cause copies of such certificate to be mailed to the Holders
of the Warrants.
G. If the Board of Directors of the Company shall declare any
dividend or other distribution with respect to the Common Stock,
other than a cash distribution out of earned surplus, the Company
shall mail notice thereof to the Holders of the Warrants not less
than 15 days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other
distribution.
IV. Fully Paid Stock, Taxes.
The Company agrees that the shares of the Common Stock represented by
each and every certificate for Warrant Shares delivered on the exercise
of this Warrant shall, at the time of such delivery, be validly issued
and outstanding, fully paid and nonassessable, and not subject to
pre-emptive rights, and the Company will take all such actions as may
be necessary to assure that the par value or stated value, if any, per
share of the Common Stock is at all times equal to or less than the
then Per Share Warrant Price. The Company further covenants and agrees
that it will pay, when due and payable, any and all Federal and state
stamp, original issue or similar taxes which may be payable in respect
of the issue of any Warrant Share or certificate therefor.
V. Registration Under Securities Act of 1933.
A. The Company agrees that if, at any time and from time to time
during the period commencing on June 1, 1997 and ending on May
31, 2002, the Board of Directors of the Company shall authorize
the filing of a registration statement or a post-effective
amendment to a registration statement (any such registration
statement being hereinafter called a "Subsequent Registration
Statement") under the Act other than a registration statement on
Form S-8 or other form which does not include substantially the
same information as would be required in a form for the general
registration of securities) in connection with the proposed offer
of any of its securities by it or any of its shareholders, the
Company will (i) promptly notify the Holder and each of the
Holders, if any, of other Warrants and/or Warrant Shares that
such Subsequent Registration Statement will be filed and that the
Warrant Shares which are then held, and/or which may be acquired
upon the exercise of the Warrants, by the Holder and such
Holders, will, at the Holder's and such Holders' request, be
included in such Subsequent Registration Statement, (ii) include
in the securities covered by such Subsequent Registration
Statement all Warrant Shares which it has been so requested to
include, (iii) use its best efforts to cause such Subsequent
Registration Statement to become effective as soon as practicable
and (iv) take all other action necessary under any Federal or
state law or regulation of any governmental authority to permit
all Warrant Shares which it has been so requested to include in
such Subsequent Registration Statement or to be sold or otherwise
disposed of, and will maintain such compliance with each such
Federal and state law and regulation of any governmental
authority for the period necessary for the Holder and such
Holders to effect the proposed sale or other disposition.
B. Whenever the Company is required pursuant to the provisions of
this Section 5 to include Warrant Shares in a registration
statement or a post-effective amendment to a registration
statement, the Company shall (i) furnish each Holder of any such
Warrant Shares and each underwriter of such Warrant Shares with
such copies of the prospectus, including the preliminary
prospectus, conforming to the Act, (and such other documents as
each such Holder or each such underwriter may reasonably request)
in order to facilitate the sale or distribution of the Warrant
Shares, (ii) use its best efforts to register or qualify such
Warrant Shares under the blue sky laws (to the extent applicable)
of such jurisdiction or jurisdictions as the Holders of any such
Warrant Shares and each underwriter of Warrant Shares being sold
by such Holders shall reasonably request and (iii) take such
other actions as may be reasonably necessary or advisable to
enable such Holders and such underwriters to consummate the sale
or distribution in such jurisdiction or jurisdictions in which
such Holders shall have reasonably requested that the Warrant
Shares be sold.
C. The Company shall pay all expenses incurred in connection with
any registration or other action pursuant to the provisions of
this Section 5, other than underwriting discounts and applicable
transfer taxes relating to the Warrant Shares.
D. The Company will indemnify the Holders of Warrant Shares which
are included in each Subsequent Registration Statement
substantially to the same extent as the Company has indemnified
the underwriters (the "Underwriters") of its public offering of
Common Stock pursuant to the Underwriting Agreement and such
Holders will indemnify the Company (and the underwriters, if
applicable) with respect to information furnished by them in
writing to the Company for inclusion therein substantially to the
same extent as the Underwriters have indemnified the Company.
VI. Limited Transferability.
This Warrant may not be sold, transferred, assigned or hypothecated by
the Holder until the first anniversary hereof except (a) to any
successor firm or corporation of Brean Murray & Co., Inc., (b) to any
of the officers, managing directors, any associates of Brean Murray &
Co., Inc., to a finder that has been recognized by both parties or of
any such successor firm or (c) in the case of an individual, pursuant
to such individual's last will and testament or the laws of descent and
distribution, and is so transferable only upon the books of the Company
which it shall cause to be maintained for the purpose. The Company may
treat the registered Holder of this Warrant as he or it appears on the
Company's books at any time as the Holder for all purposes. The
Company shall permit any Holder of a Warrant or his duly authorized
attorney, upon written request during ordinary business hours, to
inspect and copy or make extracts from its books showing the registered
holders of Warrants. All warrants issued upon the transfer or
assignment of this Warrant will be dated the same date as this Warrant,
and all rights of the Holder thereof shall be identical to those of the
Holder.
VII. Loss, etc., of Warrant.
Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant, and of indemnity
reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant, if mutilated, the
Company shall execute and deliver to the Holder a new Warrant of like
date, tenor and denomination.
VIII. Warrant Holder Not Shareholders.
Except as otherwise provided herein, this Warrant does not confer upon
the Holder any right to vote or to consent to or receive notice as a
shareholder of the Company, as such, in respect of any matters
whatsoever, or any other fights or liabilities as a shareholder, prior
to the exercise hereof.
IX. Communication.
No notice or other communication under this Warrant shall be effective
unless, but any notice or other communication shall be effective and
shall be deemed to have been given if, the same is in writing and is
mailed by first-class mail, postage prepaid, addressed to:
A. the Company at 200 Lake Street, Suite 102, Peabody, Massachusetts
01960
B. the Holder at 570 Lexington Avenue, New York, New York 10022, or
such other address as the Holder has designated in writing to the
Company.
X. Headings.
The headings of this Warrant have been inserted as a matter of
convenience and shall not affect the construction hereof.
XI. Applicable Law.
This Warrant shall be governed by and construed in accordance with the
law of the Commonwealth of Massachusetts without giving effect to the
principles of conflicts of law thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
Chief Executive Officer and its corporate seal to be hereunto affixed by its
Secretary this 31st day of July, 1998.
PHC, INC.
By: /s/ Bruce Shear
Chief Executive Officer
ATTEST:
/s/ Paula C. Wurts
Assistant Clerk
[Corporate Seal]
<PAGE>
SUBSCRIPTION
The undersigned, _________________ pursuant to the provisions of the
foregoing Warrant, hereby agrees to subscribe for and purchase ___________
shares of the Common Stock of PHC, Inc. Common stock covered by said
Warrant, and makes payment therefor in full at the price per share provided
by said Warrant.
Dated: ___________________________ Signature: ________________________
Address: _________________________
_________________________
ASSIGNMENT
FOR VALUE RECEIVED hereby sells, assigns and transfers unto ______________ the
foregoing Warrant and all rights evidenced thereby, and does irrevocably
constitute and appoint attorney, to transfer said Warrant on the books of PHC,
Inc.
Dated: ___________________________ Signature: ________________________
Address: ________________________
FOR VALUE RECEIVED hereby assigns and transfers unto _____________ the right to
purchase shares of the Common Stock of Pioneer Healthcare, Inc. by the foregoing
Warrant, and a proportionate part of said Warrant and the rights evidenced
hereby, and does irrevocably constitute and appoint attorney, to transfer that
part of said Warrant on the books of PHC, Inc.
Dated: ___________________________ Signature: ________________________
Address: _________________________
CASHLESS EXERCISE SUBSCRIPTION
The undersigned, ___________________________, pursuant to the provisions of
the foregoing Warrant, hereby agrees to subscribe to that number of shares of
Common Stock of PHC, Inc. as are issuable in accordance with the formula set
forth in paragraph l(b) of the Warrant, and makes payment therefore in full
by surrender and delivery of this Warrant.
Dated: _______________________ Signature:
________________________________
Address:
________________________________
<PAGE>
Exhibit 4.17
REPLACES WARRANT FOR 150,000 SHARES DATED JULY 31, 1997 APPENDIX B
FORM OF WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
No. 1
90,000 Shares
FOR VALUE RECEIVED, PHC, Inc. (the "Company"), hereby certifies that Brean
Murray & Co., Inc., or a permitted assign thereof, is entitled to purchase
from the Company, at any time or from time to time commencing June 1, 1997,
and prior to 5:00 P.M., New York City time, on May 31, 2002, ninety thousand
(90,000) fully paid and nonassessable shares of the common stock, of the
Company for an aggregate purchase price of $225,000 (computed on the basis of
US $2.50 per share). Upon issuance, 24,000 shares shall be fully vested and
the balance shall be 6,000 per month on the 1st of each month for the next 11
months beginning with the month of July 1997 provided that agreement between
Brean Murray and the Company dated June 1, 1997 remains in full force and
effect and has not been terminated by either party as of an application
vesting date. (Hereinafter, (i) said common stock, together with any other
equity securities which may be issued by the Company with respect thereto or
in substitution therefore, is referred to as the "Common Stock," (ii) the
shares of the Common Stock purchasable hereunder or under any other Warrant
(as hereinafter defined) are referred to as the "Warrant Shares," (iii) the
aggregate purchase price payable hereunder for the Warrant Shares is referred
to as the "Aggregate Warrant Price," (iv) the price payable hereunder for
each of the Warrant Shares is referred to as the "Per Share Warrant Price,"
(v) this Warrant, all identical warrants issued on the date hereof and all
warrants hereafter issued in exchange or substitution for this Warrant or
such other warrants are referred to as the "Warrants" and (vi) the holder of
this Warrant is referred to as the "Holder" and the holder of this Warrant
and all other Warrants are referred to as the "Holders"). The Aggregate
Warrant Price is not subject to adjustment. The Per Share Warrant Price is
subject to adjustment as hereinafter provided; in the event of any such
adjustment, the number of Warrant Shares shall be adjusted by dividing the
Aggregate Warrant Price by the Per Share Warrant Price in effect immediately
after such adjustment.
I. Exercise of Warrant.
A. Cashless Exercise
This Warrant may be exercised, in whole at any time or in part from
time to time, commencing June 1, 1997, and prior to 5:00 P.M., New York
City time, on May 31, 2002, by the Holder by the surrender of this
Warrant (with the subscription form at the end hereof duly executed) at
the address set forth in Subsection 9(a) hereof, together with proper
payment of the Aggregate Warrant Price, or the proportionate part
thereof if this Warrant is exercised in part. Payment for Warrant
Shares shall be made by certified or official bank check payable to the
order of the Company or the Warrant may be exercised by surrender of
the Warrant without payment of any other consideration, commission or
remuneration, by execution of the cashless exercise subscription form
(at the end hereof, duly executed). The number of shares to be issued
in exchange for the Warrant will be computed by subtracting the Warrant
Exercise Price from the closing bid price of the common stock on the
date of receipt of the cashless exercise subscription form, multiplying
that amount by the number of shares represented by the Warrant, and
dividing by the closing bid price as of the same date.
If this Warrant is exercised in part, this Warrant must be exercised
for a number of whole shares of the Common Stock, and the Holder is
entitled to receive a new Warrant Covering the Warrant Shares which
have not been exercised and setting forth the proportionate part of the
Aggregate Warrant Price applicable to such Warrant Shares. Upon such
surrender of this Warrant, the Company will (a) issue a certificate or
certificates in the name of the Holder for the largest number of whole
shares of the Common Stock to which the Holder shall be entitled and,
if this Warrant is exercised in whole, in lieu of any fractional share
of the Common Stock to which the Holder shall be entitled, pay to the
Holder cash in an amount equal to the fair value of such fractional
share (determined in such reasonable manner as the Board of Directors
of the Company shall determine), and (b) deliver the other securities
and properties receivable upon the exercise of this Warrant, or the
proportionate part thereof if this Warrant is exercised in part,
pursuant to the provisions of this Warrant.
II Reservation of Warrant Shares; Listing.
The Company agrees that, prior to the expiration of this Warrant, the
Company will at all times (a) have authorized and in reserve, and will
keep available, solely for issuance or delivery upon the exercise of
this Warrant, the shares of the Common Stock and other securities and
properties as from time to time shall be receivable upon the exercise
of this Warrant, free and clear of all restrictions on sale or transfer
and free and clear of all pre-emptive rights.
III. Protection Against Dilution.
A. If, at any time or from time to time after the date of this
Warrant, the Company shall issue or distribute to the holders of
shares of Common Stock evidences of its indebtedness, any other
securities of the Company or any cash, property or other assets
(excluding a subdivision, combination or reclassification, or
dividend or distribution payable in shares of Common Stock,
referred to in Subsection 3(b), and also excluding cash dividends
or cash distributions paid out of net profits legally available
therefor if the full amount thereof, together with the value of
other dividends and distributions made substantially concurrently
therewith or pursuant to a plan which includes payment thereof,
is equivalent to not more than 5% of the Company's net worth)
(any such nonexcluded event being herein called a "Special
Dividend"), the Per Share Warrant Price shall be adjusted by
multiplying the Per Share Warrant Price then in effect by a
fraction, the numerator of which shall be the then current market
price of the Common Stock (defined as the average for the thirty
consecutive business days immediately prior to the record date of
the daily closing price of the Common Stock as reported by the
NASDAQ system less the fair market value (as determined by the
Company's Board of Directors) of the evidences of indebtedness,
securities or property, or other assets issued or distributed in
such Special Dividend applicable to one share of Common Stock and
the denominator of which shall be such then current market price
per share of Common Stock. An adjustment made pursuant to this
Subsection 3(A) shall become effective immediately after the
record date of any such Special Dividend.
B. In case the Company shall hereafter (i) pay a dividend or make a
distribution on its capital stock in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a greater
number of shares, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares or (iv) issue by
reclassification of its Common Stock any shares of capital stock
of the Company, the Per Share Warrant Price shall be adjusted so
that the Holder of any Warrant upon the exercise hereof shall be
entitled to receive the number of shares of Common Stock or other
capital stock of the Company which he would have owned
immediately prior thereto. An adjustment made pursuant to this
Subsection 3(B) shall become effective immediately after the
record date in the case of a dividend or distribution and shall
become effective immediately after the effective date in the case
of a subdivision, combination or reclassification. If, as a
result of an adjustment made pursuant to this Subsection 3(B),
the Holder of any Warrant thereafter surrendered for exercise
shall become entitled to receive shares of two or more classes of
capital stock or shares of Common Stock and other capital stock
of the Company, the Board of Directors (whose determination shall
be conclusive and shall be described in a written notice to the
Holder of any Warrant promptly after such adjustment) shall
determine the allocation of the adjusted Per Share Warrant Price
between or among shares of such classes or capital stock or
shares of Common Stock and other capital stock.
C. Except as provided in Subsection 3(A) and 3(D), in case the
Company shall hereafter issue or sell any rights, options,
warrants or securities convertible into Common Stock entitling
the holders thereof to purchase Common Stock or to convert such
securities into Common Stock at a price per share (determined by
dividing (i) the total amount, if any, received or receivable by
the Company in consideration of the issuance or sale of such
rights, options, warrants or convertible securities plus the
total consideration, if any, payable to the Company upon exercise
or conversion thereof (the "Total Consideration") by (ii) the
number of additional shares of common stock issuable upon
exercise or conversion of such securities) less than the then
current Per Share Warrant Price in effect on the date of such
issuance or sale, the Per Share Warrant Price shall be adjusted
as of the date of such issuance or sale so that the same shall
equal the price determined by dividing (i) the sum of (a) the
number of shares of Common Stock outstanding on the date of such
issuance or sale multiplied by the Per Share Warrant Price plus
(b) the Total Consideration by (ii) the number of shares of
Common Stock outstanding on the date of such issuance or sale
plus the maximum number of additional shares of Common Stock
issuable upon exercise or conversion of such securities. The
provision of this section shall not apply to the issuance of any
shares of Common Stock on the exercise conversion or exchange of
any rights, options, warrants or convertible securities
outstanding on the date hereof or any such shares issued to
employees, directors, or consultants, pursuant to the Company's
Non-Employee Director Plan, Omnibus Stock Plan or Employee Stock
Purchase Plan based upon the number of options or shares
currently authorized under such plan increased by 50%.
D. In case of any capital reorganization or reclassification, or any
consolidation or merger to which the Company is a party other
than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to
another entity of the property of the Company as an entirety or
substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (including any
exchange effected in connection with a merger of a third
corporation (including any exchange effected in connection with a
merger of a third corporation into the Company), the Holder of
this Warrant shall have the right thereafter to convert such
Warrant into the kind and amount of securities, cash or other
property which he would have owned or have been entitled to
receive immediately after such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance had
this Warrant been converted immediately prior to the effective
date of such reorganization, reclassification, consolidation,
merger, statutory exchange, sale or conveyance and in any such
case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section 3 with
respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth in this
Section 3 shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock
or other securities or be, in relation to any shares of stock or
other securities or property thereafter deliverable on the
conversion of this Warrant. The above provisions of this
Subsection 3(D) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The issuer of any
shares of stock or other securities or property thereafter
deliverable on the conversion of this Warrant shall be
responsible for all of the agreements and obligations of the
Company hereunder. Notice of any such reorganization,
reclassification, consolidation, merger, statutory exchange, sale
or conveyance and of said provisions so proposed to be made,
shall be mailed to the Holders of the Warrants not less than 30
days prior to such event. A sale of all or substantially all of
the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger
for the foregoing purposes.
E. No adjustment in the Per Share Warrant Price shall be required
unless such adjustment would require an increase or decrease of at
least $0.05 per share of Common Stock; provided, however, that any
adjustments which by reason of this Subsection 3(e) are not
required to be made shall be carried forward and taken into
account in any subsequent adjustment; provided further, however,
that adjustments shall be required and made in accordance with the
provisions of this Section 3 (other than this Subsection 3(e) not
later than such time as may be required in order to preserve the
tax-free nature of a distribution to the Holder of this Warrant or
Common Stock issuable upon exercise hereof. All calculations
under this Section 3 shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be. Anything in this
Section 3 to the contrary notwithstanding, the Company shall be
entitled to make such reductions in the Per Share Warrant Price,
in addition to those required by this Section 3, as it in its
discretion shall deem to be advisable in order that any stock
dividend, subdivision of shares or distribution of rights to
purchase stock or securities convertible or exchangeable for stock
hereafter made by the Company to its shareholders shall not be
taxable.
F. Whenever the Per Share Warrant Price is adjusted as provided in
this Section 3 and upon any modification of the rights of a Holder
of Warrants in accordance with this Section 3, the Company shall
promptly obtain, at its expense, a certificate of a firm of
independent public accountants of recognized standing selected by
the Board of Directors (who may be the regular auditors of the
Company) setting forth the Per Share Warrant Price and the number
of Warrant Shares after such adjustment or the effect of such
modification, a brief statement of the facts requiring such
adjustment or modification and the manner of computing the same
and cause copies of such certificate to be mailed to the Holders
of the Warrants.
G. If the Board of Directors of the Company shall declare any
dividend or other distribution with respect to the Common Stock,
other than a cash distribution out of earned surplus, the Company
shall mail notice thereof to the Holders of the Warrants not less
than 15 days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other
distribution.
IV. Fully Paid Stock, Taxes.
The Company agrees that the shares of the Common Stock represented by
each and every certificate for Warrant Shares delivered on the exercise
of this Warrant shall, at the time of such delivery, be validly issued
and outstanding, fully paid and nonassessable, and not subject to
pre-emptive rights, and the Company will take all such actions as may
be necessary to assure that the par value or stated value, if any, per
share of the Common Stock is at all times equal to or less than the
then Per Share Warrant Price. The Company further covenants and agrees
that it will pay, when due and payable, any and all Federal and state
stamp, original issue or similar taxes which may be payable in respect
of the issue of any Warrant Share or certificate therefor.
V. Registration Under Securities Act of 1933.
A. The Company agrees that if, at any time and from time to time
during the period commencing on June 1, 1997 and ending on May
31, 2002, the Board of Directors of the Company shall authorize
the filing of a registration statement or a post-effective
amendment to a registration statement (any such registration
statement being hereinafter called a "Subsequent Registration
Statement") under the Act other than a registration statement on
Form S-8 or other form which does not include substantially the
same information as would be required in a form for the general
registration of securities) in connection with the proposed offer
of any of its securities by it or any of its shareholders, the
Company will (i) promptly notify the Holder and each of the
Holders, if any, of other Warrants and/or Warrant Shares that
such Subsequent Registration Statement will be filed and that the
Warrant Shares which are then held, and/or which may be acquired
upon the exercise of the Warrants, by the Holder and such
Holders, will, at the Holder's and such Holders' request, be
included in such Subsequent Registration Statement, (ii) include
in the securities covered by such Subsequent Registration
Statement all Warrant Shares which it has been so requested to
include, (iii) use its best efforts to cause such Subsequent
Registration Statement to become effective as soon as practicable
and (iv) take all other action necessary under any Federal or
state law or regulation of any governmental authority to permit
all Warrant Shares which it has been so requested to include in
such Subsequent Registration Statement or to be sold or otherwise
disposed of, and will maintain such compliance with each such
Federal and state law and regulation of any governmental
authority for the period necessary for the Holder and such
Holders to effect the proposed sale or other disposition.
B. Whenever the Company is required pursuant to the provisions of
this Section 5 to include Warrant Shares in a registration
statement or a post-effective amendment to a registration
statement, the Company shall (i) furnish each Holder of any such
Warrant Shares and each underwriter of such Warrant Shares with
such copies of the prospectus, including the preliminary
prospectus, conforming to the Act, (and such other documents as
each such Holder or each such underwriter may reasonably request)
in order to facilitate the sale or distribution of the Warrant
Shares, (ii) use its best efforts to register or qualify such
Warrant Shares under the blue sky laws (to the extent applicable)
of such jurisdiction or jurisdictions as the Holders of any such
Warrant Shares and each underwriter of Warrant Shares being sold
by such Holders shall reasonably request and (iii) take such
other actions as may be reasonably necessary or advisable to
enable such Holders and such underwriters to consummate the sale
or distribution in such jurisdiction or jurisdictions in which
such Holders shall have reasonably requested that the Warrant
Shares be sold.
C. The Company shall pay all expenses incurred in connection with
any registration or other action pursuant to the provisions of
this Section 5, other than underwriting discounts and applicable
transfer taxes relating to the Warrant Shares.
D. The Company will indemnify the Holders of Warrant Shares which
are included in each Subsequent Registration Statement
substantially to the same extent as the Company has indemnified
the underwriters (the "Underwriters") of its public offering of
Common Stock pursuant to the Underwriting Agreement and such
Holders will indemnify the Company (and the underwriters, if
applicable) with respect to information furnished by them in
writing to the Company for inclusion therein substantially to the
same extent as the Underwriters have indemnified the Company.
VI. Limited Transferability.
This Warrant may not be sold, transferred, assigned or hypothecated by
the Holder until the first anniversary hereof except (a) to any
successor firm or corporation of Brean Murray & Co., Inc., (b) to any
of the officers, managing directors, any associates of Brean Murray &
Co., Inc., to a finder that has been recognized by both parties or of
any such successor firm or (c) in the case of an individual, pursuant
to such individual's last will and testament or the laws of descent and
distribution, and is so transferable only upon the books of the Company
which it shall cause to be maintained for the purpose. The Company may
treat the registered Holder of this Warrant as he or it appears on the
Company's books at any time as the Holder for all purposes. The
Company shall permit any Holder of a Warrant or his duly authorized
attorney, upon written request during ordinary business hours, to
inspect and copy or make extracts from its books showing the registered
holders of Warrants. All warrants issued upon the transfer or
assignment of this Warrant will be dated the same date as this Warrant,
and all rights of the Holder thereof shall be identical to those of the
Holder.
VII. Loss, etc., of Warrant.
Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant, and of indemnity
reasonably satisfactory to the Company, if lost, stolen or destroyed,
and upon surrender and cancellation of this Warrant, if mutilated, the
Company shall execute and deliver to the Holder a new Warrant of like
date, tenor and denomination.
VIII. Warrant Holder Not Shareholders.
Except as otherwise provided herein, this Warrant does not confer upon
the Holder any right to vote or to consent to or receive notice as a
shareholder of the Company, as such, in respect of any matters
whatsoever, or any other fights or liabilities as a shareholder, prior
to the exercise hereof.
IX. Communication.
No notice or other communication under this Warrant shall be effective
unless, but any notice or other communication shall be effective and
shall be deemed to have been given if, the same is in writing and is
mailed by first-class mail, postage prepaid, addressed to:
A. the Company at 200 Lake Street, Suite 102, Peabody, Massachusetts
01960
B. the Holder at 570 Lexington Avenue, New York, New York 10022, or
such other address as the Holder has designated in writing to the
Company.
X. Headings.
The headings of this Warrant have been inserted as a matter of
convenience and shall not affect the construction hereof.
XI. Applicable Law.
This Warrant shall be governed by and construed in accordance with the
law of the Commonwealth of Massachusetts without giving effect to the
principles of conflicts of law thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
Chief Executive Officer and its corporate seal to be hereunto affixed by its
Secretary this 31st day of July, 1998.
PHC, INC.
By: /s/ Bruce Shear
Chief Executive Officer
ATTEST:
/s/ Paula C. Wurts
Assistant Clerk
[Corporate Seal]
SUBSCRIPTION
The undersigned, _________________ pursuant to the provisions of the
foregoing Warrant, hereby agrees to subscribe for and purchase -----------
shares of the Common Stock of PHC, Inc. Common stock covered by said
Warrant, and makes payment therefor in full at the price per share provided
by said Warrant.
Dated: ___________________________ Signature: ________________________
Address: _________________________
_________________________
ASSIGNMENT
FOR VALUE RECEIVED hereby sells, assigns and transfers unto _____________ the
foregoing Warrant and all rights evidenced thereby, and does irrevocably
constitute and appoint attorney, to transfer said Warrant on the books of PHC,
Inc.
Dated: ___________________________ Signature: ________________________
Address: ________________________
FOR VALUE RECEIVED hereby assigns and transfers unto _____________ the right to
purchase shares of the Common Stock of Pioneer Healthcare, Inc. by the foregoing
Warrant, and a proportionate part of said Warrant and the rights evidenced
hereby, and does irrevocably constitute and appoint attorney, to transfer that
part of said Warrant on the books of PHC, Inc.
Dated: ___________________________ Signature: ________________________
Address: _________________________
CASHLESS EXERCISE SUBSCRIPTION
The undersigned, ___________________________, pursuant to the provisions of
the foregoing Warrant, hereby agrees to subscribe to that number of shares of
Common Stock of PHC, Inc. as are issuable in accordance with the formula set
forth in paragraph l(b) of the Warrant, and makes payment therefore in full
by surrender and delivery of this Warrant.
Dated: _______________________ Signature: ________________________________
Address: ________________________________
<PAGE>
Exhibit 4.18
THE SECURITIES REPRESENTED BY THIS WARRANT (AND THE SECURITIES ISSUABLE UPON
EXERCISE OF THIS WARRANT) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, OR ANY STATE SECURITIES STATUTE. THE SECURITIES HAVE BEEN ACQUIRED
FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE
SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT
OF 1933 AND ANY APPLICABLE STATE SECURITIES STATUTE, OR UNLESS AN EXEMPTION
FROM REGISTRATION IS AVAILABLE THEREUNDER.
Shares Issuable Upon Exercise: Up to 20,000 shares of the Class A
Common Stock, $.01 par value, of PHC,
Inc.
WARRANT TO PURCHASE
SHARES OF CLASS A COMMON STOCK
Expires July 10, 2003
THIS CERTIFIES THAT, for value received, HealthCare Financial
Partners, Inc. is entitled to subscribe for and purchase that number of
shares (the "Shares") of the fully paid and nonassessable Class A Common
Stock, $.01 par value, (the "Class A Common Stock") of PHC, Inc., a
Massachusetts corporation (the "Company"), for a price of $1.50 per Share
(the "Warrant Price"), subject to the provisions and upon the terms and
conditions hereinafter set forth. 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 Incorporation 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 July 10, 1998.
1 Term. Subject to the provisions of this Warrant, the purchase
right represented by this Warrant is exercisable, in whole or in part, at any
time and from time to time from and after the Grant Date and prior to July
10, 2003.
Notwithstanding anything to the contrary contained herein,
neither this Warrant nor any rights hereunder may be transferred or assigned
except to an Assignee who is an "accredited investor" within the meaning of
Regulation D of the General Rules and Regulations of the Securities Act of
1933.
2 Method of Exercise. The purchase right represented by this
Warrant may be exercised by the holder hereof, in whole or in part and from
time to time, by either, at the election of this holder, (a) the surrender of
the Warrant (with the notice of exercise form attached hereto as Exhibit A-1
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 then applicable Warrant Price multiplied by the number of shares
then being purchased or (b) if in connection with a registered public
offering of the Company's securities (provided that such offering includes
the shares), the surrender of this Warrant (with the notice of exercise form
attached hereto as Exhibit A-2 duly executed) at the principal office of the
Company together with notice of arrangements reasonably satisfactory to the
Company and any underwriter, in the case of an underwritten registered public
offering, for payment to the Company either by certified or bank check or by
wire transfer of from the proceeds of the sale of Shares to be sold by the
holder in such public offering of an amount equal to the then applicable
Warrant Price per Share multiplied by the number of Shares then being
purchased. The person or persons in whose name(s) any certificate(s)
representing Shares which shall be issuable upon exercise of this Warrant
shall be deemed to have become the holder(s) of record of, and shall be
treated for all purposes as the record holder(s) of, the shares represented
thereby (and such shares shall be deemed to have been issued) immediately
prior to the close of business on the date or dates upon which this Warrant
is exercised and the then applicable Warrant Price paid. In the event of any
exercise of the rights represented by this Warrant, certificates for the
shares of stock so purchased shall be delivered to the holder hereof as soon
as possible and in any event within ten (10) days of receipt of such notice
and payment of the then applicable Warrant Price and, unless this Warrant has
been fully exercised or expired, a new Warrant representing the portion of
the Shares, if any, with respect to which this Warrant shall not then have
been exercised shall also be issued to the holder hereof as soon as possible
and in any event within such ten-day period.
3 Stock Fully Paid; Reservation of Shares. All shares that may be
issued upon the exercise of the rights represented by this Warrant will upon
issuance, be fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issue thereof. During the period within which
the rights represented by the Warrant may be exercised, the Company will at
all times have authorized and reserved for the purpose of issuance upon
exercise of the purchase rights evidenced by this Warrant, a sufficient
number of shares of Class A Common Stock to provide for the exercise of the
rights represented by this Warrant.
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:
4.1 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.
4.2 Subdivision or Combination of Shares. If the Company at
any time while this Warrant 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.
4.3 Stock Dividends. If the Company at any time while this
Warrant 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 4.1 and 4.2), 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 shall be appropriately adjusted.
4.4 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 Article 4 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.
4.5 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, 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.
4.6 Adjustment to Number of Shares and Warrant Price Based on
Dilutive Issuance If and whenever the Company should issue shares of its
Class A Common Stock at a price per share less than the average of the
closing of the bid and asked prices for such Class A Common Stock for the
last trading day immediately prior to the issuance of such shares (other than
shares issued pursuant to an employee benefit plan including Class A Common
Stock issued or issuable to the officers or employees or directors of or
consultants to the Company and approved by a disinterested majority of the
directors of the Company), then the Warrant Price shall be adjusted by
dividing (1) the sum of (A) the total number of shares of Class A Common
Stock outstanding immediately prior to such issuance multiplied by the then
effective Warrant Price and (B) the value of the consideration received by
the Company upon such issuances as determined by the Board of Directors by
(2) the total number of shares of Class A Common Stock outstanding
immediately after such issuance. The holder of the Warrant shall thereafter
be entitled to purchase, at the Warrant Price resulting from such adjustment,
the number of Shares (calculated to the nearest whole share) obtained by
multiplying the Warrant Price in effect immediately prior to such adjustment
by the number of shares issuable upon the exercise hereof immediately prior
to such adjustment and dividing the product thereof by the Warrant Price
resulting from such adjustment. For the purpose of this paragraph (d) the
issuance of securities convertible into or exercisable for the Class A Common
Stock shall be deemed the issuance of the number of shares of Class A Common
Stock into which such securities are convertible or for which such securities
are exercisable, and the consideration received for such securities shall be
deemed to include the minimum aggregate amount payable upon conversion or
exercise of such securities expire unexercised, the Warrant Price of Shares
issuable upon the exercise hereof shall be readjusted accordingly.
5. Notice of Adjustments. Whenever the Warrant Price or number of
Shares shall be adjusted pursuant to the provisions hereof, the Company shall
within thirty (30) days of such adjustments deliver a certificate signed by
its chief financial officer to the registered holder(s) hereof setting forth
in reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the
Warrant Price after giving effect to such adjustment.
6. Fractional Shares. No fractional Shares will be issued in
connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Warrant
Price then in effect.
7. Compliance with Securities Act, Disposition of Shares.
7.1 Compliance with Securities Act. The holder of this
Warrant, by acceptance hereof, reconfirms the representations made by the
Purchaser in a letter agreement with the Company as of the date hereof (the
"Letter Agreement") and agrees to the placement of a restrictive transfer
legend on this Warrant and the certificates representing the shares.
7.2 Disposition of Warrants and Shares. With respect to any
offer, sale or other disposition of this Warrant or any Shares acquired
pursuant to the exercise of this Warrant prior to registration of this
Warrant or such Shares, the holder hereof and each subsequent holder of this
Warrant agrees to give written notice to the Company prior thereto,
describing briefly the manner thereof, together with a written opinion of
such holder's counsel, if reasonably requested by the Company (and, in such
case, such counsel and opinion must be reasonably acceptable to the Company),
to the effect that such offer, sale or other disposition my be effected
without registration or qualification (under the Securities Act of 1933 (the
"Act") as then in effect or any federal or state law then in effect) and
indicating whether or not under the Act certificates for this Warrant or such
Shares to be sold or otherwise disposed of require any restrictive legend as
to applicable restrictions on transferability in order to insure compliance
with the Act. Each certificate representing this Warrant or the Shares thus
transferred (except a transfer pursuant to Rule 144) shall bear a legend as
to the applicable restrictions on transferability in order to ensure
compliance with the Act, unless in the aforesaid opinion of counsel for the
holder, such legend is not required in order to ensure compliance with the
Act. The Company may issue stop transfer instructions to its transfer agent
in connection with the foregoing restrictions.
8. Rights as Shareholders. No holder of the Warrant, as such, shall
be entitled to vote or receive dividends or be deemed the holder of Shares or
any other securities of the Company which may at any time be issuable on the
exercise thereof for any purpose, nor shall anything contained herein, be
construed to confer upon the holder of this Warrant, as such any of the
rights of a shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any meeting
thereof, or to receive notice of meetings (except as otherwise provided in
Section 4.5 of this warrant), or to receive dividends or subscription rights
or otherwise until this Warrant shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as
provided herein.
9. Representations and Warranties. This Warrant is issued and
delivered on the basis of the following:
9.1 Authorization and Delivery. This Warrant has been
duly authorized and executed by the Company and when delivered will be valid
and binding obligation of the Company enforceable in accordance with its
terms; and
9.2 Shares. The Shares have been duly authorized and
reserved for issuance by the Company and when issued and paid for in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable.
10. Modification and Waiver. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
11 Notices. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof or the Company shall
be delivered in the manner set forth in the Letter Agreement.
12. Binding Effect of Successors. This Warrant shall be binding upon
any corporation succeeding the Company by merger of consolidation, and all of
the obligations of the Company relating to the Shares issuable upon the
exercise of this Warrant shall be as set forth in the Letter Agreement, the
Company's Charter and the Company's by-laws (each as amended from time to
time) and shall survive the exercise and termination of this Warrant and all
of the covenants and agreements herein and in such other documents and
instruments of the Company shall inure to the benefit of the successors and
assigns of the holder hereof. The Company will, at the time of the exercise
of this Warrant, in whole or in part, upon request of the holder hereof but
at the Company's expense, acknowledge in writing its continuing obligation to
the holder hereof in respect of any rights (including without limitation, any
right to registration of the Shares) to which the holder hereof shall
continue to be entitled after such exercise in accordance with this Warrant;
provided that the failure of the holder hereof to make any such request shall
not affect the continuing obligation of the Company to the holder hereof in
respect of such rights.
13. Lost Warrants or Stock Certificates. The Company covenants to
the holder hereof that upon receipt of evidence reasonable satisfactory to
the Company of the loss, theft, destruction, or mutilation of this Warrant or
any stock certificates and, in the case of any such loss, theft or
destruction, upon receipt of an indemnity reasonable satisfactory to the
Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant or stock certificate, the Company will make and
deliver a new Warrant or stock certificate, or like tenor, in lieu of the
lost, stolen, destroyed or mutilated Warrant or stock certificate.
14. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
15. Governing Law. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws
of the Commonwealth of Massachusetts.
PHC, INC.
By: /s/ Bruce A. Shear
President
Date: July 10, 1998 (signed August 4, 1998)
Exhibit A-1
Notice of Exercise
To:
1. The undersigned hereby elects to purchase _______ Shares of PHC,
Inc. pursuant to the terms of the attached Warrant, and tenders herewith
payment of the purchase 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 Section 7 of the Warrant, 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 not present intention of distributing or reselling such
shares.
_______________________________
Signature
_________________
Date
Exhibit A-1
Notice of Exercise
To:
1. Contingent upon and effective immediately prior to the closing
(the "Closing") of the Company's public offering contemplated by the
Registration Statement of Form S _____________, filed ______________,
______ the undersigned hereby elects to purchase Shares of the Company (or
such lesser number of Shares as may be sold on behalf of the undersigned at
the Closing) pursuant to the terms of the attached Warrant.
2, Please deliver to the custodian for the selling shareholders a
certificate representing the Shares being so purchased.
3. The undersigned has instructed the custodian for the selling
shareholders to deliver to the Company $ _________________ of, if less, the
net proceeds due the undersigned from the sales of Shares in the aforesaid
public offering. If such net proceeds are less than the purchase price for
such Shares, the undersigned agrees to deliver the difference to the Company
prior to the Closing.
_______________________________
Signature
_________________
Date
warrants.dot
<PAGE>
Exhibit 4.19
(On Letterhead)
September 2, 1998
Attention: Ethan D. Leder, President
HCFP Funding, Inc.
Two Wisconsin Circle, 4th Floor
Chevy Chase MD 20815
RE: Common Stock Purchase Warrants issuable by PHC, Inc. (the
"Company") to HealthCare Financial Partners, Inc. and its
subsidiaries (collectively, "HCFP" REPLACES ALL PREVIOUS
CORRESPONDENCE REGARDING THE JULY 10, 1998 WARRANTS PRICE
PROTECTION.
Dear Mr. Leder:
This letter confirms the agreement entered into by the Company and HCFP to
the effect that the Company will provide certain price protection to HCFP at
the time HCFP exercises Warrant No. 2, issued July 10, 1998, covering 52,500
shares of Class A Common Stock and Warrant No. 3, issued July 10, 1998,
covering 20,000 shares of Class A Common Stock.
The Company hereby agrees with HCFP as follows:
(a) If on the date that HCFP exercises all of Warrant No. 2 the closing
price of the Common Stock is less than $3.26 per share, then the Company
shall pay to you, in cash (or shares of common stock having a market value
equal to or greater than such cash amount on the date of exercise), an amount
equal to the lesser of (i) the difference between the closing price of the
Common Stock on the date of exercise and $3.26, or (ii) $1.45, which amount
shall be multiplied by the number of Warrants.
(b) If on the date that HCFP exercises all of Warrant No. 3 the closing
price of the Common Stock is less than $2.95 per share, then the Company
shall pay to you, in cash (or shares of common stock having a market value
equal to or greater than such cash amount on the date of exercise), an amount
equal to the lesser of (i) the difference between the closing price of the
Common Stock on the date of exercise and $2.95, or (ii) $1.45, which amount
shall be multiplied by the number of Warrants.
The provision described clause (a) above applies to all of Warrant No. 2
without regard to any prior exercise of Warrant No. 3 under paragraph (b).
The provision described in clause (b) above applies to all of Warrant No. 3
without regard to any prior exercise of Warrant No. 2 under paragraph (a).
HCFP agrees not to exercise the Warrants less than six months following the
repayment of the secured term debt of the Company to HCFP.
The effect of this Letter Agreement shall be to insure that HCFP receives
value (in cash or stock as applicable, or as specified herein) of at least
$105,125.00 from the exercise of the Warrants. If pursuant to this Letter
Agreement, the Company is required to pay cash or issue stock to HCFP upon
HCFP's exercise of a Warrant, the Company will make the required payment of
cash or issue stock at such time as the Common Stock underlying the Warrant
is sold by HCFP at a price less than $3.26 (in the case of Warrant No. 2) or
$2.95 (in the case of Warrant No. 3).
<PAGE>
HealthCare Financial Partners, Inc.
September 2,1998
Page 2
The execution, delivery and effectiveness of this Letter Agreement shall not,
except as expressly provided in this Letter Agreement, operate as a waiver of
any right, power or remedy of Lender, nor constitute a waiver of any
provision of the any of the notes made by the Company or any of its
subsidiaries or affiliates, or any of the loan agreements by and between HCFP
or any of its subsidiaries or affiliates, or any other documents, instruments
and agreements executed or delivered in connection therewith.
This Letter Agreement shall be governed by and construed in accordance with
the laws of the State of Maryland.
This Letter Agreement may be executed in counterparts, and both counterparts
taken together shall be deemed to constitute one and the same instrument.
If these conditions are acceptable to Lender, please so signify by signing
below where indicated.
Very truly yours,
PHC, INC.
a Massachusetts corporation
By:_____________________________
Bruce A. Shear
President
THE FOREGOING IS ACKNOWLEDGED AND AGREED TO AS OF THE ________ DAY OF
SEPTEMBER, 1998.
HEALTHCARE FINANCIAL
PARTNERS, INC.,
a Delaware corporation
By:____________________________
Name:__________________________
Title:___________________________
<PAGE>
<PAGE>
EXHIBIT 21.1
STATE OF
NAME OF SUBSIDIARY DOING BUSINESS AS (NAME) INCORPORATION
PHC, Inc. Pioneer Behavioral Health Massachusetts
Pioneer Healthcare
PDSS
PHC of Utah, Inc. Highland Ridge Hospital Massachusetts
PHC of Virginia, Inc. Mount Regis Massachusetts
Center
Changes
PHC of Rhode Island, Inc. Good Hope Center Massachusetts
PHC of Michigan, Inc. Harbor Oaks Hospital Massachusetts
PHC of Nevada, Inc. Harmony Healthcare Massachusetts
Harmony Behavioral Nevada
Healthcare
Northpoint-Pioneer, Inc. Pioneer Counseling Center Massachusetts
PHC of Kansas, Inc. Total Concept EAP Massachusetts
Quality Care Centers of Franvale Nursing and Massachusetts
Massachusetts, Inc. Rehabilitation Center
PHC of California, Inc. Marin Grove Massachusetts
Pioneer Counseling of Counseling Associates of Massachusetts
Virginia, Inc. Virginia, Inc. Massachusetts
Counseling Associates of
Virginia
BSC-NY, Inc. Behavioral Stress Center New York
STL, Inc. Massachusetts
Professional Health New York
Associates, Inc.
<PAGE>
Exhibit 10.65
$4,000,000.00
LOAN AND SECURITY AGREEMENT
by and between
PHC OF MICHIGAN, INC.
PHC OF UTAH, INC.
PHC OF VIRGINIA, INC.
PHC OF RHODE ISLAND, INC.
PIONEER COUNSELING OF VIRGINIA, INC.
("Borrower")
and
HCFP FUNDING, INC.
("Lender")
February ____, 1998
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of
February ____, 1998, by and among PHC OF MICHIGAN, INC., a Massachusetts
corporation ("PHCM"), PHC OF UTAH, INC., a Massachusetts corporation
("PHCU"), and PHC OF VIRGINIA, INC., a Massachusetts corporation, PHC OF
RHODE ISLAND, INC., a Massachusetts corporation, PIONEER COUNSELING OF
VIRGINIA, INC., a Massachusetts corporation (collectively, "New Borrower")
and HCFP FUNDING, INC., a Delaware corporation ("Lender").
RECITALS
A. Lender and PHCM entered into a Loan and Security Agreement dated
as of February 3, 1997, as amended (the "PHCM Loan Agreement"), establishing
a financing arrangement in the maximum amount of One Million Five Hundred
Thousand and No/100 Dollars ($1,500,000.00).
B. Lender and PHCU entered into a Loan and Security Agreement dated
as of May 21, 1996, as amended (the "PHCU Loan Agreement"), establishing a
financing arrangement in the maximum amount of One Million and No/100 Dollars
($1,000,000.00).
C. New Borrowers now desire to establish financing arrangements with
and borrow funds from Lender, and Lender is willing to establish such
arrangements for make loans and extensions of credit to New Borrowers, on
substantially the same terms as those contained in the PHCM Loan Agreement
and the PHCU Loan Agreement.
D. Lender, PHCM and PHCU believe it is in the best interests of each
of them to amend and restate the PHCM Loan Agreement and the PHCU Loan
Agreement by combining those agreements into one agreement, and to have New
Borrowers added to such combined agreement.
E. This Agreement shall be serve as an Amended and Restated Loan
Agreement for each of the PHCM Loan Agreement and for the PHCU Loan Agreement
and as a new Loan and Security Agreement for New Borrowers.
F. PHCM, PHCU and New Borrowers hereafter shall be collectively
referred to as "Borrower."
NOW, THEREFORE, in consideration of the promises and covenants contained
in this Agreement, and for other consideration, the receipt and sufficiency
of which are acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
Section 1.1. Account. "Account" means any right to payment for
goods sold or leased or services rendered, whether or not evidenced by an
instrument or chattel paper, and whether or not earned by performance,
including, without limitation, the right to payment of management fees.
Section 1.2. Account Debtor. "Account Debtor" means any Person
obligated on any Account of Borrower, including without limitation, any
Insurer and any Medicaid/Medicare Account Debtor.
Section 1.3. Affiliate. "Affiliate" means, with respect to a
specified Person, any Person directly or indirectly controlling, controlled
by, or under common control with the specified Person, including without
limitation their stockholders and any Affiliates thereof. A Person shall be
deemed to control a corporation if the Person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
business of the corporation whether through the ownership of voting
securities, by contract, or otherwise.
Section 1.4. Agreement. "Agreement" means this Loan and Security
Agreement, as it may be amended or supplemented from time to time.
Section 1.5. Base Rate. "Base Rate" means a rate of interest
equal to two and one quarter percent (2.25%) above the "Prime Rate of
Interest".
Section 1.6. Borrowed Money. "Borrowed Money" means any obligation
to repay money, any indebtedness evidenced by notes, bonds, debentures or
similar obligations, any obligation under a conditional sale or other title
retention agreement and the net aggregate rentals under any lease which under
GAAP would be capitalized on the books of the Borrower or which is the
substantial equivalent of the financing of the property so leased.
Section 1.7. Borrower. "Borrower" has the meaning set forth in
the Preamble.
Section 1.8. Borrowing Base. "Borrowing Base has the meaning set
forth in Section 2.1 (d).
Section 1.9. Business Day. "Business Day" means any day on which
financial institutions are open for business in the State of Maryland,
excluding Saturdays and Sundays.
Section 1.10. Closing Date. "Closing" and "Closing Date" have the
meanings set forth in Section 5.3.
Section 1.11. Commitment Fee. "Commitment Fee" has the meaning set
forth in Section 2.4(a).
Section 1.12. Collateral. "Collateral" has the meaning set forth in
Section 3.1.
Section 1.13. Controlled Group. "Controlled Group" means a
"controlled group" within the meaning of Section 4001(b) of ERISA.
Section 1.14. Cost Report Settlement Account. "Cost Report
Settlement Account" means an "Account" owed to Borrower by a
Medicaid/Medicare Account Debtor pursuant to any cost report, either interim,
filed or audited, as the context may require.
Section 1.15. Default Rate. "Default Rate" means a rate per annum
equal to two percent (2%) above the Base Rate.
Section 1.16. Concentration Account. "Concentration Account" has
the meaning set forth in Section 2.3(a).
Section 1.17. ERISA. "ERISA" has the meaning set forth in Section
4.12.
Section 1.18. Event of Default. "Event of Default" and "Events of
Default" have the meanings set forth in Section 8. 1.
Section 1.19. GAAP. "GAAP" means generally accepted accounting
principles applied in a matter consistent with the financial statements
referred to in Section 4.7.
Section 1.20. Governmental Authority. "Governmental Authority"
means and includes any federal, state, District of Columbia, county,
municipal, or other government and any department, commission, board, bureau,
agency or instrumentality thereof, whether domestic or foreign.
Section 1.21. Hazardous Material. "Hazardous Material" means any
substances defined or designated as hazardous or toxic waste, hazardous or
toxic material, hazardous or toxic substance, or similar term, by any
environmental statute, rule or regulation or any Governmental Authority.
Section 1.22. Highest Lawful Rate. "Highest Lawful Rate" means the
maximum lawful rate of interest referred to in Section 2.7 that may accrue
pursuant to this Agreement.
Section 1.23. Insurer. A Person that insures a Patient against
certain of the costs incurred in the receipt by such Patient of Medical
Services, or that has an agreement with Borrower to compensate Borrower for
providing services to a Patient.
Section 1.24. Lender. "Lender" has the meaning set forth in the
Preamble.
Section 1.25. Loan. "Loan" has the meaning set forth in Section
2.1(a).
Section 1.26. Loan Documents. "Loan Documents" means and includes
this Agreement, the Note, and each and every other document now or hereafter
delivered in connection therewith, as any of them may be amended, modified,
or supplemented from time to time.
Section 1.27. Loan Management Fee. "Loan Management Fee" has the
meaning set forth in Section 2.4(c).
Section 1.28. Lock Box. "Lockbox" has the meaning set forth in
Section 2.3(a).
Section 1.29. Lockbox Bank. "Lockbox Bank" has the meaning set
forth in Section 2.3(a).
Section 1.30. Maximum Loan Amount. "Maximum Loan Amount" has the
meaning set forth in Section 2. 1 (a).
Section 1.31. Medicaid/Medicare Account Debtor. "Medicaid/Medicare
Account Debtor" means any Account Debtor which is (i) the United States of
America acting under the Medicaid/Medicare program established pursuant to
the Social Security Act, (ii) any state or the District of Columbia acting
pursuant to a health plan adopted pursuant to Title XIX of the Social
Security Act or (iii) any agent, carrier, administrator or intermediary for
any of the foregoing.
Section 1.32. Medical Services. Medical and health care services
provided to a Patient, including, but not limited to, medical and health care
services provided to a Patient and performed by Borrower which are covered by
a policy of insurance issued by an Insurer, and includes physician services,
nurse and therapist services, dental services, hospital services, skilled
nursing facility services, comprehensive outpatient rehabilitation services,
home health care services, residential and out-patient behavioral healthcare
services, and medicine or health care equipment provided by Borrower to a
Patient for a necessary or specifically requested valid and proper medical or
health purpose.
Section 1.33. Note. "Note" has the meaning set forth in Section
2.1(c).
Section 1.34. Obligations. "Obligations" has the meaning set forth
in Section 3.1.
Section 1.35. Patient. Any Person receiving Medical Services from
Borrower and all Persons legally liable to pay Borrower for such Medical
Services other than Insurers.
Section 1.36. Permitted Liens. "Permitted Liens" means: (a) liens
for taxes not delinquent, or which are being contested in good faith and by
appropriate proceedings which suspend the collection thereof and in respect
of which adequate reserves have been made (provided that such proceedings do
not, in Lender's sole discretion, involve any substantial danger of the sale,
loss or forfeiture of such property or assets or any interest therein); (b)
deposits or pledges to secure obligations under workmen's compensation,
social security or similar laws, or under unemployment insurance; (c)
deposits or pledges to secure bids, tenders, contracts (other than contracts
for the payment of money), leases, statutory obligations, surety and appeal
bonds and other obligations of like nature arising in the ordinary course of
business; (d) mechanic's, workmen's, materialmen's or other like liens
arising in the ordinary course of business with respect to obligations which
are not due, or which are being contested in good faith by appropriate
proceedings which suspend the collection thereof and in respect of which '
adequate reserves have been made (provided that such proceedings do not, in
Lender's sole discretion, involve any substantial danger of the sale, loss or
forfeiture of such property or assets or any interest therein); (e) liens and
encumbrances in favor of Lender; (f) liens granted in connection with the
lease or purchase of property or assets financed by borrowings permitted by
Section 7.1 (provided, however, that no such borrowings permitted by Section
7.1 may be secured by liens on any of the Collateral); and (g) liens set
forth on Schedule 1.36.
Section 1.37. Person. "Person" means an individual, partnership,
corporation, trust, joint venture, joint stock company, limited liability
company, association, unincorporated organization, Governmental Authority, or
any other entity.
Section 1.38. Plan. "Plan" has the meaning set forth in Section 4.12.
Section 1.39. Premises. "Premises" has the meaning set forth in
Section 4.14.
Section 1.40. Prime Rate of Interest. "Prime Rate of Interest"
means that rate of interest quoted by Shawmut Bank, N.A., or any successor
thereto, as the same may from time to time fluctuate.
Section 1.41. Prohibited Transaction. "Prohibited Transaction"
means a "prohibited transaction" within the meaning of Section 406 of ERISA
or Section 4975(c)(1) of the Internal Revenue Code.
Section 1.42. Qualified Account. "Qualified Account" means an
Account of Borrower generated in the ordinary course of Borrower's business
from the sale of goods or rendition of medical services which Lender, in its
sole credit judgment, deems to be a Qualified Account. Without limiting the
generality of the foregoing, no Account shall be a Qualified Account if: (a)
the Account or any portion thereof is payable by an individual beneficiary,
recipient or subscriber individually and not directly to Borrower by a
Medicaid/Medicare Account Debtor or commercial medical insurance carrier
acceptable to Lender in its sole discretion; (b) the Account remains unpaid
more than one hundred fifty (150) days past the claim or invoice date; (c)
the Account is subject to any defense, set-off, counterclaim, deduction,
discount, credit, chargeback, freight claim, allowance, or adjustment of any
kind; (d) any part of any goods the sale of which has given rise to the
Account has been returned, rejected, lost, or damaged; (e) if the Account
arises from the sale of goods by Borrower, such sale was not an absolute sale
or on consignment or on approval or on a sale-or-return basis or subject to
any other repurchase or return agreement, or such goods have not been shipped
to the Account Debtor or its designee; (f) if the Account arises from the
performance of services, such services have not been actually been performed
or were undertaken in violation of any law; (g) the Account is subject to a
lien other than a Permitted Lien; (h) the Borrower knows or should have known
of the bankruptcy, receivership, reorganization, or insolvency of the Account
Debtor; (i) the Account is evidenced by chattel paper or an instrument of any
kind, or has been reduced to judgment; (j) the Account is an Account of an
Account Debtor having its principal place of business or executive office
outside the United States; (k) the Account Debtor is an Affiliate or
Subsidiary of Borrower; (l) more than ten percent (10%) of the aggregate
balance of all Accounts owing from the Account Debtor obligated on the
Account are outstanding more than one hundred eighty (180) days past their
invoice date; (m) fifty percent (50%) or more of the Accounts from the
Account Debtor are not deemed Qualified Accounts hereunder; (n) the total
unpaid Accounts of the Account Debtor, except for a Medicaid/Medicare Account
Debtor, exceed twenty percent (20%) of the net amount of all Qualified
Accounts; (o) any covenant, representation or warranty contained in the Loan
Documents with respect to such Account has been breached; or (p) the Account
fails to meet such other specifications and requirements which may from time
to time be reasonably established by Lender.
Section 1.43. Reportable Event. "Reportable Event" means a
"reportable event" as defined in Section 403 (b) of ERISA.
Section 1.44. Revolving Credit Loan. "Revolving Credit Loan" has
the meaning set forth in Section 2.1 (b).
Section 1.45. Term. "Term" has the meaning set forth in Section 2.8.
ARTICLE II
LOAN
Section 2.1. Terms.
(a) The maximum aggregate principal amount of credit extended by
Lender to Borrower hereunder (the "Loan") that will be outstanding at any
time is Four Million and No/100 Dollars ($4,000,000.00) (the "Maximum Loan
Amount").
(b) The Loan shall be in the nature of a revolving line of credit,
and shall include sums advanced and other credit extended by Lender to or for
the benefit of the Borrower from time to time under this Article II (each a
"Revolving Credit Loan") up to the Maximum Loan Amount depending upon the
availability in the Borrowing Base, the requests of Borrower pursuant to the
terms and conditions of Section 2.2 below, and on such other basis as Lender
may reasonably determine. The outstanding principal balance of the Loan may
fluctuate from time to time, to be reduced by repayments made by Borrower
(which may be made without penalty or premium), and to be increased by future
Revolving Credit Loans, advances and other extensions of credit to or for the
benefit of Borrower, and shall be due and payable in full upon the expiration
of the Term. For purposes of this Agreement, any determination as to whether
there is ability within the Borrowing Base for advances or extensions of
credit shall be made by Lender in its sole discretion and is final and
binding upon Borrower.
(c) At Closing, Borrower shall execute and deliver to Lender a
promissory note evidencing the Borrower's unconditional obligation to repay
Lender for Revolving Credit Loans, advances, and other extensions of credit
made under the Loan, in the form of Exhibit A to this Agreement (the "Note"),
dated the date hereof, payable to the order of Lender in accordance with the
terms thereof. The Note shall bear interest from the date thereof until
repaid, with interest payable monthly in arrears on the first Business Day of
each month, at a rate per annum (on the basis of the actual number of days
elapsed over a year of 360 days) equal to the Base Rate, provided that after
an Event of Default such rate shall be equal to the Default Rate. Each
Revolving Credit Loan, advance and other extension of credit shall be deemed
evidenced by the Note, which is deemed incorporated by reference herein and
made a part hereof.
(d) Subject to the terms and conditions of this Agreement, advances
under the Loan shall be made against a borrowing base equal to (i) eighty
percent (80%) of Qualified Accounts that remain unpaid for fewer than one
hundred twenty (120) days, and (ii) sixty percent (60%) of Qualified Accounts
that remain unpaid for between one hundred twenty (120) and one hundred fifty
(150) days, in either case due and owing from any Medicaid/Medicare, Insurer
or other Account Debtor, including, without limitation, Accounts payable
pursuant to Cost Report Settlement Accounts or in the form of management fees
(the "Borrowing Base"). At the option of Borrower, a separate Borrowing Base
may be prepared for each entity constituting Borrower.
Section 2.2. Loan Administration. Borrowings under the Loan shall
be as follows:
(a) A request for a Revolving Credit Loan shall be made, or shall be
deemed to be made, in the following manner: (i) Borrower, may give Lender
notice of its intention to borrow, in which notice Borrower shall specify the
amount of the proposed borrowing and the proposed borrowing date, not later
than 2:00 p.m. Eastern time one (1) Business Day prior to the proposed
borrowing date; provided, however, that no such request may be made at a time
when there exists an Event of Default; and (ii) the becoming due of any
amount required to be paid under this Agreement, whether as interest or for
any other Obligation, shall be deemed irrevocably to be a request for a
Revolving Credit Loan on the due date in the amount required to pay such
interest or other Obligation.
(b) Borrower hereby irrevocably authorizes Lender to disburse the
proceeds of each Revolving Credit Loan requested, or deemed to be requested,
as follows: (i) the proceeds of each Revolving Credit Loan requested under
subsection 2.2(a)(i) shall be disbursed by Lender by wire transfer to such
bank account as may be agreed upon by Borrower or Lender from time to time or
elsewhere if pursuant to written direction from Borrower; and (ii) the
proceeds of each Revolving Credit Loan requested under subsection 2.2(a)(ii)
shall be disbursed by Lender by way of direct payment of the relevant
interest or other Obligation.
(c) All Revolving Credit Loans, advances and other extensions of
credit to or for the benefit of Borrower shall constitute one general
Obligation of Borrower, and shall be secured by Lender's lien upon all of the
Collateral.
(d) Lender shall enter all Revolving Credit Loans as debits to a loan
account in the name of Borrower and shall also record in said loan account
all payments made by Borrower on any Obligations and all proceeds of
Collateral which are indefeasibly paid to Lender, and may record therein, in
accordance with customary accounting practice, other debits and credits,
including interest and all charges and expenses properly chargeable to
Borrower.
(e) Lender will account to Borrower monthly with a statement of
Revolving Credit Loans, charges and payments made pursuant to this Agreement,
and such account rendered by Lender shall be deemed final, binding and
conclusive upon Borrower unless Lender is notified by Borrower in writing to
the contrary within sixty (60) days of the date each accounting is mailed to
Borrower. Such notice shall be deemed an objection to those items
specifically objected to therein.
Section 2.3. Collections, Disbursements, Borrowing Availability,
and Lockbox Account. Borrower shall maintain a lockbox account (the
"Lockbox") as follows: PHC of Rhode Island, Inc. and PHC of Virginia, Inc.
with LaSalle National Bank, and PHC of Michigan, Inc., PHC of Utah, Inc. and
Pioneer Counseling of Virginia, Inc. with Bank One Arizona, N.A. (as
applicable, the "Lockbox Bank"), subject to the provisions of this Agreement,
and shall execute with the Lockbox Bank a Lockbox Agreement in the form
attached to this Agreement as Exhibit B or such other form as the Lockbox
Bank and Lender may require, and such other agreements related thereto as
Lender may require. Borrower shall ensure that all collections of Accounts
are paid directly from Account Debtors into the Lockbox, and that all funds
paid into the Lockbox are immediately transferred into a depository account
maintained by Lender at Bank One Arizona, N.A., or First Bank, N.A., as
determined by Lender in its sole discretion and communicated to Borrower (the
"Concentration Account"). Lender shall apply, on a daily basis, all funds
transferred into the Concentration Account pursuant to this Section 2.3 to
reduce the outstanding indebtedness under the Loan with future Revolving
Credit Loans, advances and other extensions of credit to be made by Lender
under the conditions set forth in this Article II. To the extent that any
collections of Accounts or proceeds of other Collateral are not sent directly
to the Lockbox but are received by Borrower, such collections shall be held
in trust for the benefit of Lender and immediately remitted, in the form
received, to the Lockbox Bank for transfer to the Concentration Account
immediately upon receipt by Borrower. All funds transferred from the
Concentration Account for application to Borrowees indebtedness to Lender
shall be applied to reduce the Loan balance, but for purposes of calculating
interest, shall be subject to a five (5) Business Day clearance period. If
as the result of collections of Accounts pursuant to the terms and conditions
of this Section 2.3 a credit balance exists with respect to the Concentration
Account, such credit balance shall not accrue interest in favor of Borrower,
but shall be available to Borrower at any time or times for so long as no
Event of Default exists.
Section 2.4. Fees.
(a) At Closing, Borrower shall unconditionally pay to Lender a
commitment fee (the "Commitment Fee") equal to Fifteen Thousand and No/100
Dollars ($15,000.00), which is one percent (1%) of the difference between (i)
the Maximum Loan Amount set forth in this Agreement and (ii) the aggregate
respective Maximum Loan Amounts under the PHCM Loan Agreement and the PHCU
Loan Agreement.
(b) For so long as the Loan is available to Borrower, Borrower
unconditionally shall pay to Lender a monthly loan management fee (the "Loan
Management Fee") equal to twenty-seven and one-half one hundredths of one
percent (0.275%) of the average amount of the outstanding principal balance
of the Revolving Credit Loans during the preceding month. The Loan
Management Fee shall be payable monthly in arrears on the final day of each
successive calendar month.
(c) Borrower shall pay to Lender all out-of-pocket audit and
appropriate fees in connection with audits and appraisals of Borrower's books
and records and such other matters as Lender shall deem appropriate, which
shall be due and payable on the first Business Day of the month following the
date of issuance by Lender of a request for payment thereof to Borrower.
Notwithstanding anything herein to the contrary, Lender acknowledges and
agrees that, absent the occurrence of an Event of Default hereunder,
Borrower's maximum obligation for the payment of out-of-pocket audit and
appraisal fees in any calendar year shall be Seven Thousand Five Hundred and
No/100 Dollars ($7,500.00) for each entity constituting Borrower. Following
the occurrence of an Event of Default, such limitation shall not be
applicable.
(d) Borrower shall pay to Lender, on demand, any and all fees,
costs or expenses which Lender or any participant pays to a bank or other
similar institution (including, without limitation, any fees paid by Lender
to any participant) arising out of or in connection with (i) the forwarding
to Borrower or any other Person on behalf of Borrower, by Lender, of proceeds
of Revolving Credit Loans made by Lender to Borrower pursuant to this
Agreement, and (ii) the depositing for collection, by Lender or any
participant, of any check or item of payment received or delivered to Lender
or any participant on account of Obligations.
Section 2.5. Payments. Principal payable on account of Revolving
Credit Loans shall be payable by Borrower to Lender immediately upon the
earliest of (i) the receipt by Borrower of any proceeds of any of the
Collateral, to the extent of such proceeds, (ii) the occurrence of an Event
of Default in consequence of which the Loan and the maturity of the payment
of the Obligations are accelerated, or (iii) the termination of this
Agreement pursuant to Section 2.8 hereof; provided, however, that if any
advance made by Lender in excess of the Borrowing Base shall exist at any
time, Borrower shall, immediately upon demand, repay such overadvance.
Interest accrued on the Revolving Credit Loans shall be due on the earliest
of (i) the first Business Day of each month (for the immediately preceding
month), computed on the last calendar day of the preceding month, (ii) the
occurrence of an Event of Default in consequence of which the Loan and the
maturity of the payment of the Obligations are accelerated, or (iii) the
termination of this Agreement pursuant to Section 2.8 hereof. Except to the
extent otherwise set forth in this Agreement, all payments of principal and
of interest on the Loan, all other charges and any other obligations of
Borrower hereunder, shall be made to Lender to the Concentration Account, in
immediately available funds.
Section 2.6. Use of Proceeds. Except as otherwise expressly
permitted under this Agreement, the proceeds of Lender's advances under the
Loan shall be used solely for working capital and for other costs and
expenses of Borrower arising in the ordinary course of Borrower's business.
Section 2.7. Interest Rate Limitation. The parties intend to
conform strictly to the applicable usury laws in effect from time to time
during the term of the Loan. Accordingly, if any transaction contemplated
hereby would be usurious under such laws, then notwithstanding any other
provision hereof. (a) the aggregate of all interest that is contracted for,
charged, or received under this Agreement or under any other Loan Document
shall not exceed the maximum amount of interest allowed by applicable law
(the "Highest Lawful Rate"), and any excess shall be promptly credited to
Borrower by Lender (or, to the extent that such consideration shall have been
paid, such excess shall be promptly refunded to Borrower by Lender); (b)
neither Borrower nor any other Person now or hereafter liable hereunder shall
be obligated to pay the amount of such interest to the extent that it is in
excess of the Highest Lawful Rate; and (c) the effective rate of interest
shall be reduced to the Highest Lawful Rate. All sums paid, or agreed to be
paid, to Lender for the use, forbearance, and detention of the debt of
Borrower to Lender shall, to the extent permitted by applicable law, be
allocated throughout the full term of the Note until payment is made in full
so that the actual rate of interest does not exceed the Highest Lawful Rate
in effect at any particular time during the full term thereof. If at any
time the rate of interest under the Note exceeds the Highest Lawful Rate, the
rate of interest to accrue pursuant to this Agreement shall be limited,
notwithstanding anything to the contrary herein, to the Highest Lawful Rate,
but any subsequent reductions in the Base Rate shall not reduce the interest
to accrue pursuant to this Agreement below the Highest Lawful Rate until the
total amount of interest accrued equals the amount of interest that would
have accrued if a varying rate per annum equal to the interest rate under the
Note had at all times been in effect. If the total amount of interest paid
or accrued pursuant to this Agreement under the foregoing provisions is less
than the total amount of interest that would have accrued if a varying rate
per annum equal to the interest rate under the Note had been in effect, then
Borrower agrees to pay to Lender an amount equal to the difference between
(a) the lesser of (i) the amount of interest that would have accrued if the
Highest Lawful Rate had at all times been in effect, or (ii) the amount of
interest that would have accrued if a varying rate per annum equal to the
interest rate under the Note had at all times been in effect, and (b) the
amount of interest accrued in accordance with the other provisions of this
Agreement.
Section 2.8. Term.
(a) Subject to Lender's right to cease making Revolving Credit Loans
to Borrower upon or after any Event of Default, this Agreement shall be in
effect for a period of two (2) years from the Closing Date, and this
Agreement shall automatically renew itself for one-year periods thereafter,
unless terminated as provided in this Section 2.8 (the "Term").
(b) Upon at least thirty (30) days prior written notice to
Borrower, Lender may terminate this Agreement as of the day of the second and
each subsequent annual anniversary of the Closing Date, and may terminate
this Agreement without notice upon or after the occurrence of an Event of
Default.
(c) Upon at least thirty (30) days prior written notice to Lender,
Borrower may terminate this Agreement effective as of the day of the second
or any subsequent annual anniversary of the Closing Date without incurring
the liquidated damages described below. In addition, upon at least thirty
(30) days prior written notice to Lender, Borrower may terminate this
Agreement prior to the second or any subsequent annual anniversary of the
Closing Date, provided that, at the effective date of such termination prior
to the second anniversary, Borrower shall pay to Lender (in addition to the
then outstanding principal, accrued interest and other Obligations owing
under the terms of this Agreement and any other Loan Documents) as liquidated
damages for the loss of bargain and not as a penalty, an amount equal to two
percent (2%) of the Maximum Loan Amount.
(d) All of the Obligations shall be immediately due and payable upon
the termination date stated in any notice of termination of this Agreement.
All undertakings, agreements, covenants, warranties, and representations, of
Borrower contained in the Loan Documents shall survive any such termination
and Lender shall retain its liens in the Collateral and all of its rights and
remedies under the Loan Documents notwithstanding such termination until
Borrower has paid the Obligations to Lender, in full, in immediately
available funds.
Section 2.9. Joint and Several Liability; Binding Obligations.
Each entity comprising Borrower and executing this Agreement on behalf of
Borrower shall be jointly and severally liable for all of the Obligations.
In addition, each entity comprising Borrower hereby acknowledges and agrees
that all of the representations, warranties, covenants, obligations,
conditions, agreements and other terms contained in this Agreement shall be
applicable to and shall be binding upon each individual entity comprising
Borrower, and shall be binding upon all such entities when taken together.
ARTICLE III
COLLATERAL
Section 3.1. Generally. As security for the payment of all liabilities
of Borrower to Lender, including without limitation: (i) indebtedness
evidenced under the Note, repayment of Revolving Credit Loans, advances and
other extensions of credit, all fees and charges owing by Borrower, and all
other liabilities and obligations of every kind or nature whatsoever of
Borrower to Lender, whether now existing or hereafter incurred, joint or
several, matured or unmatured, direct or indirect, primary or secondary,
related or unrelated, due or to become due, including but not limited to any
extensions, modifications, substitutions, increases and renewals thereof,
(ii) the payment of all amounts advanced by Lender to preserve, protect,
defend, and enforce its rights hereunder and in the following property in
accordance with the terms of this Agreement, and (iii) the payment of all
expenses incurred by Lender in connection therewith (collectively, the
"Obligations"), Borrower hereby assigns and grants to Lender a continuing
first priority lien on and security interest in, upon, and to the following
property (the "Collateral"):
(a) All of Borrower's now-owned and hereafter acquired or arising
Accounts, accounts receivable and rights to payment of every kind and
description, and any contract rights, chattel paper, documents and
instruments with respect thereto;
(b) All of Borrower's now owned and hereafter acquired or arising
general intangibles of every kind and description pertaining to its Accounts,
accounts receivable and other rights to payment, including, but not limited
to, all existing and future customer lists, choses in action, claims, books,
records, contracts, licenses, formulae, tax and other types of refunds,
returned and unearned insurance premiums, rights and claims under insurance
policies, and computer information, software, records, and data;
(c) All of Borrower's now or hereafter acquired deposit accounts into
which Accounts are deposited, including the Lockbox Account;
(d) All of Borrower's monies and other property of every kind and
nature now or at any time or times hereafter in the possession of or under
the control of Lender or a bailee or Affiliate of Lender; and
(e) The proceeds (including, without limitation, insurance proceeds)
of all of the foregoing.
Section 3.2. Lien Documents. At Closing and thereafter as Lender
deems necessary in its sole discretion, Borrower shall execute and deliver to
Lender, or have executed and delivered (all in form and substance
satisfactory to Lender in its sole discretion):
(a) UCC-1 Financing statements pursuant to the Uniform Commercial Code
in effect in the jurisdiction(s) in which Borrower operates, which Lender may
file in any jurisdiction where any Collateral is or may be located and in any
other jurisdiction that Lender deems appropriate; provided that a carbon,
photographic, or other reproduction or other copy of this Agreement or of a
financing statement is sufficient as and may be filed in lieu of a financing
statement; and
(b) Any other agreements, documents, instruments, and writings deemed
necessary by Lender or as Lender may otherwise request from time to time in
its sole discretion to evidence, perfect, or protect Lender's lien and
security interest in the Collateral required hereunder.
Section 3.3. Collateral Administration.
(a) All Collateral (except deposit accounts) will at all times be
kept by Borrower at its principal office(s) as set forth on Exhibit D hereto
and shall not, without the prior written approval of Lender, be moved
therefrom.
(b) Borrower shall keep accurate and complete records of its Accounts
and all payments and collections thereon and shall submit to Lender on such
periodic basis as Lender shall request a sales and collections report for the
preceding period, in form satisfactory to Lender. In addition, if Accounts
in an aggregate face amount in excess of $50,000.00 become ineligible because
they fall within one of the specified categories of ineligibility set forth
in the definition of Qualified Accounts or otherwise, Borrower shall notify
Lender of such occurrence on the first Business Day following such occurrence
and the Borrowing Base shall thereupon be adjusted to reflect such
occurrence. If requested by Lender, Borrower shall execute and deliver to
Lender formal written assignments of all of its Accounts weekly or daily,
which shall include all Accounts that have been created since the date of the
last assignment, together with copies of claims, invoices or other
information related thereto.
(c) Whether or not an Event of Default has occurred, any of Lender's
officers, employees or agents shall have the right, at any time or times
hereafter, in the name of Lender, any designee of Lender or Borrower, to
verify the validity, amount or any other matter relating to any Accounts by
mail, telephone, telegraph or otherwise. Absent an Event of Default, Lender
shall notify Borrower prior to commencing such verification process and
Borrower shall cooperate fully with Lender in an effort to facilitate and
promptly conclude such verification process.
(d) To expedite collection, Borrower shall endeavor in the first
instance to make collection of its Accounts for Lender. Lender retains the
right at all times after the occurrence of an Event of Default, subject to
applicable law regarding Medicaid/Medicare Account Debtors, to notify Account
Debtors that Accounts have been assigned to Lender and to collect Accounts
directly in its own name and to charge the collection costs and expenses,
including reasonable attorneys' fees, to Borrower.
Section 3.4. Other Actions. In addition to the foregoing,
Borrower (i) shall provide prompt written notice to each private indemnity,
managed care or other Insurer who either is currently an Account Debtor or
becomes an Account Debtor at any time following the date hereof that the
Lender has been granted a first priority lien and security interest in, upon
and to all Accounts applicable to such Insurer, and Lender may from time to
time require Borrower to create any and all similar notices which will be
forwarded to such Insurers by Lender, and (ii) shall do anything further that
may be lawfully required by Lender to secure Lender and effectuate the
intentions and objects of this Agreement, including but not limited to the
execution and delivery of lockbox agreements, continuation statements,
amendments to financing statements, and any other documents required
hereunder. At Lender's request, Borrower shall also immediately deliver to
Lender all items for which Lender must receive possession to obtain a
perfected security interest. Borrower shall, on Lender's demand, deliver to
Lender all notes, certificates, and documents of title, chattel paper,
warehouse receipts, instruments, and any other similar instruments
constituting Collateral.
Section 3.5. Searches. Prior to Closing, and thereafter (as and
when requested by Lender in its sole discretion), Borrower shall obtain and
deliver to Lender the following searches against Borrower (the results of
which are to be consistent with Borrower's representations and warranties
under this Agreement), all at its own expense:
(a) Uniform Commercial Code searches with the Secretary of State and
local filing offices of each jurisdiction where Borrower maintains its
executive offices, a place of business, or assets;
(b) Judgment, federal tax lien and corporate tax lien searches, in
each jurisdiction searched under clause (a) above; and
(c) Good standing certificates showing Borrower to be in good standing
in its state of formation and in each other state in which it is doing and
presently intends to do business for which qualification is required.
Section 3.6. Power of Attorney. Each of the officers of Lender is
hereby irrevocably made, constituted and appointed the true and lawful
attorney for Borrower (without requiring any of them to act as such) with
full power of substitution to do the following: (a) endorse the name of
Borrower upon any and all checks, drafts, money orders, and other instruments
for the payment of money that are payable to Borrower and constitute
collections on Borrower's Accounts; (b) execute in the name of Borrower any
financing statements, schedules, assignments, instruments, documents, and
statements that Borrower is obligated to give Lender hereunder; and (c) do
such other and further acts and deeds in the name of Borrower that Lender may
deem necessary or desirable to enforce any Account or other Collateral or
perfect Lender's security interest or lien in any Collateral.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Each entity constituting Borrower represents and warrants to Lender,
and shall be deemed to represent and warrant on each day on which any
Obligations shall be outstanding hereunder, that:
Section 4.1. Subsidiaries. Except as set forth in Schedule 4.1.
Borrower has no subsidiaries.
Section 4.2. Organization and Good Standing. Borrower is a
corporation duly organized, validly existing, and in good standing under the
laws of its state of incorporation, is in good standing as a foreign
corporation in each jurisdiction in which the character of the properties
owned or leased by it therein or the nature of its business makes such
qualification necessary, has the corporate power and authority to own its
assets and transact the business in which it is engaged, and has obtained all
certificates, licenses and qualifications required under all laws,
regulations, ordinances, or orders of public authorities necessary for the
ownership and operation of all of its properties and transaction of all of
its business.
Section 4.3. Authority. Borrower has full corporate power and
authority to enter into, execute, and deliver this Agreement and to perform
its obligations hereunder, to borrow the Loan, to execute and deliver the
Note, and to incur and perform the obligations provided for in the Loan
Documents, all of which have been duly authorized by all necessary corporate
action. No consent or approval of shareholders of, or lenders to, Borrower
and no consent, approval, filing or registration with any Governmental
Authority is required as a condition to the validity of the Loan Documents or
the performance by Borrower of its obligations thereunder.
Section 4.4. Binding Agreement. This Agreement and all other Loan
Documents constitute, and the Note, when issued and delivered pursuant hereto
for value received, will constitute, the valid and legally binding
obligations of Borrower, enforceable against Borrower in accordance with
their respective terms.
Section 4.5. Litigation. Except as disclosed in Schedule 4.5,
there are no actions, suits, proceedings or investigations pending or, to the
best of the Borrowers' knowledge, threatened against Borrower before any
court or arbitrator or before or by any Governmental Authority which, in any
one case or in the aggregate, if determined adversely to the interests of the
Borrower, could have a material adverse effect on the business, properties,
condition (financial or otherwise) or operations, present or prospective, of
Borrower, or upon its ability to perform its obligations under the Loan
Documents. Borrower is not in default with respect to any order of any
court, arbitrator, or Governmental Authority applicable to Borrower or its
properties.
Section 4.6. No Conflict. The execution and delivery by Borrower
of this Agreement and the other Loan Documents do not, and the performance of
its obligations thereunder will not, violate, conflict with, constitute a
default under, or result in the creation of a lien or encumbrance upon the
property of Borrower under: (a) any provision of Borrower's articles of
incorporation or its bylaws, (b) any provision of any law, rule, or
regulation applicable to Borrower, or (c) any of the following: (i) any
indenture or other agreement or instrument to which Borrower is a party or by
which Borrower or its property is bound; or (ii) any judgment, order or
decree of any court, arbitration tribunal, or Governmental Authority having
jurisdiction over Borrower which is applicable to Borrower.
Section 4.7. Financial Condition. The audited financial statements
of PHC, Inc. and its subsidiaries (including each entity comprising the
Borrower) (collectively, the "Consolidated Company") as of June 30, 1997,
certified by Richard A. Eisner & Co., LLP, and the unaudited financial
statements of the Consolidated Company as of December 31, 1997, certified by
the chief financial officer of the Consolidated Company, which have been
delivered to Lender, fairly present the financial condition of the
Consolidated Company and the results of its operations and changes in
financial condition as of the dates and for the periods referred to, and have
been prepared in accordance with GAAP. There are no material unrealized or
anticipated liabilities, direct or indirect, fixed or contingent, of the
Consolidated Company as of the dates of such financial statements which are
not reflected therein or in the notes thereto. There has been no adverse
change in the business, properties, condition (financial or otherwise) or
operations (present or prospective) of any of the entities comprising
Borrower since December 31, 1997. The Consolidated Company's fiscal year
ends on June 30. The federal tax identification number of each entity
constituting Borrower is listed on Schedule 4.7.
Section 4.8. No Default. Borrower is not in default under or
with respect to any obligation in any respect which could be adverse to its
business, operations, property or financial condition, or which could
materially adversely affect the ability of Borrower to perform its
obligations under the Loan Documents. No Event of Default or event which,
with the giving of notice or lapse of time, or both, could become an Event of
Default, has occurred and is continuing.
Section 4.9. Title to Properties. Borrower has good and
marketable title to its properties and assets, including the Collateral and
the properties and assets reflected in the financial statements described in
Section 4.7, subject to no lien, mortgage, pledge, encumbrance or charge of
any kind, other than Permitted Liens. Borrower has not agreed or consented
to cause any of its properties or assets whether owned now or hereafter
acquired to be subject in the future (upon the happening of a contingency or
otherwise) to any lien, mortgage, pledge, encumbrance or charge of any kind
other than Permitted Liens.
Section 4.10. Taxes. Borrower has filed, or has obtained
extensions for the filing of, all federal, state and other tax returns which
are required to be filed, and has paid all taxes shown as due on those
returns and all assessments, fees and other amounts due as of the date
hereof. All tax liabilities of Borrower were, as of September 30, 1996, and
are now, adequately provided for on Borrower's books. No tax liability has
been asserted by the Internal Revenue Service or other taxing authority
against Borrower for taxes in excess of those already paid except as
described in Schedule 4.10.
Section 4.11. Securities and Banking Laws and Regulations.
(a) The use of the proceeds of the Loan and Borrower's issuance of
the Note will not directly or indirectly violate or result in a violation of
the Securities Act of 1933 or the Securities Exchange Act of 1934, as
amended, or any regulations issued pursuant thereto, including without
limitation Regulations U, T, G, or X of the Board of Governors of the Federal
Reserve System. Borrower is not engaged in the business of extending credit
for the purpose of the purchasing or carrying "margin stock" within the
meaning of those regulations. No part of the proceeds of the Loan hereunder
will be used to purchase or carry any margin stock or to extend credit to
others for such purpose.
(b) Borrower is not an investment company within the meaning of the
Investment Company Act of 1940, as amended, nor is it, directly or
indirectly, controlled by or acting on behalf of any Person which is an
investment company within the meaning of that Act.
Section 4.12. ERISA. No employee benefit plan (a "Plan") subject
to the Employee Retirement Income Security Act of 1974 ("ERISA") and
regulations issued pursuant thereto that is maintained by Borrower or under
which Borrower could have any liability under ERISA (a) has failed to meet
minimum funding standards established in Section 302 of ERISA, (b) has failed
to comply with all applicable requirements of ERISA and of the Internal
Revenue Code, including all applicable rulings and regulations thereunder,
(c) has engaged in or been involved in a prohibited transaction (as defined
in ERISA) under ERISA or under the Internal Revenue Code, or (d) has been
terminated. Borrower has not assumed, or received notice of a claim asserted
against Borrower for, withdrawal liability (as defined in the Multi-Employer
Pension Plan Amendments Act of 1980, as amended) with respect to any
multi-employer pension plan and is not a member of any Controlled Group (as
defined in ERISA). Borrower has timely made when due all contributions with
respect to any multi-employer pension plan in which it participates and no
event has occurred triggering a claim against Borrower for withdrawal
liability with respect to any multi-employer pension plan in which Borrower
participates.
Section 4.13. Compliance with Law. Except as described in Schedule
4.13, Borrower is not in material violation of any statute, rule or
regulation of any Governmental Authority (including, without limitation, any
statute, rule or regulation relating to employment practices or to
environmental, occupational and health standards and controls). Borrower has
obtained all licenses, permits, franchises, and other Governmental
authorizations necessary for the ownership of its properties and the conduct
of its business. Borrower is current with all reports and documents required
to be filed with any state or federal securities commission or similar.
Governmental Authority and is in full compliance with all applicable rules
and regulations of such commissions.
Section 4.14. Environmental Matters. No use, exposure, release,
generation, manufacture, storage, treatment, transportation or disposal of
Hazardous Material has occurred or is occurring on or from any real property
on which the Collateral is located or which is owned, leased or otherwise
occupied by Borrower (the "Premises"), or off the Premises as a result of any
action of Borrower, except as described in Schedule 4,14. All Hazardous
Material used, treated, stored, transported to or from, generated or handled
on the Premises, or off the Premises by Borrower, has been disposed of on or
off the Premises by or on behalf of Borrower in a lawful manner. There are
no underground storage tanks present on or under the Premises owned or leased
by Borrower. No other environmental, public health or safety hazards exist
with respect to the Premises.
Section 4.15. Places of Business. The only places of business of
Borrower, and the places where it keeps and intends to keep the Collateral
and records concerning the Collateral, are at the addresses set forth in
Schedule 4.15. Schedule 4.15 also lists the owner of record of each such
property.
Section 4.16. Intellectual Property. Borrower exclusively owns or
possesses all the patents, patent applications trademarks trademark
applications, service marks, trade names, copyrights, franchises, licenses,
and rights with respect to the foregoing necessary for the present and
planned future conduct of its business, without any conflict with the rights
of others. A list of all such intellectual property (indicating the nature
of Borrower's interest), as well as all outstanding franchises and licenses
given by or held by Borrower, is attached as Schedule 4.16. Borrower is not
in default of any obligation or undertaking with respect to such intellectual
property or rights.
Section 4.17. Stock Ownership. The identity of the stockholders of
all classes of the outstanding stock of Borrower, together with the
respective ownership percentages held by such stockholders, are as set forth
on Schedule 4.17.
Section 4.18. Material Facts. Neither this Agreement nor any other
Loan Document nor any other agreement, document, certificate, or statement
furnished to Lender by or on behalf of Borrower in connection with the
transactions contemplated hereby contains any untrue statement of material
fact or omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading. There is no fact
known to Borrower that adversely affects or in the future (so far as Borrower
can reasonably foresee) may adversely affect the business, operations,
affairs or financial condition of Borrower, or any of its properties or
assets.
Section 4.19. Investments, Guarantees, and Certain Contracts.
Borrower does not own or hold any equity or long-term debt investments in,
have any outstanding advances to, have any outstanding guarantees for the
obligations of, or have any outstanding borrowings from, any Person, except
as described on Schedule 4.19. Borrower is not a party to any contract or
agreement, or subject to any charter or other corporate restriction, which
materially adversely affects its business.
Section 4.20. Business Interruptions. Within five years prior to
the date hereof, neither the business, property or assets, or operations of
Borrower has been materially adversely affected in any way by any casualty,
strike, lockout, combination of workers, or order of the United States of
America or other Governmental Authority, directed against Borrower. There
are no pending or, to the best of Borrower's knowledge, threatened labor
disputes, strikes, lockouts, or similar occurrences or grievances against
Borrower or its business.
Section 4.21. Names. Within five years prior to the date hereof,
Borrower has not conducted business under or used any other name (whether
corporate or assumed) other than as shown on Schedule 4.21. Borrower is the
sole owner of all names listed on that Schedule and any and all business done
and invoices issued in such names are Borrower's sales, business, and
invoices. Each trade name of Borrower represents a division or trading style
of Borrower and not a separate corporate subsidiary or independent Affiliate.
Section 4.22. Joint Ventures. Borrower is not engaged in any
joint venture or partnership with any other Person, except as set forth on
Schedule 4.22.
Section 4.23. Accounts. Lender may rely, in determining which
Accounts are Qualified Accounts, on all statements and representations made
by Borrower with respect to any Account or Accounts. Unless otherwise
indicated in writing to Lender, with respect to each Account:
(a) It is genuine and in all respects what it purports to be,
and is not evidenced by a judgment;
(b) It arises out of a completed, bona fide sale and delivery
of goods or rendition of services by Borrower in the ordinary course of its
business and in accordance with the terms and conditions of all purchase
orders, contracts, certification, participation, certificate of need, or
other documents relating thereto and forming a part of the contract between
Borrower and the Account Debtor;
(c) It is for a liquidated amount maturing as stated in a
duplicate claim or invoice covering such sale or rendition of services, a
copy of which has been furnished or is available to Lender;
(d) Such Account, and Lender's security interest therein, is
not, and will not (by voluntary act or omission by Borrower), be in the
future, subject to any offset, lien, deduction, defense, dispute,
counterclaim or any other adverse condition, and each such Account is
absolutely owing to Borrower and is not contingent in any respect or for any
reason;
(e) There are no facts, events or occurrences which in any way
impair the validity or enforceability of any Accounts or tend to reduce the
amount payable thereunder from the face amount of the claim or invoice and
statements delivered to Lender with respect thereto;
(f) To the best of Borrower's knowledge, (i) the Account Debtor
thereunder had the capacity to contract at the time any contract or other
document giving rise to the Account was executed and (ii) such Account Debtor
is solvent;
(g) To the best of Borrower's knowledge, there are no
proceedings or actions which are threatened or pending against any Account
Debt thereunder which might result in any material adverse change in such
Account Debtor's financial condition or the collectibility of such Account;
(h) It has been billed and forwarded to the Account Debtor for
payment in accordance with applicable laws and compliance and conformance
with any and requisite procedures, requirements and regulations governing
payment by such Account Debtor with respect to such Account, and such Account
if due from a Medicaid/Medicare Account Debtor is properly payable directly
to Borrower; and
(i) Borrower has obtained and currently has all certificates of
need, Medicaid and Medicare provider numbers, licenses, permits and
authorizations as necessary in the generation of such Accounts.
ARTICLE V
CLOSING AND CONDITIONS OF LENDING
Section 5.1. Conditions Precedent to Agreement. The obligation of
Lender to enter into and perform this Agreement and to make Revolving Credit
Loans is subject to the following conditions precedent:
(a) Lender shall have received two (2) originals of this Agreement
and all other Loan Documents required to be executed and delivered at or
prior to Closing (other than the Note, as to which Lender shall receive only
one original), executed by Borrower and any other required Persons, as
applicable.
(b) Lender shall have received all searches and good standing
certificates required by Section 3.5.
(c) Borrower shall have complied and shall then be in compliance with
all the terms, covenants and conditions of the Loan Documents.
(d) There shall have occurred no Event of Default and no event which,
with the giving of notice or the lapse of time, or both, could constitute
such an Event of Default.
(e) The representations and warranties contained in Article IV shall
be true and correct.
(f) Lender shall have received copies of all board of directors
resolutions and other corporate action taken by Borrower to authorize the
execution, delivery and performance of the Loan Documents and the borrowing
of the Loan thereunder, as well as the names and signatures of the officers
of Borrower authorized to execute documents on its behalf in connection
herewith, all as also certified as of the date hereof by Borrower's chief
financial officer, and such other papers as Lender may require.
(g) Lender shall have received copies, certified as true, correct and
complete by a corporate officer of Borrower, of the articles of incorporation
and bylaws of Borrower, with any amendments thereto, and all other documents
necessary for performance of the obligations of Borrower under this Agreement
and the other Loan Documents.
(h) Lender shall have received a written opinion of counsel for
Borrower, dated the date hereof, in the form of Exhibit D.
(i) Lender shall have received such financial statements, reports,
certifications, and other operational information required to be delivered
hereunder, including without limitation an initial borrowing base certificate
calculating the Borrowing Base.
0) Lender shall have received the portion of the Commitment Fee
payable at Closing in accordance with Section 2.4(a) of this Agreement.
(k) The Lockbox and the Concentration Account shall have been
established.
(1) Lender shall have received a certificate of Borrower's chief
financial officer, dated the Closing Date, certifying that all of the
conditions specified in this Section have been fulfilled.
Section 5.2. Conditions Precedent to Advances. Notwithstanding
any other provision of this Agreement, no Loan proceeds, Revolving Credit
Loans, advances or other extensions of credit under the Loan shall be
disbursed hereunder unless the following conditions have been satisfied or
waived immediately prior to such disbursement:
(a) The representations and warranties on the part of Borrower
contained in Article IV of this Agreement shall be true and correct in all
respects at and as of the date of disbursement or advance, as though made on
and as of such date (except to the extent that such representations and
warranties expressly relate solely to an earlier date and except that the
references in Section 4.7 to financial statements shall be deemed to be a
reference to the then most recent annual and interim financial statements of
Borrower furnished to Lender pursuant to Section 6.1 hereof).
(b) No Event of Default or event which, with the giving of notice of
the lapse of time, or both, could become an Event of Default shall have
occurred and be continuing or would result from the making of the
disbursement or advance.
(c) No adverse change in the condition (financial or otherwise),
properties, business, or operations of Borrower shall have occurred and be
continuing with respect to Borrower since the date hereof.
Section 5.3. Closing. Subject to the conditions of this Article
V, the Loan shall be made available on the date as is mutually agreed by the
parties (the "Closing Date") at such time as may by mutually agreeable to the
parties upon the execution hereof (the "Closing") at such place as may be
requested by Lender.
Section 5.4. Waiver of Rights. By completing the Closing
hereunder, or by making advances under the Loan, Lender does not waive a
breach of any representation or warranty of Borrower hereunder or under any
other Loan Document, and all of Lender's claims and rights resulting from any
breach or misrepresentation by Borrower are specifically reserved by Lender.
ARTICLE VI
AFFIRMATIVE COVENANTS
Each entity constituting Borrower covenants and agrees that for so long
as Borrower may borrow hereunder and until payment in full of the Note and
performance of all other obligations of Borrower under the Loan Documents:
Section 6.1. Financial Statements and Collateral Reports.
Borrower will furnish to Lender (a) a sales and collections report and
accounts receivable aging schedule on a form acceptable to Lender within
fifteen (15) days after the end of each calendar month, which shall include,
but not be limited to, a report of sales, credits issued, and collections
received; (b) payable aging schedules within fifteen (15) days after the end
of each calendar month; (c) internally prepared monthly financial statements
for Borrower, certified by Borrower's chief financial officer to be in
accordance with GAAP to the best of his or her knowledge, within forty-five
(45) days of the end of each calendar month (provided, however, that Borrower
reserves the right to make reasonable accounting adjustments to such monthly
financial statements within a reasonable period of time following the
delivery thereof to Lender); (d) internally prepared quarterly financial
statements for the Consolidated Company (accompanied by detailed financial
information pertaining to Borrower), to be furnished to Lender simultaneously
with the filing by the Consolidated Company with the U.S. Securities and
Exchange Commission of quarterly financial statements on Form 10-Q; (e) to
the extent prepared by Borrower, annual projections, profit and loss
statements, balance sheets, and cash flow reports (prepared on a monthly
basis) for the succeeding fiscal year within thirty (30) days before the end
of each of Borrower's fiscal years; (f) annual audited financial statements
for the Consolidated Company (as such term is defined in Section 4.7)
prepared by Richard A. Eisner & Co., LLP or a firm of independent public
accountants reasonably satisfactory to Lender, to be furnished to Lender
simultaneous with the filing by the Consolidated Company with the U.S.
Securities and Exchange Commission of annual financial statements on Form
10-K; (g) promptly upon receipt thereof, copies of any reports submitted to
Borrower by independent accountants in connection with any interim audit of
the books of Borrower and copies of each management control letter provided
to Borrower by independent accountants; (h) as soon as available, copies of
all financial statements and notices provided by Borrower to all of its
stockholders; and (i) such additional information, reports or statements as
Lender may from time to time request. Annual financial statements shall set
forth in comparative form figures for the corresponding periods in the prior
fiscal year. All financial statements shall include a balance sheet and
statement of earnings and shall be prepared in accordance with GAAP.
Section 6.2. Payments Hereunder. Borrower will make all payments
of principal, interest, fees, and all other payments required hereunder,
under the Loan, and under any other agreements with Lender to which Borrower
is a party, as and when due.
Section 6.3. Existence, Good Standing, and Compliance with Laws.
Borrower will do or cause to be done all things necessary (a) to obtain and
keep in full force and effect all corporate existence, rights, licenses,
privileges, and franchises of Borrower necessary to the ownership of its
property or the conduct of its business, and comply with all applicable
present and future laws, ordinances, rules, regulations, orders and decrees
of any Governmental Authority having or claiming jurisdiction over Borrower;
and (b) to maintain and protect the properties used or useful in the conduct
of the operations of Borrower, in a prudent manner, including without
limitation the maintenance at all times of such insurance upon its insurable
property and operations as required by law or by Section 6.7 hereof.
Section 6.4. Legally. The making of the Loan and each
disbursement or advance under the Loan shall not be subject to any penalty or
special tax, shall not be prohibited by any governmental order or regulation
applicable to Borrower, and shall not violate any rule or regulation of any
Governmental Authority, and necessary consents, approvals and authorizations
of any Governmental Authority to or of any such disbursement or advance shall
have been obtained.
Section 6.5. Lender's Satisfaction. All instruments and legal
documents and proceedings in connection with the transactions contemplated by
this Agreement shall be satisfactory in form and substance to Lender and its
counsel, and Lender shall have received all documents, including records of
corporate proceedings and opinions of counsel, which Lender may have
requested in connection therewith.
Section 6.6. Taxes and Charges. Borrower will timely file all tax
reports and pay and discharge all taxes, assessments and governmental charges
or levies imposed upon Borrower, or its income or profits or upon its
properties or any part thereof, before the same shall be in default and prior
to the date on which penalties attach thereto, as well as all lawful claims
for labor, material, supplies or otherwise which, if unpaid, might become a
lien or charge upon the properties or any part thereof of Borrower; provided
however, that the Borrower shall not be required to pay and discharge or
cause to be paid and discharged any such tax, assessment, charge, levy or
claim so long as the validity or amount thereof shall be contested in good
faith and by appropriate proceedings by Borrower, and the Borrower shall have
set aside on their books adequate reserve therefor; and provided however,
that such deferment of payment is permissible only so long as Borrower's
title to, and its right to use, the Collateral is not adversely affected
thereby and Lender's lien and priority on the Collateral are not adversely
affected, altered or impaired thereby.
Section 6.7. Insurance. Borrower will carry adequate public
liability and professional liability insurance with responsible companies
satisfactory to Lender in such amounts and against such risks as is
customarily maintained by similar businesses and by owners of similar
property in the same general area.
Section 6.8. General Information. Borrower will furnish to Lender
such information as Lender may, from time to time, request with respect to
the business or financial affairs of Borrower, and, upon reasonable prior
notice, permit any officer, employee or agent of Lender to visit and inspect
Borrower's corporate headquarters or any of Borrower's facilities at which
Accounts are generated, to meet with appropriate personnel and to examine the
minute books, books of account and other records, including management
letters prepared by Borrower's auditors, of Borrower, and make copies thereof
or extracts therefrom, and to discuss its and their business affairs,
finances and accounts with, and be advised as to the same by, the accountants
and officers of Borrower, all at such reasonable times and as often as Lender
may require.
Section 6.9. Maintenance of Property. Borrower will maintain, keep
and preserve all of its properties in good repair, working order and
condition and from time to time make all needful and proper repairs,
renewals, replacements, betterments and improvements thereto, so that the
business carried on in connection therewith may be properly and
advantageously conducted at all times.
Section 6.10. Notification of Events of Default and Adverse
Developments. Borrower promptly will notify Lender upon the occurrence of:
(i) any Event of Default; (ii) any event which, with the giving of notice or
lapse of time, or both, could constitute an Event of Default; (iii) any
event, development or circumstance whereby the financial statements
previously furnished to Lender fail in any material respect to present
fairly, in accordance with GAAP, the financial condition and operational
results of Borrower; (iv) any judicial, administrative or arbitration
proceeding pending against Borrower, and any judicial or administrative
proceeding known by Borrower to be threatened against it which, if adversely
decided, could adversely affect its condition (financial or otherwise) or
operations (present or prospective) or which may expose Borrower to uninsured
liability of $25,000.00 or more; (v) any default claimed by any other
creditor for Borrowed Money of Borrower other than Lender; and (vi) any other
development in the business or affairs of Borrower which may be adverse; in
each case describing the nature thereof and (in the case of notification
under clauses (i) and (ii)) the action Borrower proposes to take with respect
thereto.
Section 6.11. Employee Benefit Plans. Borrower will (a) comply
with the funding requirements of ERISA with respect to the Plans for its
employees, or will promptly satisfy any accumulated funding deficiency that
arises under Section 302 of ERISA; (b) furnish Lender, promptly after filing
the same, with copies of all reports or other statements filed with the
United States Department of Labor, the Pension Benefit Guaranty Corporation,
or the Internal Revenue Service with respect to all Plans, or which Borrower,
or any member of a Controlled Group, may receive from such Governmental
Authority with respect to any such Plans, and (c) promptly advise Lender of
the occurrence of any Reportable Event or Prohibited Transaction with respect
to any such Plan and the action which Borrower proposes to take with respect
thereto. Borrower will make all contributions when due with respect to any
multi-employer pension plan in which it participates and will promptly advise
Lender: (a) upon its receipt of notice of the assertion against Borrower of a
claim for withdrawal liability; (b) upon the occurrence of any event which
could trigger the assertion of a claim for withdrawal liability against
Borrower; and (c) upon the occurrence of any event which would place Borrower
in a Controlled Group as a result of which any member (including Borrower)
thereof may be subject to a claim for withdrawal liability, whether
liquidated or contingent.
Section 6.12. Financing Statements. Borrower shall provide to
Lender evidence satisfactory to Lender as to the due recording of termination
statements, releases of collateral, and Forms UCC-3, and shall cause to be
recorded financing statements on Form UCC-1, duly executed by Borrower and
Lender, in all places necessary to release all existing security interests
and other liens in the Collateral (other than as permitted hereby) and to
perfect and protect Lender's first priority lien and security interest in the
Collateral, as Lender may request.
Section 6.13. Financial Records. Borrower shall keep current and
accurate books of records and accounts in which full and correct entries will
be made of all of its business transactions, and will reflect in its
financial statements adequate accruals and appropriations to reserves, all in
accordance with GAAP.
Section 6.14. Collection of Accounts. Borrower shall continue to
collect its Accounts in the ordinary course of business.
Section 6.15. Places of Business. Borrower shall give thirty (30)
days' prior written notice to Lender of any change in the location of any of
its places of business, of the places where its records concerning its
Accounts are kept, of the places where the Collateral is kept, or of the
establishment of any new, or the discontinuance of any existing, places of
business.
Section 6.16. Business Conducted. Borrower shall continue in the
business presently conducted by it using its best efforts to maintain its
customers and goodwill. Borrower shall not engage, directly or indirectly,
in any line of business substantially different from the business conducted
by it immediately prior to the Closing Date, or engage in business or lines
of business which are not reasonably related thereto.
Section 6.17. Litigation and Other Proceedings. Borrower shall
give prompt notice to Lender of any litigation, arbitration, or other
proceeding before any Governmental Authority against or affecting Borrower if
the amount claimed is more than $25,000.00
Section 6.18. Bank Accounts. Borrower shall assign all of its
depository accounts to Lender.
Section 6.19. Submission of Collateral Documents. Borrower will,
on demand of Lender, make available to Lender copies of shipping and delivery
receipts evidencing the shipment of goods that gave rise to an Account,
medical records, insurance verification forms, assignment of benefits.
in-take forms or other proof of the satisfactory performance of services that
gave rise to an Account, a copy of the claim or invoice for each Account and
copies of any written contract or order from which the Account arose.
Borrower shall promptly notify Lender if an Account becomes evidenced or
secured by an instrument or chattel paper and upon request of Lender, will
promptly deliver any such instrument or chattel paper to Lender.
Section 6.20. Licensure, Medicaid/Medicare Cost Report. Borrower
will maintain all certificates of need, provider numbers and licenses
necessary to conduct its business as presently conducted, and take any steps
required to comply with any such new or additional requirements that may be
imposed on providers of medical products and services. If required, all
Medicaid/Medicare costs reports will be properly filed.
Section 6.21. Officer's Certificates. Together with the monthly
financial statements delivered pursuant to clause (iii) of Section 6.1. and
together with the audited annual financial statements delivered pursuant to
clause (g) of that Section, Borrower shall deliver to Lender a certificate of
its chief financial officer in form and substance satisfactory to Lender
setting forth:
(a) The information (including detailed calculations) required in
order to establish whether Borrower is in compliance with the requirements of
Articles VI and VII as of the end of the period covered by the financial
statements then being furnished; and
(b) That the signer has reviewed the relevant terms of this
Agreement, and has made (or caused to be made under his supervision) a review
of the transactions and conditions of Borrower from the beginning of the
accounting period covered by the income statements being delivered to the
date of the certificate, and that such review has not disclosed the existence
during such period of any condition or event which constitutes an Event of
Default or which is then, or with the passage of time or giving of notice or
both, could become an Event of Default, and if any such condition or event
existed during such period or now exists, specifying the nature and period of
existence thereof and what action Borrower has taken or proposes to take with
respect thereto.
Section 6.22. Visits and Inspections. Borrower agrees to permit
representatives of Lender, from time to time, as often as may be reasonably
requested upon at least twenty-four (24) hours' prior notice, but only during
normal business hours, to visit and inspect the properties of Borrower, and
to inspect, audit and make extracts from its books and records, and discuss
with its President or Controller, or other persons designated by either of
them, and its independent accountants, Borrower's business, assets,
liabilities, financial condition, business prospects and results of
operations.
ARTICLE VII
NEGATIVE COVENANTS
Each entity constituting Borrower covenants and agrees that so long as
Borrower may borrow hereunder and until payment in full of the Note and
performance of all other obligations of the Borrower under the Loan documents:
Section 7.1. Borrowing. Borrower will not create, incur, assume
or suffer to exist any liability for Borrowed Money except: (a) indebtedness
to Lender; (b) indebtedness of Borrower secured by mortgages, encumbrances or
liens expressly permitted by Section 7.3 hereof, (c) accounts payable to
trade creditors and current operating expenses (other than for borrowed
money) which are not aged more than one hundred twenty (120) days from the
billing date or more than thirty (30) days from the due date, in each case
incurred in the ordinary course of business and paid within such time period,
unless the same are being contested in good faith and by appropriate and
lawful proceedings, and Borrower shall have set aside such reserves, if any,
with respect thereto as are required by GAAP and deemed adequate by Borrower
and its independent accountants; (d) borrowings incurred in the ordinary
course of its business and not exceeding $50,000.00 in the aggregate
outstanding at any one time; or (e) indebtedness incurred to finance the
acquisition of fee simple ownership of the facility identified in Schedule
4,15, with such indebtedness to be secured solely by a mortgage on such
facility. Borrower will not make prepayments on any existing or future
indebtedness for Borrowed Money to any Person (other than Lender, to the
extent permitted by this Agreement or any subsequent agreement between
Borrower and Lender).
Section 7.2. Joint Ventures. Borrower will not invest directly or
indirectly in any joint venture for any purpose without the prior written
notice to, and the express written consent of, Lender, which consent may be
withheld in Lender's sole discretion.
Section 73. Liens and Encumbrances. Borrower will not create,
incur, assume or suffer to exist any mortgage, pledge, lien or other
encumbrance of any kind (including the charge upon property purchased under a
conditional sale or other title retention agreement) upon, or any security
interest in, any of its Collateral, whether now owned or hereafter acquired,
except for Permitted Liens.
Section 7.4. Merger, Acquisition, or Sale of Assets. Borrower
will not enter into any merger or consolidation with or acquire all or
substantially all of the assets of any Person, and will not sell, lease, or
otherwise dispose of any of its assets except in the ordinary course of its
business.
Section 7.5. Sale and Leaseback. Borrower will not, directly or
indirectly, enter into any arrangement whereby Borrower sells or transfers
all or any part of its assets and thereupon and within one year thereafter
rents or leases the assets so sold or transferred without the prior written
notice to, and the express written consent of, Lender, which consent may be
withheld in Lender's sole discretion; provided, however, that in any fiscal
year Borrower shall be permitted to enter into any transactions described in
this Section 7.5 without obtaining Lender's prior written consent so long as
the aggregate amount involved in such transactions during such fiscal year is
lower than Fifty Thousand and No/100 Dollars ($50,000.00).
Section 7.6. Dividends and Management Fees. Borrower will not
declare or pay any dividends, purchase, redeem or otherwise acquire for value
any of its outstanding stock, or return any capital of its stockholders, nor
shall Borrower pay or become obligated to pay management fees or fees of a
similar nature to any Person; provided, however, that so long as no Event of
Default has occurred hereunder, Borrower may make any such dividends or
purchase, redeem or otherwise acquire such outstanding stock, return any such
capital, or pay any such management fees, so long as doing so would not
violate any of the other terms and conditions of this Agreement.
Section 7.7. Loans. Borrower will not make loans or advances to
any Person, other than (i) trade credit extended in the ordinary course of
its business, and (ii) advances for business travel and similar temporary
advances in the ordinary course of business to officers, stockholders,
directors, and employees.
Section 7.8. Contingent Liabilities. Borrower will not assume,
guarantee, endorse, contingently agree to purchase or otherwise become liable
upon the obligation of any Person, except by the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business.
Section 7.9. Subsidiaries. Borrower will not form any subsidiary,
or make any investment in or any loan in the nature of an investment to, any
other Person.
Section 7.10. Compliance with ERISA. Borrower will not permit with
respect to any Plan covered by Title IV of ERISA any Prohibited Transaction
or any Reportable Event.
Section 7.11. Certificates of Need. Amend, alter or suspend or
terminate or make provisional in any material way, any certificate of need or
provider number without the prior written consent of Lender.
Section 7.12. Transactions with Affiliates. Borrower will not enter
into any transaction, including without limitation the purchase, sale, or
exchange of property, or the loaning or giving of funds to any Affiliate or
subsidiary, except in the ordinary course of business and pursuant to the
reasonable requirements of Borrower's business and upon terms substantially
the same and no less favorable to Borrower as it would obtain in a comparable
arm's length transaction with an Person not an Affiliate or subsidiary, and
so long as the transaction is not otherwise prohibited hereunder. For purposes
of the foregoing, Lender consents to the transactions described on Schedule
7.12.
Section 7.13. Use of Lender's Name. Borrower will not use Lender's
name (or the name of any of Lender's affiliates) in connection with any of
its business operations. Borrower may disclose to third parties that
Borrower has a borrowing relationship with Lender. Nothing herein contained
is intended to permit or authorize Borrower to make any contract on behalf of
Lender.
Section 7.14. Change in Capital Structure. There shall occur no
change in Borrower's capital structure as set forth in Schedule 4.17.
Section 7.15. Contracts and Agreements. Borrower will not become
or be a party to any contract or agreement which would breach this Agreement,
or breach any other instrument, agreement, or document to which Borrower is a
party or by which it is or may be bound.
Section 7.16. Margin Stock. Borrower will not carry or purchase
any "margin security" within the meaning of Regulations U, G, T or X of the
Board of Governors of the Federal Reserve System.
Section 7.17. Truth of Statements and Certificates. Borrower will
not furnish to Lender any certificate or other document that contains any
untrue statement of a material fact or that omits to state a material fact
necessary to make it not misleading in light of the circumstances under which
it was furnished.
ARTICLE VIII
EVENTS OF DEFAULT
Section 8.1. Events of Default. Each of the following
(individually, an "Event of Default" and collectively, the "Events of
Default") shall constitute an event of default hereunder:
(a) A default in the payment of any installment of principal of, or
interest upon, the Note when due and payable, whether at maturity or
otherwise, which default shall have continued unremedied for a period of five
(5) days after written notice thereof from Lender to Borrower;
(b) A default in the payment of any other charges, fees, or other
monetary obligations owing to Lender arising out of or incurred in connection
with this Agreement, when such payment is due and payable, which default
shall have continued unremedied for a period of five (5) days after written
notice from Lender;
(c) A default in the due observance or performance by Borrower of any
other term, covenant or agreement contained in any of the Loan Documents,
which default shall have continued unremedied for a period of thirty (30)
days after written notice from Lender;
(d) If any representation or warranty made by Borrower herein or in
any of the other Loan Documents, any financial statement, or any statement or
representation made in any other certificate, report or opinion delivered in
connection herewith or therewith proves to have been incorrect or misleading
in any material respect when made, which default shall have continued
unremedied for a period of ten (10) days after written notice from Lender;
(e) If any obligation of Borrower (other than its Obligations
hereunder) for the payment of Borrowed Money is not paid when due or within
any applicable grace period, or such obligation becomes or is declared to be
due and payable prior to the expressed maturity thereof, or there shall have
occurred an event which, with the giving of notice or lapse of time, or both,
would cause any such obligation to become, or allow any such obligation to be
declared to be, due and payable;
(f) If Borrower makes an assignment for the benefit of creditors,
offers a composition or extension to creditors, or makes or sends notice of
an intended bulk sale of any business or assets now or hereafter conducted by
Borrower;
(g) If Borrower files a petition in bankruptcy, is adjudicated
insolvent or bankrupt, petitions or applies to any tribunal for any receiver
of or any trustee for itself or any substantial part of its property,
commences any proceeding relating to itself under any reorganization,
arrangement, readjustment or debt, dissolution or liquidation law or statute
of any jurisdiction, whether now or hereafter in effect, or there is
commenced against Borrower any such proceeding which remains undismissed for
a period of sixty (60) days, or any Borrower by any act indicates its consent
to, approval of, or acquiescence in, any such proceeding or the appointment
of any receiver of or any trustee for a Borrower or any substantial part of
its property, or suffers any such receivership or trusteeship to continue
undischarged for a period of sixty (60) days;
(h) If one or more final judgments against Borrower or attachments
against its property not fully and unconditionally covered by insurance shall
be rendered by a court of record and shall remain unpaid, unstayed on appeal,
undischarged, unbonded and undismissed for a period of ten (10) days;
(i) A Reportable Event which might constitute grounds for
termination of any Plan covered by Title IV of ERISA or for the appointment
by the appropriate United States District Court of a trustee to administer
any such Plan or for the entry of a lien or encumbrance to secure any
deficiency, has occurred and is continuing thirty (30) days after its
occurrence, or any such Plan is terminated, or a trustee is appointed by an
appropriate United States District Court to administer any such Plan, or the
Pension Benefit Guaranty Corporation institutes proceedings to terminate any
such Plan or to appoint a trustee to administer any such Plan, or a lien or
encumbrance is entered to secure any deficiency or claim;
0) If any outstanding stock of Borrower is sold or otherwise
transferred by the Person owning such stock on the date hereof,
(k) If there shall occur any uninsured damage to or loss, theft or
destruction of any portion of the Collateral;
(1) If Borrower breaches of violates the terms of, or if a default or
an event which could, whether with notice or the passage of time, or both,
constitute a default, occurs under any other existing or future agreement
(related or unrelated) between Borrower and Lender;
(m) Upon the issuance of any execution or distraint process against
Borrower or any of its property or assets;
(n) If Borrower ceases any material portion of its business
operations as presently conducted;
(o) If any indication or evidence is received by Lender that Borrower
may have directly or indirectly been engaged in any type of activity which,
in Lender's discretion, might result in the forfeiture of any property of
Borrower to any Governmental Authority, which default shall have continued
unremedied for a period of ten (10) days after written notice from Lender;
(p) Borrower or any Affiliate of Borrower, shall challenge or
contest, in any action, suit or proceeding, the validity or enforceability of
this Agreement, or any of the other Loan Documents, the legality or the
enforceability of any of the Obligations or the perfection or priority of any
Lien granted to Lender;
(q) Borrower shall be criminally indicted or convicted under any law
that could lead to a forfeiture of any Collateral.
(r) There shall occur a material adverse change in the financial
condition or business prospects of Borrower, or if Lender in good faith deems
itself insecure as a result of acts or events bearing upon the financial
condition of Borrower or the repayment of the Note, which default shall have
continued unremedied for a period of ten (10) days after written notice from
Lender.
(s) PHC, Inc. shall have breached any of its representations,
warranties or covenants contained in the Unconditional Guaranty of Payment
and Performance of even date with this Agreement, executed in favor of Lender.
(t) An Event of Default shall have occurred under the Secured Term
Note dated March 12, 1997 in the original principal amount of $1,100,000.00
(as such Secured Term Note has been or may be amended (by Allonge or
otherwise), replaced or modified), executed by PHC of Michigan, Inc. in favor
of Lender.
(u) An Event of Default shall have occurred under the Secured Term
Note dated December 9, 1997 in the original principal amount of $500,000.00
(as such Secured Term Note has been or may be amended (by Allonge or
otherwise), replaced or modified), executed by PHC of Michigan, Inc. in favor
of Lender.
Section 8.2. Acceleration. Upon the occurrence of any of the
foregoing Events of Default, the Note shall become and be immediately due and
payable upon declaration to that effect delivered by Lender to Borrower;
provided that, upon the happening of any event specified in Section 8.1.(g)
hereof, the Note shall be immediately due and payable without declaration or
other notice to Borrower.
Section 8.3. Remedies.
(a) In addition to all other rights, options, and remedies granted to
Lender under this Agreement, upon the occurrence of an Event of Default
Lender may (i) terminate the Loan, whereupon all outstanding Obligations
shall be immediately due and payable, (ii) exercise all other rights granted
to it hereunder and all rights under the Uniform Commercial Code in effect in
the applicable jurisdiction(s) and under any other applicable law, and (iii)
exercise all rights and remedies under all Loan Documents now or hereafter in
effect, including the following rights and remedies (which list is given by
way of example and is not intended to be an exhaustive list of all such
rights and remedies):
(i) The right to take possession of, send notices regarding,
and collect directly the Collateral, with or without judicial process, and to
exercise all rights and remedies available to Lender with respect to the
Collateral under the Uniform Commercial Code in effect in the jurisdiction(s)
in which such Collateral is located;
(ii) The right to (by its own means or with judicial assistance)
enter any of Borrower's premises and take possession of the Collateral, or
render it unusable, or dispose of the Collateral on such premises in
compliance with subsection (b), without any liability for rent, storage,
utilities, or other sums, and Borrower shall not resist or interfere with
such action;
(iii) The right to require Borrower at Borrower's expense to
assemble all or any part of the Collateral and make it available to Lender T
any place designated by Lender;
(iv) The right to reduce the Maximum Loan Amount or to use the
Collateral and/or funds in the Concentration Account in amounts up to the
Maximum Loan Amount for any reason; and
(v) The right to relinquish or abandon any Collateral or any
security interest therein.
(b) Borrower agrees that a notice received by it at least five (5)
days before the time of any intended public sale, or the time after which any
private sale or other disposition of the Collateral is to be made, shall be
deemed to be reasonable notice of such sale or other disposition. If
permitted by applicable law, any perishable Collateral which threatens to
speedily decline in value or which is sold on a recognized marked may be sold
immediately by Lender without prior notice to Borrower. At any sale or
disposition of Collateral, Lender may (to the extent permitted by applicable
law) purchase all or any part of the Collateral, free from any right of
redemption by Borrower, which right is hereby waived and released. At any
sale or disposition of Collateral, Lender may (to the extent permitted by
applicable law) purchase all or any part of the Collateral, free from any
right of redemption by Borrower, which right is hereby waived and released.
Borrower covenants and agrees not to interfere with or impose any obstacle to
Lender's exercise of its rights and remedies with respect to the Collateral.
Section 8.4. Nature of Remedies. Lender shall have the right to
proceed against all or any portion of the Collateral to satisfy, in any
order, (a) the liabilities and Obligations of Borrower to Lender, or (b) upon
the occurrence of an Event of Default under the March Secured Note, the
liabilities and obligations of Borrower to Lender thereunder, or (c) upon the
occurrence of an Event of Default under the December Secured Note, the
liabilities and obligations of PHC of Michigan, Inc. to Lender thereunder.
All rights and remedies granted Lender hereunder and under any agreement
referred to herein, or otherwise available at law or in equity, shall be
deemed concurrent and cumulative, and not alternative remedies, and Lender
may proceed with any number of remedies at the same time until the Loan, and
all other existing and future liabilities and obligations of Borrower and PHC
Utah to Lender, are satisfied in full. The exercise of any one right or
remedy shall not be deemed a waiver or release of any other right or remedy,
and Lender, upon the occurrence of an Event of Default, may proceed against
Borrower, and/or the Collateral, at any time, under any agreement, with any
available remedy and in any order."
ARTICLE IX
MISCELLANEOUS
Section 9.1. Expenses and Taxes.
(a) Borrower agrees to pay, whether or not the Closing occurs, all
out-of-pocket charges and expenses incurred by Lender (including without
limitation the reasonable fees and expenses of Lender's counsel) in
connection with the negotiation, preparation and execution of each of the
Loan Documents; provided, however that with respect to the period through and
including the Closing, Borrower shall in no event be required to pay more
than the following amounts incurred by Lender: (i) Six Thousand and No/100
Dollars ($6,000.00) in legal fees plus (ii) out-of-pocket charges and
expenses. Borrower also agrees to pay all out-of-pocket charges and expenses
incurred by Lender (including the reasonable fees and expenses of Lender's
counsel) in connection with the enforcement, protection or preservation of
any right or claim of Lender and the collection of any amounts due under the
Loan Documents.
(b) Borrower shall pay all taxes (other than taxes based upon or
measured by Lender's income or revenues or any personal property tax), if
any, in connection with the issuance of the Note and the recording of the
security documents therefor. The obligations of Borrower under this clause
(b) shall survive the payment of Borrowees indebtedness hereunder and the
termination of this Agreement.
Section 9.2. Entire Agreement: Amendments. This Agreement and the
other Loan Documents constitute the full and entire understanding and
agreement among the parties with regard to their subject matter and supersede
all prior written or oral agreements, understandings, representations and
warranties made with respect thereto. No amendment, supplement or
modification of this Agreement nor any waiver of any provision thereof shall
be made except in writing executed by the party against whom enforcement is
sought.
Section 9.3. No Waiver, Cumulative Rights. No waiver by any party
hereto of any one or more defaults by the other party in the performance of
any of the provisions of this Agreement shall operate or be construed as a
waiver of any future default or defaults, whether of a like or different
nature. No failure or delay on the part of any party in exercising any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any other right,
power or remedy. The remedies provided for herein are cumulative and are not
exclusive of any remedies that may be available to any party hereto at law,
in equity or otherwise.
Section 9.4. Notices. Any notice or other communication required
or permitted hereunder shall be in writing and personally delivered, mailed
by registered or certified mail (return receipt requested and postage
prepaid), sent by telecopier (with a confirming copy sent by regular mail),
or sent by prepaid overnight courier service, and addressed to the relevant
party at its address set forth below, or at such other address as such party
may, by written notice, designate as its address for purposes of notice
hereunder:
(a) If to Lender, at:
HCFP Funding, Inc.
2 Wisconsin Circle, Fourth Floor
Chevy Chase, MD 20814
Attn: Ethan Leder, President
Telephone: (301) 961-1640
Telecopier: (301) 664-9860
(b) If to Borrower, at:
200 Lake Street, Suite 102
Peabody, MA 01960
Attn: Ms. Paula Wurts, Chief Financial Officer
Telephone: (978) 536-2777
Telecopier: (978) 536-2677
With a copy to:
Willie J. Washington, Esq.
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, MA 02109
Telephone: (617) 248-5000
Telecopier: (617) 248-4000
If mailed, notice shall be deemed to be given five (5) days after being sent,
if sent by personal delivery or telecopier, notice shall be deemed to be
given when delivered, and if sent by prepaid courier, notice shall be deemed
to be given on the next Business Day following deposit with the courier.
Section 9.5. Severability. If any term, covenant or condition of
this Agreement, or the application of such term, covenant or condition to any
party or circumstance shall be found by a court of competent jurisdiction to
be, to any extent, invalid or unenforceable, the remainder of this Agreement
and the application of such term, covenant, or condition to parties or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term, covenant or
condition shall be valid and enforced to the fullest extent permitted by
law. Upon determination that any such term is invalid, illegal or
unenforceable, the parties hereto shall amend this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner.
Section 9.6. Successors and Assigns. This Agreement, the Note, and
the other Loan Documents shall be binding upon and inure to the benefit of
Borrower and Lender and their respective successors and assigns.
Notwithstanding the foregoing, Borrower may not assign any of its rights or
delegate any of its obligations hereunder without the prior written consent
of Lender, which may be withheld in its sole discretion. Lender may sell,
assign, transfer, or participate any or all of its rights or obligations
hereunder without notice to or consent of Borrower.
Section 9.7. Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but
all of which together shall constitute but one instrument.
Section 9.8. Interpretation. No provision of this Agreement or
any other Loan Document shall be interpreted or construed against any party
because that party or its legal representative drafted that provision. The
titles of the paragraphs of this Agreement are for convenience of reference
only and are not to be considered in construing this Agreement. Any pronoun
used in this Agreement shall be deemed to include singular and plural and
masculine, feminine and neuter gender as the case may be. The words
"herein," "hereof," and "hereunder" shall be deemed to refer to this entire
Agreement, except as the context otherwise requires.
Section 9.9. Survival of Terms. All covenants, agreements,
representations and warranties made in this Agreement, any other Loan
Document, and in any certificates and other instruments delivered in
connection therewith shall be considered to have been relied upon by Lender
and shall survive the making by Lender of the Loans herein contemplated and
the execution and delivery to Lender of the Note, and shall continue in full
force and effect until all liabilities and obligations of Borrower to Lender
are satisfied in full.
Section 9.10. Release of Lender. Borrower releases Lender, its
officers, employees, and agents, of and from any claims for loss or damage
resulting from acts or conduct of any or all of them, unless caused by
Lender's recklessness, gross negligence, or willful misconduct.
Section 9.11. Time. Whenever Borrower is required to make any
payment or perform any act on a Saturday, Sunday, or a legal holiday under
the laws of the State of Maryland (or other jurisdiction where Borrower is
required to make the payment or perform the act), the payment may be made or
the act performed on the next Business Day. Time is of the essence in
Borrower's performance under this Agreement and all other Loan Documents.
Section 9.12. Commissions. The transaction contemplated by this
Agreement was brought about by Lender and Borrower acting as principals and
without any brokers, agents, or finders being the effective procuring cause.
Borrower represents that it has not committed Lender to the payment of any
brokerage fee, commission, or charge in connection with this transaction. If
any such claim is made on Lender by any broker, finder, or agent or other
person, Borrower will indemnify, defend, and hold Lender harmless from and
against the claim and will defend any action to recover on that claim, at
Borrowees cost and expense, including Lender's counsel fees. Borrower
further agrees that until any such claim or demand is adjudicated in Lender's
favor, the amount demanded will be deemed a liability of Borrower under this
Agreement, secured by the Collateral.
Section 9.13. Third Parties. No rights are intended to be created
hereunder or under any other Loan Document for the benefit of any third party
donee, creditor, or incidental beneficiary of Borrower. Nothing contained in
this Agreement shall be construed as a delegation to Lender of Borrower's
duty of performance, including without limitation Borrower's duties under any
account or contract in which Lender has a security interest.
Section 9.14. Discharge of Borrower's Obligations. Lender, shall
have the right, if Borrower has previously failed to do so, upon reasonable
notice to Borrower, to: (a) obtain insurance covering any of the Collateral
as required hereunder; (b) pay for the performance of any of Borrower's
obligations hereunder; (c) discharge taxes, liens, security interests, or
other encumbrances at any time levied or placed on any of the Collateral in
violation of this Agreement unless Borrower is in good faith with due
diligence by appropriate proceedings contesting those items; and (d) pay for
the maintenance and preservation of any of the Collateral. Expenses and
advances shall be added to the Loan, until reimbursed to Lender and shall be
secured by the Collateral. Such payments and advances by Lender shall not be
construed as a waiver by Lender of an Event of Default.
Section 9.15. Information to Participants. Lender may divulge to
any participant it may obtain in the Loan, or any portion thereof, all
information, and furnish to such participant copies of reports, financial
statements, certificates, and documents obtained under any provision of this
Agreement or any other Loan Document.
Section 9.16. Indemnity. Borrower hereby agrees to indemnify and
hold harmless Lender, its partners, officers, agents and employees
(collectively, "Indemnitee") from and against any liability, loss, cost,
expense, claim, damage, suit, action or proceeding ever suffered or incurred
by Lender (including reasonable attorneys' fees and expenses) arising from
Borrower's failure to observe, perform or discharge any of its covenants,
obligations, agreements or duties hereunder, or from the breach of any of the
representations or warranties contained in Article IV hereof. In addition,
Borrower shall defend Indemnitee against and save it harmless from all claims
of any Person with respect to the Collateral. Notwithstanding any contrary
provision in this Agreement, the obligation of Borrower under this Section
9.16 shall survive the payment in full of the Obligations and the termination
of this Agreement.
Section 9.17. Choice of Law: Consent to Jurisdiction. THIS
AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE
APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF
THIS AGREEMENT OR THE NOTE IS COMMENCED BY LENDER IN THE STATE OF MARYLAND OR
FEDERAL COURT LOCATED IN THE STATE OF MARYLAND, BORROWER HEREBY CONSENTS TO
THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH ACTION AND TO THE LAYING OF
VENUE IN THE STATE OF MARYLAND. ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY
SERVED IF MAILED BY REGISTERED MAIL, POSTAGE PREPAID, TO THE BORROWER AT ITS
ADDRESS DESCRIBED IN SECTION 9.4 HEREOF.
Section 9.18. Waiver of Trial by Jury. BORROWER HEREBY (A)
COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF
RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT
TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY BORROWER,
AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH
ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER
IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT
HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO
SERVE AS CONCLUSIVE EVIDENCE OF BORROWER'S WAIVER OF THE RIGHT TO JURY
TRIAL. FURTHER, BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF
LENDER (INCLUDING LENDER'S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
TO BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY
TRIAL PROVISION.
H:\WP\LEGAL\CLIENTS\PHCINC\LNSECAGT.WPD
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
ATTEST: HCFP FUNDING, INC.
a Delaware corporation
By: _________________________ By: ________________[SEAL]
Name: Name:
Title: Title:
ATTEST: PHC OF MICHIGAN, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear [SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
ATTEST: PHC OF UTAH, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear [SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
ATTEST: PHC OF VIRGINIA, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear [SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
(SIGNATURES CONTINUED ON NEXT PAGE)
H:\WP\LEGAL\CLIENTS\PHCINC\LNSECAGT.WPD
<PAGE>
ATTEST: PHC OF RHODE ISLAND, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear [SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
ATTEST: PIONEER COUNSELING OF VIRGINIA, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear [SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
H:\WP\LEGAL\CLfENTS\PHCINC\LNSECAGT.WPD
<PAGE>
LIST OF EXHIBITS
Exhibit A - Form of Revolving Credit Note
Exhibit B - Form of Lockbox Agreement
Exhibit C - Form of Concentration Account Agreement
Exhibit D - Locations of Collateral
Exhibit E - Form of Legal Opinion
H:\WP\LEGAL\CLfENTS\PHCINC\LNSECAGT.WPD
<PAGE>
LIST OF SCHEDULES
Schedule 1.36 - Permitted Liens
Schedule 4.1 - Subsidiaries
Schedule 4.5 - Litigation
Schedule 4.7 - Tax Identification Numbers
Schedule 4.10 - Taxes
Schedule 4.13 - Non-Compliance with Law
Schedule 4.14 - Environmental Matters
Schedule 4.15 - Places of Business
Schedule 4.16 - Licenses
Schedule 4.17 - Stock Ownership
Schedule 4.19 - Borrowings and Guarantees
Schedule 4.21 - Trade Names
Schedule 4.22 - Joint Ventures
Schedule 7.12 - Transactions with Affiliates
H:\WP\LEGAL\CLfENTS\PHCINC\LNSECAGT.WPD
<PAGE>
CERTIFICATE OF VALIDITY
February _____, 1998
TO: HCFP Funding, Inc.
Wisconsin Circle
Suite 320
Chevy Chase, Maryland 20815
The undersigned is an officer and/or member and/or party interested in
PHC of Michigan, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Rhode
Island, Inc. and Pioneer Counseling of Virginia, Inc. collectively,
"Borrower"). Please refer to that certain Loan and Security Agreement
between you and Borrower of even date with this Certificate (the
"Agreement"). Capitalized terms used but not defined in this Certificate
shall have the meanings ascribed to them in the Agreement.
To induce you to enter into the Agreement with Borrower, the
undersigned, in his or her individual capacity, hereby warrants, covenants,
certifies and guarantees to you, and will be deemed to further warrant,
covenant, certify and guarantee as of the date of each borrowing by Borrower
under the Agreement, as follows with respect to the Qualified Accounts that
will be financed by you under the Agreement:
1. Each such Qualified Account included in the Borrowing Base will
be genuine and in all respects what it purports to be, and will represent a
bona fide obligation of Borrower's Patients or other Persons arising out of
the delivery of Medical Services.
2. Borrower will not finance any Qualified Accounts with you as to
which there are any offsets, contra-accounts or counterclaims of any nature
whatsoever, and Borrower will comply fully with the lockbox procedures and
requirements set forth in the Agreement (including, without limitation,
Section 2.3 of the Agreement) and will otherwise do nothing to impede or
interfere with the normal collection and payment of the Qualified Accounts
financed by you
3. Each Qualified Account will arise out of a completed, bona fide
sale and delivery of goods or rendition of services by Borrower in the
ordinary course of its business and in accordance with the terms and
conditions of all purchase orders, contracts, certifications, participations,
certificates of need, or other documents relating to and forming a part of
the contract between Borrower and the account debtor.
4. Each Qualified Account will be for a liquidated amount maturing
as stated in a duplicate claim or invoice covering such sale or rendition of
services, a copy of which has been furnished or shall be available to Lender.
<PAGE>
HCFP Funding, Inc.
February _, 1998
Page 2
5. No Qualified Account will, by voluntary act or omission of
Borrower, be subject to any offset, lien, deduction, defense, dispute,
counterclaim or any other adverse condition, and each Qualified Account will
be absolutely owing to Borrower and will not be contingent in any respect or
for any reason.
6. Each Qualified Account shall have been billed and forwarded to
the Account Debtor for payment in accordance with applicable laws and in
compliance and conformity with any and requisite procedures, requirements and
regulations governing payment by such Account Debtor with respect to the
Qualified Account, and the Qualified Account if due from a Medicaid/Medicare
Account Debtor shall be properly payable directly to Borrower.
7. Borrower shall have obtained and currently has all certificates
of need, Medicaid and Medicare provider numbers, licenses, permits and
authorizations as necessary in the generation of such Qualified Accounts.
8. If a Qualified Account is owed by an Insurer, the insurance claim
related to the Qualified Account shall have been verified by a process
approved by the Lender and shall have been forwarded to the Insurer for
payment.
9. As of the date of this Certificate, Borrower is solvent.
10. As of the date of this Certificate, the Qualified Accounts are
free and clear of liens, security interests or claims of any nature
whatsoever, other than any lien or security interest to you or to your
affiliate, HCFP Funding II, Inc.
The undersigned hereby further undertakes to save you free and harmless
from any damage or loss that you may sustain as a result of any willful
breach by any officer or director of Borrower of any of the foregoing
warranties, covenants or guarantees or any fraud, deceit or criminal act on
the part of any officer or director of Borrower in its dealings with you.
Nothing contained in this Certificate shall be in any way impaired or
affected by any change in or amendment of any of the Agreement or the
documents ancillary to the Agreement, and this Certificate shall be binding
upon the undersigned and his heirs, personal representatives, successors and
assigns. The liability of the undersigned under the Certificate is direct
and unconditional, and may be enforced without requiring you first to resort
to any other right, remedy or security. It is not necessary for you to give
the undersigned notice of any changes in any of the Agreement, the documents
ancillary to the Agreement or your financial arrangements with Borrower, to
all of which the undersigned now hereby consents.
WITNESS:
/s/ Paula C. Wurts /s/ Bruce A. Shear
Bruce A. Shear
H:\WP\LEGAL\CLIENTS\PHCINC\LNCRVAL.WPD
<PAGE>
2-14-98
February ____, 1998
PHC, Inc.
PHC of Michigan, Inc.
PHC of Utah, Inc.
200 Lake Street, Suite 102
Peabody, Massachusetts 01960
Attention: Mr. Bruce Shear
Ms. Paula Wurts
Re: Loan and Security Agreement (the "New Loan Agreement") to be
entered by and among HCFP Funding, Inc. ("Lender"), PHC of
Michigan, Inc. and PHC of Utah, Inc. (collectively, "Old
Borrowers"), and PHC of Virginia, Inc., PHC of Rhode Island, Inc.
and Pioneer Counseling of Virginia, Inc. (collectively, "New
Borrowers")
Ladies and Gentlemen:
Lender and Old Borrowers have agreed to enter into the New Loan
Agreement whereby New Borrowers will be eligible for financing from Lender and
the aggregate Maximum Loan Amount for both Old Borrowers and New Borrowers will
be increased to Four Million and No/100 Dollars ($4,000,000.00). In connection
with entering into the New Loan Agreement, Lender and Old Borrower agree as
follows:
1. The New Loan Agreement will serve to amend and restate the
respective former Loan and Security Agreements with each Old Borrower (the
"Old Loan Agreements").
2. The New Loan Agreement will serve as the initial Loan and
Security Agreement with each New Borrower.
3. Upon the closing of and first funding under the New Loan
Agreement, the Revolving Credit Notes executed by Old Borrowers pursuant to
the Old Loan Agreements will be cancelled and replaced by the Revolving
Credit Note executed pursuant to the New Loan Agreement.
4. The Certificates of Validity executed by Bruce Shear pursuant to
the Old Loan Agreement will be cancelled and replaced by the Certificate of
Validity executed pursuant to the New Loan Agreement.
<PAGE>
PHC, Inc.
PHC of Michigan, Inc.
PHC of Utah, Inc.
February _, 1998
Page 2
5. The Unconditional Guaranty of Payment and Performance executed by
PHC, Inc. in connection with the Old Loan Agreements will be cancelled and
replaced by the Unconditional Guaranty of Payment and Performance executed
pursuant to the New Loan Agreement.
6. The Unconditional Guaranty of Payment and Performance executed by
PHC, Inc. in connection with the Secured Term Note of December ____, 1997
made by PHC of Michigan, Inc. in favor of HCFP Funding II, Inc. will remain
in full force and effect.
7. The Mortgage currently securing the payment of the obligations of
Old Borrowers under the Old Loan Agreements will be amended to include the
obligations of both Old Borrowers and New Borrowers under the New Loan
Agreement.
If the foregoing correctly states the understanding of the parties,
please sign below where indicated.
Very truly yours,
HCFP FUNDING, INC.
By: __________________________
Name:
Title:
THE FOREGOING CORRECTLY STATES THE UNDERSTANDING OF THE PARTIES AS OF THE DAY
OF FEBRUARY _____, 1998.
PHC, INC. PHC OF MICHIGAN, INC.
By: /s/ Bruce A. Shear Name: Bruce A. Shear
Title: President Title: President
PHC OF UTAH, INC.
By: /s/ Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
H:\WP\LEGAL\CLIENTS\PHCINC\Sideletter.wpd
<PAGE>
REVOLVING CREDIT NOTE
$4,000,000.00
February _, 1998
FOR VALUE RECEIVED, the undersigned, PHC OF MICHIGAN, INC., a
Massachusetts corporation, PHC OF UTAH, INC., a Massachusetts corporation,
PHC OF VIRGINIA, INC., a Massachusetts corporation, PHC OF RHODE ISLAND,
INC., a Massachusetts corporation, and PIONEER COUNSELING OF VIRGINIA, INC.,
a Massachusetts corporation, (collectively, "Borrower"), jointly and
severally, promise to pay, in lawful money of the United States, to the order
of HCFP FUNDING, INC., a Delaware corporation ("Lender"), the principal sum
of Four Million and No/100 Dollars ($4,000,000.00), or so much thereof as
shall be advanced or readvanced and shall remain unpaid under the Loan
established pursuant to that certain Loan and Security Agreement of even date
with this Note by and among the undersigned and Lender (the "Loan
Agreement"), plus interest on the unpaid balance thereof, computed on a
360-day basis, at the rate per annum that is set forth in the Loan
Agreement. All capitalized terms used, and not otherwise specifically
defined, in this Revolving Credit Note ("Note") shall have the meanings
ascribed to them in the Loan Agreement.
This Note amends, restates and replaces in its entirety the Revolving
Credit Note dated May 21, 1996 made by PHC of Utah, Inc. and the Revolving
Credit Note dated February 3, 1997 made by PHC of Michigan, Inc.
This Note shall evidence the undersigned's obligation to repay all
sums advanced by Lender from time to time under and as part of the Loan. The
actual amount due and owing from time to time under this Note shall be
evidenced by Lender's records of receipts and disbursements with respect to
the Loan, which shall be conclusive evidence of that amount, absent manifest
error.
Interest hereon shall be payable monthly, in arrears, on the first
Business Day of each month hereafter (for the previous month). For purposes
of this Note, a "Business Day" shall mean any day on which banks are open for
business in Maryland, excluding Saturdays and Sundays.
This Note shall become due and payable upon the earlier to occur of
(i) the expiration of the Term, or (ii) any Event of Default under the Loan
Agreement, or any other event under any other Loan Documents which would
result in this Note becoming due and payable. At such time, the entire
principal balance of this Note and all other fees, costs and expenses, if
any, shall be due and payable in full. Lender shall then have the option at
any time and from time to time to exercise all of the rights and remedies set
forth in this Note and in the other Loan Documents, as well as all rights and
remedies otherwise available to Lender at law or in equity, to collect the
unpaid indebtedness under this Note and the other Loan Documents. This Note
is secured by the Collateral, as defined in and described in the Loan
Agreement.
Whenever any principal and/or interest and/or fee under this Note
shall not be paid when due, whether at the stated maturity or by
acceleration, interest on such unpaid amounts shall thereafter be payable at
a rate per annum equal to five percentage points above the stated rate of
interest on this Note until such amounts shall be paid.
The undersigned and Lender intend to conform strictly to the
applicable usury laws in effect from time to time during the term of the
Loan. Accordingly, if any transaction contemplated hereby would be usurious
under such laws, then notwithstanding any other provision hereof: (a) the
aggregate of all interest that is contracted for, charged, or received under
this Note or under any other Loan Document shall not exceed the maximum
amount of interest allowed by applicable law, and any excess shall be
promptly credited to the undersigned by Lender (or, to the extent that such
consideration shall have been paid, such excess shall be promptly refunded to
the undersigned by Lender); (b) neither the undersigned nor any other Person
(as defined in the Loan Agreement) now or hereafter liable hereunder shall be
obligated to pay the amount of such interest to the extent that it is in
excess of the maximum interest permitted by applicable law; and (c) the
effective rate of interest shall be reduced to the Highest Lawful Rate (as
defined in the Loan Agreement). All sums paid, or agreed to be paid, to
Lender for the use, forbearance, and detention of the debt of Borrower to
Lender shall, to the extent permitted by applicable law, be allocated
throughout the full term of this Note until payment is made in full so that
the actual rate of interest does not exceed the Highest Lawful Rate in effect
at any particular time during the full term thereof. If at any time the rate
of interest under the Note exceeds the Highest Lawful Rate, the rate of
interest to accrue pursuant to this Note shall be limited, notwithstanding
anything to the contrary herein, to the Highest Lawful Rate, but any
subsequent reductions in the Base Rate shall not reduce the interest to
accrue pursuant to this Note below the Highest Lawful Rate until the total
amount of interest accrued equals the amount of interest that would have
accrued if a varying rate per annum equal to the interest rate under the Note
had at all times been in effect. If the total amount of interest paid or
accrued pursuant to this Note under the foregoing provisions is less than the
total amount of interest that would have accrued if a varying rate per annum
equal to the interest rate under this Note had been in effect, then the
undersigned agrees to pay to Lender an amount equal to the difference between
(a) the lesser of (i) the amount of interest that would have accrued if the
Highest Lawful Rate had at all times been in effect, or (ii) the amount of
interest that would have accrued if a varying rate per annum equal to the
interest rate under the Note had at all times been in effect, and (b) the
amount of interest accrued in accordance with the other provisions of this
Note and the Loan Agreement.
This Note is the "Note" referred to in the Loan Agreement, and is
issued pursuant thereto. Reference is made to the Loan Agreement for a
statement of the additional rights and obligations of the undersigned and
Lender. In the event of any conflict between the terms hereof and the terms
of the Loan Agreement, the terms of the Loan Agreement shall prevail. All of
the terms, covenants, provisions, conditions, stipulations, promises and
agreements contained in the Loan Documents to be kept, observed and/or
performed by the undersigned are made a part of this Note and are
incorporated herein by this reference to the same extent and with the same
force and effect as if they were fully set forth herein, and the undersigned
promises and agrees to keep, observe and perform them or cause them to be
kept, observed and performed, strictly in accordance with the terms and
provisions thereof
Each party liable hereon in any capacity, whether as maker, endorser,
surety, guarantor or otherwise, (i) waives presentment for payment, demand,
protest and notice of presentment, notice of protest, notice of non-payment
and notice of dishonor of this debt and each and every other notice of any
kind respecting this Note and all lack of diligence or delays in collection
or enforcement hereof, (ii) agrees that Lender and any subsequent holder of
this Note, at any time or times, without notice to the undersigned or its
consent, may grant extensions of time, without limit as to the number of the
aggregate period of such extensions, for the payment of any principal,
interest or other sums due hereunder, (iii) to the extent permitted by law,
waives all exemptions under the laws of the State of Maryland and/or any
state or territory of the United States, (iv) to the extent permitted by law,
waives the benefit of any law or rule of law intended for its advantage or
protection as an obligor hereunder or providing for its release or discharge
from liability hereon, in whole or in part, on account of any facts or
circumstances other than full and complete payment of all amounts due
hereunder, and (v) agrees to pay, in addition to all other sums of money due,
all cost of collection and attorney's fees, whether suit be brought or not,
if this Note is not paid in full when due, whether at the stated maturity or
by acceleration.
No waiver by Lender or any subsequent holder of this Note of any one or
more defaults by the undersigned in the performance of any of its obligations
hereunder shall operate or be construed as a waiver of any future default or
defaults, whether of a like or different nature. No failure or delay on the
part of Lender in exercising any right, power or remedy under this Note
(including, without limitation, the right to declare this Note due and
payable) shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy.
If any term, covenant or condition of this Note, or the application of
such term, covenant or condition to any party or circumstance shall be found
by a court of competent jurisdiction to be, to any extent, invalid or
unenforceable, the remainder of this Note and the application of such term,
covenant, or condition to parties or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby, and
each term, covenant or condition shall be valid and enforced to the fullest
extent permitted by law. Upon determination that any such term is invalid,
illegal or unenforceable, the undersigned shall cooperate with Lender to
amend this Note so as to effect the original intent of the parties as closely
as possible in an acceptable manner.
No amendment, supplement or modification of this Note nor any waiver of
any provision hereof shall be made except in writing executed by the party
against whom enforcement is sought.
This Note shall be binding upon the undersigned and its successors and
assigns. Notwithstanding the foregoing, the undersigned may not assign any
of its rights or delegate any of its obligations hereunder without the prior
written consent of Lender, which may be withheld in its sole discretion.
THIS NOTE IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF MARYLAND WITHOUT RESPECT TO ANY OTHERWISE APPLICABLE
CONFLICTS-OF-LAWS PRINCIPLES, BOTH AS TO INTERPRETATION AND PERFORMANCE, AND
THE PARTIES EXPRESSLY CONSENT AND AGREE TO THE NON-EXCLUSIVE JURISDICTION OF
THE COURTS OF THE STATE OF MARYLAND AND THE UNITED STATES DISTRICT COURT FOR
THE DISTRICT OF MARYLAND AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND,
WAIVING ALL CLAIMS OR DEFENSES BASED ON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE, INCONVENIENT FORUM OR THE LIKE. BORROWER HEREBY CONSENTS TO
SERVICE OF PROCESS BY MAILING A COPY OF THE SUMMONS TO BORROWER, BY CERTIFIED
OR REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER'S ADDRESS SET FORTH IN
SECTION 9.4 OF THE LOAN AGREEMENT. BORROWER FURTHER WAIVES ANY CLAIM FOR
CONSEQUENTIAL DAMAGES IN RESPECT OF ANY ACTION TAKEN OR OMITTED TO BE TAKEN
BY LENDER IN GOOD FAITH.
THE UNDERSIGNED HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY
JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO
TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND
VOLUNTARILY BY THE UNDERSIGNED, AND THIS WAIVER IS INTENDED TO ENCOMPASS
INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY
TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND REQUESTED TO
SUBMIT THIS NOTE TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND
THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF THE
UNDERSIGNED'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, THE UNDERSIGNED
HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING
LENDER'S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO ANY BORROWER
THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL
PROVISION.
H:\WP\LEGAL\CLIENTS\PHCINC\LNNOTEJT.wpd
IN WITNESS THEREOF, the undersigned have executed this Note as of the date
fire above written.
BORROWER:
ATTEST: PHC OF MICHIGAN, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear (SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
ATTEST: PHC OF UTAH, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear (SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
ATTEST: PHC OF VIRGINIA, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear (SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
ATTEST: PHC OF RHODE ISLAND, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear (SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
ATTEST: PIONEER COUNSELING OF VIRGINIA, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear (SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
H:\WP\LEGAL\CLIENTS\PHCINC\LNNOTEJT.wpd
<PAGE>
THIS GUARANTY CONTAINS PROVISIONS FOR WAIVER
OF JURY TRIAL
UNCONDITIONAL GUARANTY OF PAYMENT AND PERFORMANCE
THIS UNCONDITIONAL GUARANTY OF PAYMENT AND PERFORMANCE (the "Guaranty")
is dated as of February , 1998 and is made by PHC, INC., a Massachusetts
corporation ("Guarantor"), in favor of HCFP FUNDING II, INC., a Delaware
corporation (Lender).
RECITALS
A. Pursuant to a certain Loan and Security Agreement of even date
with this Guaranty (as the agreement may from time to time be amended,
modified or supplemented, the "Loan Agreement"), by and among PHC OF
MICHIGAN, INC., a Massachusetts corporation, PHC OF UTAH, INC., a
Massachusetts corporation, PHC OF VIRGINIA, INC., a Massachusetts
corporation, PHC OF RHODE ISLAND, INC., a Massachusetts corporation, and
PIONEER COUNSELING OF VIRGINIA, INC., a Massachusetts corporation,
(collectively, "Borrower'), and Lender, Lender has agreed to make available
to Borrower a revolving line of credit in the maximum aggregate principal
amount of Four Million and No/100 Dollars ($4,000.00), or so much thereof as
shall be advanced or readvanced from time to time and remain unpaid (the
"Loan"); and
B. Lender is willing to make the Loan under the Loan Agreement but
only upon the condition, among others, that Guarantor shall have executed and
delivered to Lender this Guaranty.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained in this Guaranty and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties agree
as follows:
1. All capitalized terms used but not defined in this Guaranty
shall have the respective meanings given them in the Loan Agreement.
2. To induce Lender to execute and deliver the Loan Agreement and to
make the Loan upon the terms and conditions set forth in the Loan Agreement,
and in consideration thereof. Guarantor hereby unconditionally and
irrevocably guarantees to Lender, and to its successors, endorsees,
transferees and assigns, Borrower's prompt and complete payment when due,
whether at the stated maturity, by acceleration or otherwise, of the
Obligations, and Borrower's prompt and complete performance of all of its
other covenants, obligations and agreements contained in the Loan Agreement.
3. Guarantor hereby waives notice of the acceptance of this Guaranty
and of the extending of credit as above specified and the state of
indebtedness of Borrower at any time, and expressly agrees to any extensions,
renewals, accelerations or modifications of such credit or any of the terms
of such credit, and waives diligence, presentment, demand of payment, protest
or notice, whether of non-payment, dishonor, protest or otherwise, of any
document or documents and notice of any extension, renewal, modification or
default and assent to the release, substitution or variation of any
collateral that may at any time be held as security for any credit extended
to Borrower, all without relieving Guarantor of any liability under this
Guaranty. The obligations of Guarantor under this Guaranty shall be an
unconditional obligation to make prompt payment and performance to Lender
irrespective of the genuineness, validity, regularity or enforceability of
any indebtedness or evidence of indebtedness of Borrower to Lender or of
other circumstances that might otherwise under the laws of any jurisdiction
constitute a legal or equitable discharge of a surety or a guarantor or a bar
(in the nature of a moratorium or otherwise) to the enforcement of Lender's
rights either (i) against Borrower on all or any part of its Obligations or
(ii) under this Guaranty.
4. Notwithstanding any payment or payments made by Guarantor under
this Guaranty or any setoff or application of :funds of Guarantor by Lender,
Guarantor shall not be entitled to be subrogated to any of the rights of
Lender against Borrower or any collateral security or guarantee or right of
offset held by Lender for the payment or performance of the Obligations, nor
shall Guarantor seek any reimbursement from Borrower in respect of payments
made by Guarantor under this Guaranty, until all amounts then owing and any
other performance then due to Lender by Borrower for or on account of the
Obligations are paid and satisfied in full. Upon such payment and
satisfaction in full, Guarantor shall be subrogated to all rights of Lender
against Borrower or any collateral security or guarantee or right of offset
held by Lender for the payment and performance of the Obligations.
5. Any indebtedness of Borrower now or hereafter owed to or held by
Guarantor is hereby subordinated to the indebtedness of Borrower to Lender;
and such indebtedness of Borrower to Guarantor if Lender so requests shall be
collected, enforced and received by Guarantor as trustee for Lender and be
paid over to Lender on account of the indebtedness of Borrower to Lender but
without reducing or affecting in any manner the liability of Guarantor under
the other provisions of this Guaranty.
6. This is intended to be and shall be construed as a continuing
guarantee and shall remain in full force and effect and shall be binding in
accordance with and to the extent of its terms upon Guarantor and Guarantor's
heirs and assigns, and shall inure to the benefit of Lender, and its
successors, endorsees, transferees and assigns.
7. If all or any part of the Obligations of Borrower to Lender are
not paid when due, Guarantor hereby guarantees that it will pay the same to
Lender, upon demand, without set-off or counterclaim and without reduction by
reason of any taxes, levies, imposts, charges and withholdings, restrictions
or conditions of any nature that are now or may hereafter be imposed, 2
levied or assessed by any country, political subdivision or taxing authority,
all of which will be for the account of and paid by Guarantor, and Lender
need not first proceed to preserve, utilize or exhaust any other right or
remedy against Borrower or any other guarantor or any security that Lender
may have to obtain payment. The payment shall be made in immediately
available funds to Lender's office at 2 Wisconsin Circle, Fourth Floor, Chevy
Chase, Maryland 20815, Attention: Ethan D. Leder, President, or at such other
place as Lender may designate in writing.
8. No failure to exercise and no delay in exercising, on the part of
Lender, any right, power or privilege under this Guaranty shall operate as a
waiver of the right, power or privilege, nor shall any single or partial
exercise of any right, power or privilege preclude any other or further
exercise of the right, power or privilege, or the exercise of any other power
or right. The rights and remedies provided in this Guaranty are cumulative
and not exclusive of any rights or remedies provided by law.
9. Notice or demand to the parties to this Guaranty shall be
sufficiently given if in writing and personally delivered, or mailed by
registered or certified first class mail, postage prepaid, return receipt
requested, or sent by commercial courier against receipt, to the party
intended and at the address or addresses specified in the preamble to this
Guaranty. Any party may designate a change of address by notice in writing
to the other parties, the notice to be effective ten (1 0) days after mailing
or delivery as provided in this Section 9.
10. Guarantor hereby represents, warrants, and covenants to Lender
that:
(a) It is a corporation duly incorporated, validly existing and
in good standing under the laws of the jurisdiction of its incorporation, and
has the corporate power and authority to own its property, conduct its
business as now being conducted and to make and perform this Guaranty and the
transactions contemplated by this Guaranty, and is duly qualified to do
business and is in good standing as a foreign corporation in each
jurisdiction where the nature and extent of the business conducted by it, or
property owned by it, and applicable law require such qualification, except
where the failure so to qualify would not have a material adverse effect on
the business, operations or financial position of Guarantor.
(b) The execution, delivery and performance of this Guaranty
have been duly authorized by all necessary corporate action and will not
violate any provision of law or any order of any court or governmental agency
or the certificate of incorporation or other incorporating documents or
bylaws of Guarantor, or conflict with, or result in a breach of, or
constitute (with or without notice or lapse of time or both) a default under,
or result in the creation of any security interest, lien, charge or
encumbrance upon any property or assets of Guarantor, pursuant to any
agreement, indenture or other instrument to which it is a party or by which
it may be bound.
(c) Except as disclosed to Lender in writing prior to the
execution of this Guaranty, no action, suit, investigation or proceeding is
pending or known to be threatened against or affecting Guarantor that, if
adversely determined, would have a material adverse effect upon its financial
condition or operations.
(d) Guarantor is not in default under any provision of its
certificate of incorporation or other incorporating documents, bylaws or
stock provisions (or any amendment to such documents or provisions), any
indenture relating to borrowed money, any agreement to which it is a party or
by which it is bound, any other indenture, or any order, regulation, ruling
or requirement of a court or public body or authority by which it is bound,
which default would have a material adverse effect on the business,
operations or financial position of Guarantor.
(e) No license, consent or approval of, or filing with, any
governmental body or other regulatory authority is required for the making
and performance of, or any instrument or transaction contemplated by, this
Guaranty. Guarantor holds all certificates and authorizations of all
governmental agencies and authorities required by law to enable it to engage
in the business currently transacted by it, except those certificates and
authorizations as to which the failure to so hold would not, in the
aggregate, have a material adverse effect on Guarantor.
11. No provision of this Guaranty shall be waived, amended or
supplemented except by a written instrument executed by Lender and Guarantor.
12. The obligations of Guarantor under this Guaranty shall continue
in full force and effect and shall remain in operation until all of the
Obligations shall have been paid in full or otherwise fully satisfied, and
continue to be effective or be reinstated, as the case may be, if at any time
payment or other satisfaction of any of the Obligations is rescinded or must
otherwise be restored or returned upon the bankruptcy, insolvency, or
reorganization of Borrower, or otherwise, as though such payment had not been
made or other satisfaction occurred. No invalidity, irregularity or
unenforceability by reason of applicable bankruptcy laws or any other similar
law, or any law or order of any government or government agency purporting to
reduce, amend or otherwise affect, the Obligations, shall impair, affect, be
a defense to or claim against the obligations of Guarantor under this
Guaranty.
13. In addition to its guarantee of Borrower's payment of the
Obligations and Borrower's performance of all covenants, obligations and
agreements contained in the Loan Documents, Guarantor shall pay all actual
costs and expenses (including reasonable attorney's fees) paid or incurred by
Lender in connection with the enforcement of this Guaranty.
14. Guarantor hereby agrees to execute any and all further documents,
agreements, and instruments, and take all further actions, that Lender shall
reasonably request to effectuate or further preserve, evidence, perfect or
protect the rights purported to be created in favor of Lender under this
Guaranty.
15. Guarantor hereby assumes responsibility for keeping itself
informed of the financial condition of Borrower, and any and all endorsers
and/or other guarantors of any instrument or document evidencing all or any
part of the Obligations, and of all other circumstances bearing upon the risk
of nonpayment of the Obligations, or any part of the Obligations, that
diligent inquiry would reveal, and Guarantor hereby agrees that Lender shall
have no duty to advise Guarantor of information known to Lender regarding
such condition or any such circumstances. If Lender, in its sole discretion,
undertakes at any time or from time to time to provide any such information
to Guarantor, Lender shall be under no obligation (i) to undertake any
investigation not a part of its regular business routine, (ii) to disclose
any information that, pursuant to accepted or reasonable commercial finance
practices, Lender wishes to maintain confidential, or (iii) to make any other
or future disclosures of such information or any other information to
Guarantor.
16. This Guaranty may be executed in one or more counterpart copies,
each of which shall be an original and all of which together shall constitute
one and the same instrument, and it is not necessary that all parties'
signatures appear on each counterpart.
17. If any term, covenant or condition of this Guaranty, or the
application of such term, covenant or condition to any party or circumstance,
shall be found by a court of competent jurisdiction to be, to any extent,
invalid or unenforceable, the remainder of this Guaranty and the application
of such term, covenant, or condition to parties or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term, covenant or condition shall be valid and enforced to
the fullest extent permitted by law. Upon a determination that any such term
is invalid, illegal or unenforceable, the parties to this Guaranty shall
amend this Guaranty so as to effect the original intent of the parties as
closely as possible in an acceptable manner.
18. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE
APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF
THIS GUARANTY IS COMMENCED BY LENDER IN THE STATE COURTS OF THE STATE OF
MARYLAND OR IN THE U.S. DISTRICT COURT FOR THE DISTRICT OF MARYLAND,
GUARANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH
ACTION AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND. ANY PROCESS IN
ANY SUCH ACTION SHALL BE DULY SERVED IF MAILED BY REGISTERED MAIL, POSTAGE
PREPAID, TO GUARANTOR AT ITS ADDRESS SET FORTH IN THE PREAMBLE TO THIS
GUARANTY.
19. GUARANTOR HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY
JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO
TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN,
KNOWINGLY AND VOLUNTARILY, BY GUARANTOR, AND THIS WAIVER IS INTENDED TO
ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO
A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND
REQUESTED TO SUBMIT THIS GUARANTY TO ANY COURT HAVING JURISDICTION OVER THE
SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE
OF GUARANTOR'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, GUARANTOR HEREBY
CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER'S
COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO GUARANTOR THAT LENDER
WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.
20. AFTER AN EVENT OF DEFAULT, GUARANTOR AUTHORIZES ANY ATTORNEY
ADMITTED TO PRACTICE BEFORE ANY COURT OF RECORD IN THE UNITED STATES OR THE
CLERK OF SUCH COURT TO APPEAR ON BEHALF OF GUARANTOR IN ANY COURT IN ONE OR
MORE PROCEEDINGS, OR BEFORE ANY CLERK THEREOF OF PROTHONOTARY OR OTHER COURT
OFFICIAL, AND TO CONFESS JUDGMENT AGAINST GUARANTOR IN FAVOR OF LENDER IN THE
FULL AMOUNT DUE ON THIS GUARANTY (INCLUDING PRINCIPAL, ACCRUED INTEREST AND
ANY AND ALL CHARGES, FEES AND COSTS) PLUS REASONABLE ATTORNEYS' FEES, PLUS
COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF BORROWER FOR PRIOR
HEARING. GUARANTOR AGREES AND CONSENTS THAT VENUE AND JURISDICTION SHALL BE
PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE STATE OF MARYLAND OR OF
BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF MARYLAND. GUARANTOR WAIVES THE BENEFIT OF ANY AND EVERY STATUTE,
ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING UPON
GUARANTOR ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF
EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT
OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT.
THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST GUARANTOR
SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT
EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED
PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE
OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN
AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR PROPER.
H:\WP\LEGAL\CLIENTS\PHCINC\Guarcorp.wpd
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed as of
the date first written above.
ATTEST: PHC, INC.
a Massachusetts corporation
By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear (SEAL]
Name: Paula C. Wurts Name: Bruce A. Shear
Title: CFO Title: President
H:\WP\LEGAL\CLIENTS\PHCINC\Guarcorp.wpd
<PAGE>
THIS GUARANTY CONTAINS PROVISIONS FOR WAIVER
OF JURY TRIAL
UNCONDITIONAL GUARANTY OF PAYMENT AND PERFORMANCE
THIS UNCONDITIONAL GUARANTY OF PAYMENT AND PERFORMANCE (the "Guaranty")
is dated as of June 8, 1998 and is made by Bruce A. Shear, an individual
("Guarantor"), in favor of HCFP FUNDING, INC., a Delaware corporation
("Lender").
RECITALS
WHEREAS, pursuant to a certain Loan and Security Agreement dated as of
February 18, 1998 (as the agreement may from time to time be amended,
modified or supplemented, the "Loan Agreement"), by and among PHC OF
MICHIGAN, INC., PHC OF UTAH, INC., PHC OF VIRGINIA, INC., PHC OF RHODE
ISLAND, INC., and PIONEER COUNSELING OF VIRGINIA, INC. (collectively,
"Borrower") and Lender, the parties entered into certain revolving credit
financing arrangements; and
WHEREAS, Lender has agreed to make available to Borrower an Overline
Loan, in the maximum aggregate principal amount of Two Hundred Thousand and
No/100 Dollars ($200,000.00) (the "Overline Loan") which shall be treated for
all purposes as a Revolving Credit Loan under the Loan Agreement, and all
principal, interest, fees and other costs and expenses relating to the
Overline Loan ("Overline Obligations") shall be treated as additional
Obligations under the Loan Agreement and the other Loan Documents; and
WHEREAS, Lender is willing to make the Overline Loan but only upon the
condition, among others, that Guarantor shall have executed and delivered to
Lender this Guaranty.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained in this Guaranty and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties agree
as follows:
1 All capitalized terms used but not defined in this Guaranty shall
have the respective meanings given them in the Loan Agreement.
2. To induce Lender to execute and deliver the Overline Loan and to
make the Overline Loan upon the terms and conditions set forth therein, and
in consideration thereof, Guarantor hereby unconditionally and irrevocably
guarantees to Lender, and to its successors, endorsees, transferees and
assigns, Borrower's prompt and complete payment when due, whether at the
stated maturity, by acceleration or otherwise, of the Overline Obligations
and Borrower's prompt and complete performance of all of its other covenants,
obligations and agreements related to the Overline Loan.
3. Guarantor hereby waives notice of the acceptance of this Guaranty
and of the extending of credit as above specified and the state of
indebtedness of Borrower at any time, and expressly agrees to any extensions,
renewals, accelerations or modifications of such credit or any of the terms
of such credit, and waives diligence, presentment, demand of payment, protest
or notice, whether of non-payment, dishonor, protest or otherwise, of any
document or documents and notice of any extension, renewal, modification or
default and assent to the release, substitution or variation of any
collateral that may at any time be held as security for any credit extended
to Borrower, all without relieving Guarantor of any liability under this
Guaranty. The obligations of Guarantor under this Guaranty shall be an
unconditional obligation to make prompt payment and performance to Lender
irrespective of the genuineness, validity, regularity or enforceability of
any indebtedness or evidence of indebtedness of Borrower to Lender or of
other circumstances that might otherwise under the laws of any jurisdiction
constitute a legal or equitable discharge of a surety or a guarantor or a bar
(in the nature of a moratorium or otherwise) to the enforcement of Lender's
rights either (i) against Borrower on all or any part of its Overline
Obligations or (ii) under this Guaranty.
4. Notwithstanding any payment or payments made by Guarantor under
this Guaranty or any setoff or application of funds of Guarantor by Lender,
Guarantor shall not be entitled to be subrogated to any of the rights of
Lender against Borrower or any collateral security or guarantee or right of
offset held by Lender for the payment or performance of the Overline
Obligations, nor shall Guarantor seek any reimbursement from Borrower in
respect of payments made by Guarantor under this Guaranty, until all amounts
then owing and any other performance then due to Lender by Borrower for or on
account of the Overline Obligations are paid and satisfied in full. Upon
such payment and satisfaction in full, Guarantor shall be subrogated to all
rights of Lender against Borrower or any collateral security or guarantee or
right of offset held by Lender for the payment and performance of the
Overline Obligations.
5. Any indebtedness of Borrower now or hereafter owed to or held by
Guarantor is hereby subordinated to the indebtedness of Borrower to Lender;
and such indebtedness of Borrower to Guarantor if Lender so requests shall be
collected, enforced and received by Guarantor as trustee for Lender and be
paid over to Lender on account of the indebtedness of Borrower to Lender but
without reducing or affecting in any manner the liability of Guarantor under
the other provisions of this Guaranty.
6. This is intended to be and shall be construed as a continuing
guarantee and shall remain in full force and effect and shall be binding in
accordance with and to the extent of its terms upon Guarantor and Guarantor's
heirs and assigns, and shall inure to the benefit of Lender, and its
successors, endorsees, transferees and assigns.
7. If all or any part of the Overline Obligations of Borrower to
Lender are not paid when due, and if collections of Accounts under the
Loan Agreement are not sufficient to pay the portion of the Overline
Obligations that are due, Guarantor hereby guarantees that it will pay the
same to Lender, upon demand, without set-off or counterclaim and without
reduction by reason of any taxes, levies, imposts, charges and withholdings,
restrictions or conditions of any nature that are now or may hereafter be
imposed, levied or assessed by any country, political subdivision or taxing
authority, all of which will be for the account of and paid by Guarantor, and
Lender need not first proceed to preserve, utilize or exhaust any other right
or remedy against Borrower or any other guarantor or any security that Lender
may have to obtain payment. The payment shall be made in immediately available
funds to Lender's office at 2 Wisconsin Circle, Fourth Floor, Chevy Chase,
Maryland 20815, Attention: Ethan D. Leder, President, or at such other place
as Lender may designate in writing.
8. No failure to exercise and no delay in exercising, on the part of
Lender, any right, power or privilege under this Guaranty shall operate as a
waiver of the right, power or privilege, nor shall any single or partial
exercise of any right, power or privilege preclude any other or further
exercise of the right, power or privilege, or the exercise of any other power
or right. The rights and remedies provided in this Guaranty are cumulative
and not exclusive of any rights or remedies provided by law.
9. Notice or demand to the parties to this Guaranty shall be
sufficiently given if in writing and personally delivered, or mailed by
registered or certified first class mail, postage prepaid, return receipt
requested, or sent by commercial courier against receipt, to the party
intended and at the address or addresses specified in the preamble to this
Guaranty. Any party may designate a change of address by notice in writing
to the other parties, the notice to be effective ten (10) days after mailing
or delivery as provided in this Section 9.
10. Guarantor hereby represents, warrants, and covenants to Lender:
(a) Guarantor has the full right, power and authority to enter
into this Guaranty.
(b) The execution, delivery and performance of this Guaranty
will not violate any provision of law or any order of any court or
governmental agency or conflict with, or result in a breach of, or constitute
(with or without notice or lapse of time or both) a default under, or result
in the creation of any security interest, lien, charge or encumbrance upon
any property or assets of Guarantor, pursuant to any agreement, indenture or
other instrument to which it is a party or by which it may be bound.
(c) Except as disclosed to Lender in writing prior to the
execution of this Guaranty, no action, suit, investigation or proceeding is
pending or known to be threatened against or affecting Guarantor that, if
adversely determined, would have a material adverse effect upon its financial
condition.
(d) Guarantor is not in default under any provision of any
indenture relating to borrowed money, any agreement to which it is a party or
by which it is bound, any other indenture, or any order, regulation, ruling
or requirement of a court or public body or authority by which it is bound,
which default would have a material adverse effect on the financial position
of Guarantor.
(e) No license, consent or approval of, or filing with, any
governmental body or other regulatory authority is required for the making
and performance of, or any instrument or transaction contemplated by, this
Guaranty. Guarantor holds all certificates and authorizations of all
governmental agencies and authorities required by law to enable it to engage
in the business currently transacted by it, except those certificates and
authorizations as to which the failure to so hold would not, in the
aggregate, have a material adverse effect on Guarantor.
11. No provision of this Guaranty shall be waived, amended or
supplemented except by a written instrument executed by Lender.
12. The obligations of Guarantor under this Guaranty shall continue
in full force and effect and shall remain in operation until all of the
Overline Obligations shall have been paid in full or otherwise fully
satisfied, and continue to be effective or be reinstated, as the case may be,
if at any time payment or other satisfaction of any of the Overline
Obligations is rescinded or must otherwise be restored or returned upon the
bankruptcy, insolvency, or reorganization of Borrower, or otherwise, as
though such payment had not been made or other satisfaction occurred. No
invalidity, irregularity or unenforceability by reason of applicable
bankruptcy laws or any other similar law, or any law or order of any
government or government agency purporting to reduce, amend or otherwise
affect, the Overline Obligations, shall impair, affect, be a defense to or
claim against the obligations of Guarantor under this Guaranty.
13. In addition to its guarantee of Borrower's payment of the
Overline Obligations and Borrower's performance of all covenants, obligations
and agreements contained in the Loan Documents related to the Overline
Obligations, Guarantor shall pay all actual costs and expenses (including
reasonable attorney's fees) paid or incurred by Lender in connection with the
enforcement of this Guaranty.
14. Guarantor hereby agrees to execute any and all further documents,
agreements, and instruments, and take all further actions, that Lender shall
reasonably request to effectuate or further preserve, evidence, perfect or
protect the rights purported to be created in favor of Lender under this
Guaranty.
15. Guarantor hereby assumes responsibility for keeping itself
informed of the financial condition of Borrower, and any and all endorsers
and/or other guarantors of any instrument or document evidencing all or any
part of the Overline Obligations, and of all other circumstances bearing upon
the risk of nonpayment of the Overline Obligations, or any part of the
Overline Obligations, that diligent inquiry would reveal, and Guarantor
hereby agrees that Lender shall have no duty to advise Guarantor of
information known to Lender regarding such condition or any such
circumstances. If Lender, in its sole discretion, undertakes at any time or
from time to time to provide any such information to Guarantor, Lender shall
be under no obligation (i) to undertake any investigation not a part of its
regular business routine, (ii) to disclose any information that, pursuant to
accepted or reasonable commercial finance practices, Lender wishes to
maintain confidential, or (iii) to make any other or future disclosures of
such information or any other information to Guarantor.
16. This Guaranty may be executed in one or more counterpart copies,
each of which shall be an original and all of which together shall constitute
one and the same instrument, and it is not necessary that all parties'
signatures appear on each counterpart.
17. If any term, covenant or condition of this Guaranty, or the
application of such term, covenant or condition to any party or circumstance,
shall be found by a court of competent jurisdiction to be, to any extent,
invalid or unenforceable, the remainder of this Guaranty and the application
of such term, covenant, or condition to parties or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term, covenant or condition shall be valid and enforced to
the fullest extent permitted by law. Upon determination that any such term
is invalid, illegal or unenforceable, the parties to this Guaranty shall
amend this Guaranty so as to effect the original intent of the parties as
closely as possible in an acceptable manner.
18. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE
APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF
THIS GUARANTY IS COMMENCED BY LENDER IN THE STATE COURTS OF THE STATE OF
MARYLAND OR IN THE U.S. DISTRICT COURT FOR THE DISTRICT OF MARYLAND,
GUARANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH
ACTION AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND. ANY PROCESS IN
ANY SUCH ACTION SHALL BE DULY SERVED IF MAILED BY REGISTERED MAIL, POSTAGE
PREPAID, TO GUARANTOR AT ITS ADDRESS SET FORTH IN THE PREAMBLE TO THIS
GUARANTY.
19. GUARANTOR HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY
JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO
TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY
AND VOLUNTARILY, BY GUARANTOR, AND THIS WAIVER IS INTENDED TO ENCOMPASS
INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY
TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND REQUESTED TO
SUBMIT THIS GUARANTY TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER
AND THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF GUARANTOR'S
WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, GUARANTOR HEREBY CERTIFIES THAT
NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER'S COUNSEL) HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, TO GUARANTOR THAT LENDER WILL NOT SEEK
TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.
20. GUARANTOR AUTHORIZES ANY ATTORNEY ADMITTED TO PRACTICE BEFORE ANY
COURT OF RECORD IN THE UNITED STATES OR THE CLERK OF SUCH COURT TO APPEAR ON
BEHALF OF GUARANTOR IN ANY COURT IN ONE OR MORE PROCEEDINGS, OR BEFORE ANY
CLERK THEREOF OF PROTHONOTARY OR OTHER COURT OFFICIAL, AND TO CONFESS
JUDGMENT AGAINST GUARANTOR IN FAVOR OF LENDER IN THE FULL AMOUNT DUE ON THIS
GUARANTY (INCLUDING PRINCIPAL, ACCRUED INTEREST AND ANY AND ALL CHARGES, FEES
AND COSTS) PLUS ATTORNEYS' FEES EQUAL TO FIFTEEN PERCENT (15%) OF THE AMOUNT
DUE, PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF BORROWER
FOR PRIOR HEARING. GUARANTOR AGREES AND CONSENTS THAT VENUE AND JURISDICTION
SHALL BE PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE STATE OF MARYLAND
OR OF BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES DISTRICT COURT FOR
THE DISTRICT OF MARYLAND. GUARANTOR WAIVES THE BENEFIT OF ANY AND EVERY
STATUTE, ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING
UPON GUARANTOR ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF
EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT
OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT.
THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST GUARANTOR
SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT
EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED
PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE
OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN
AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR PROPER.
H:\WP\LEGAL\CLIENTS\PHCINC\Guarind 1over.wpd
IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed as of
the date first written above.
WITNESS: GUARANTOR:
___________________________ ________________________________
Bruce A. Shear
<PAGE>
Exhibit 99.1
CAUTIONARY STATEMENT FOR PURPOSES
OF THE SAFE HARBOR" PROVISIONS OF THE
PRIVATE LITIGATION REFORM ACT OF 1995
PHC, Inc. (the "Company") desires to take advantage of the new "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is including this Exhibit 99.1 in its Form 10-KSB in order to do so.
The Company wishes to caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
consolidated results for the Company's current quarter and beyond, to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, the Company.
During its last fiscal year and in certain other fiscal years of its
operation, the Company has generated losses and there can be no assurance
that future losses will not occur.
The Company has experienced a significant increase in accounts
receivable in recent years and there can be no assurance that this trend will
not continue, and that if it does, that it will not have a material adverse
effect on the Company's cash flow and financial performance.
The Company historically experiences and expects to continue to
experience a decline in revenue in its fiscal quarters ending December 31 due
to a seasonality decline in revenue from the Company's substance abuse
facilities during such period.
Payment for the company's substance abuse treatment is provided by
private insurance carriers and managed care organizations; payment for
long-term and subacute care is provided by private insurance carriers,
managed care organizations and the Medicare and Medicaid programs; payment
for psychiatric services is provided by private insurance carriers, managed
care organizations and the Medicare and Medicaid programs. In general,
revenues derived from the Medicare and Medicaid programs in connection with
the long-term and subacute care services provided by the Company have been
less profitable to the Company than revenues derived from private insurers
and managed care organizations in connection with the substance abuse
treatment provided by the Company and changes in the sources of the Company's
revenues could significantly alter the Company's profitability.
Additionally, the Company experiences greater delays in the collection of
amounts reimbursable by the Medicare and Medicaid programs than in the
collection of amounts reimbursable by private insurers and managed care
organizations. Accordingly, a change in the Company's service mix from
substance abuse to long-term care could have a materially adverse effect on
the Company as would an increase in the percentage of the Company's patients
who are insured by Medicare or Medicaid.
Cost containment pressures from private insurers in the Medicare and
Medicaid programs may begin to restrict the amount that the Company can
charge for its services.
There can be no assurance that the Company's existing facilities will
continue to meet, or that proposed facilities will meet, the requirements for
reimbursement by third party or government payors.
The Company has substantial receivables from Medicare and Medicaid
which constitute a concentration of credit risk should these agencies defer
or be unable to make reimbursement payments as due.
The Company often experiences significant delays in the collection of
amounts reimbursable by third-party payors. Although the Company believes it
maintains an adequate allowance for doubtful accounts, if the amount of
receivables which eventually becomes uncollectible exceeds such allowance,
the Company could be materially adversely affected.
If a growing number of managed care organizations and insurance
companies adopt policies which limit the length of stay for substance abuse
treatment, the Company's business would be materially adversely affected.
There can be no assurance that occupancy rates at the Company's
facilities will continue at present levels. Similarly, there can be no
assurance that the patient census will not decrease in the future.
There can be no assurance that the Company will be successful in
identifying appropriate acquisition opportunities, or if it does, that the
Company will be successful in acquiring such facilities or that such acquired
facilities will be profitable. The failure of the company to implement its
acquisition strategy could have a materially adverse effect an the Company's
financial performance. Moreover, the inherent risks of expansion could also
have a material adverse effect on the Company's business.
Additionally, the company's acquisition program will be directed by the
President and Chief Executive officer of the Company and the Company does not
intend to seek stockholder approval 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. Furthermore, the company's acquisition strategy is highly
dependent on access to capital, of which there can be no assurance.
The Company and the healthcare industry in general are subject to
extensive federal, state and local regulation with respect to licensure and
conduct of operations. There can be no assurance that the Company will be
able to obtain new licenses to affect its acquisition strategy or maintain
its existing licenses and reimbursement program participation approvals.
It is not possible to accurately predict the content or impact of
future legislation and regulations affecting the healthcare industry. In
addition, both the Medicare and Medicaid programs are subject to statutory
and regulatory changes and there can be no assurances that payments under
those programs to the Company will, in the future, remain at a level
comparable to the present level or be sufficient to cover the cost allocable
to such patients.
Bruce A. Shear the President and Chief Executive officer of the Company
together with his affiliates is able to control all matters requiring
approval of the stockholders, including the election of a majority of the
directors, as a result of his ownership of the Company's stock.
There can be no assurance that the Company will be successful in hiring
or retaining the personnel it requires for continued growth, or that the
Company will be able to continue to attract and retain highly qualified
personnel, particularly skilled healthcare personnel. The healthcare business
is highly competitive and subject to excess capacity.
The Company has entered into relationships with large employers,
healthcare institutions, labor unions and other key clients to provide
treatment for chemical dependency and substance abuse as well as other
services and the loss of any of these key clients would require the Company
to expend considerable effort to replace patient referrals and would result
in revenue losses to the Company and attendant loss in income.
Existing environmental contamination at certain of the Company's
facilities and potential future environmental contamination at facilities
acquired by the company could have a materially adverse effect on the
Company's operations.
On October 31, 1994, the Company was served with a summons for a Civil
Action in the Superior Court Department of the Trial Court of the
Commonwealth of Massachusetts by NovaCare, Inc. ("NovaCare"), an entity which
contracted with the Company in 1992 to provide rehabilitation therapy and
related administrative services to the Company's long-term care facility (the
"Action"). The complaint alleged that the Company owed NovaCare contractual
damages in the amount of approximately $587,000, plus interest, attorney
fees, costs of collection, and double or triple damages pursuant to a
Massachusetts statute prohibiting unfair and deceptive trade practices. The
Company filed a counterclaim alleging that NovaCare breached the contract in
question and that the Company may be owed damages in excess of the amount
sought by NovaCare.
On February 13, 1996, the company settled the Action by agreeing to pay
NovaCare an amount less than its claim. The Company is not paying NovaCare
accrued interest, attorney's fees, costs of collection, or multiple damages.
A portion of the settlement amount has already been paid. The balance of the
settlement amount is payable over twelve (12) months with interest on the
unpaid balance at 9.5%. In the event that the Company defaults on its
obligation to pay the settlement amount, it has agreed to entry of judgment
against it in the amount of $457, 637.46 (the "Judgment"). The Judgment
represents the full unpaid balance of NovaCare's claim against the Company,
including interest, attorney's fees, and costs of collection. Any amounts
paid by the Company to NovaCare after February 9, 1996 shall be deducted from
the Judgment. Until the settlement amount is paid, NovaCare will continue to
hold a mortgage on a day care property owned by the Company in Saugus,
Massachusetts. As of Fiscal Year Ended June 30, 1997, this obligation has
been paid in full.
Interruption by fire, earthquakes or other catastrophic events, power
failures, work stoppages, regulatory actions or other causes to any of the
Company's operations could have a materially adverse impact on the Company.
The company has and in the future may enter into transactions in which
it acquires businesses or obtains financing for a consideration that includes
the issuance of stock, warrants, options or convertible debt at a price less
than the value at which the Company's stock may then be trading in the public
markets or which are convertible into or exercisable for Common Stock at a
conversion rate or exercise price less than such value. Such transactions
may result in significant dilution to the existing holders of the Company's
stock.
The Company has authorized 1,000,000 shares of Preferred Stock, the
terms of which may be fixed and which may be issued by the Company's Board of
Directors, without stockholder approval. The issuance of the Preferred Stock
could have the effect of making it more difficult for a third party to
acquire the Company and may result in the issuance of stock that dilutes the
existing stockholders and has liquidation, redemption, dividend and other
preferences superior to the Company's outstanding Class A Common Stock.
NOTE:
THIS DOES NOT DISCUSS PREFERRED STOCK, REDEMPTION OF WARRANTS, THE
EFFECTS OF DE-LISTING FROM NASDAQ, PENNY STOCK RULES OR THIN FLOAT. THOSE
SUBJECTS ARE, HOWEVER, INCLUDED IN THE RISK-FACTOR SECTION OF THE 06/97 S-3.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of income filed as
part of the report on Form 10-KSB and is qualified in its entirety by reference
to such report on Form 10-KSB.
</LEGEND>
<CIK> 0000915127
<NAME> PHC, Inc
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 227,077
<SECURITIES> 0
<RECEIVABLES> 11,615,001
<ALLOWANCES> 3,488,029
<INVENTORY> 0
<CURRENT-ASSETS> 8,532,173
<PP&E> 3,032,925
<DEPRECIATION> 904,652
<TOTAL-ASSETS> 17,099,968
<CURRENT-LIABILITIES> 8,330,177
<BONDS> 0
0
10
<COMMON> 56,626
<OTHER-SE> 4,360,176
<TOTAL-LIABILITY-AND-EQUITY> 17,099,968
<SALES> 0
<TOTAL-REVENUES> 21,246,189
<CGS> 0
<TOTAL-COSTS> 24,199,169
<OTHER-EXPENSES> 1,438,542
<LOSS-PROVISION> 3,684,452
<INTEREST-EXPENSE> 1,289,642
<INCOME-PRETAX> (3,792,686)
<INCOME-TAX> 219,239
<INCOME-CONTINUING> (4,011,925)
<DISCONTINUED> (2,220,296)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,232,221)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
