Logo Letterhead
To Our Valued Shareholders:
During our 1998 fiscal year we completed divestiture of all non-core
operations and returned to focusing on the behavioral healthcare business
that has brought success to your Company in the past. As a further
reinforcement to our commitment to becoming the best provider of behavioral
healthcare in this country, the Company changed its name to Pioneer
Behavioral Health.
I am pleased to report that the results of our efforts have already lead
to:
o A return to profitability of our Company for the first fiscal
quarter ended September 30, 1998. We firmly believe the
foundation is now in place to grow our business profitably in
future quarters.
o The strengthening of our anagement team and our financial
accounting procedures which resulted in the reporting to the
market of our first quarter results over two weeks early.
o Increasing communications with our shareholders and an expanded
shareholder base.
We are excited about our return to profitability. Our committed
management team is very focused and I look forward to reporting improved
results as each quarter progresses. The future course for Pioneer Behavioral
Health has been set and we will continue to work hard to enhance shareholder
value.
/s/ Bruce A. Shear
President
November 18, 1998
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 [FEE REQUIRED] for the fiscal year ended June 30, 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
<PAGE>
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.
<PAGE>
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: November 18, 1998 By: /S/ 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 November 18, 1998
Bruce A. Shear Executive Officer and
Director (principal
executive officer)
/s/ PAULA C. WURTS Controller and Assistant November 18, 1998
Paula C. Wurts Treasurer (principal
financial and accounting
officer)
/s/ GERALD M. PERLOW Director November 18, 1998
Gerald M. Perlow
/s/ DONALD E. ROBAR Director November 18, 1998
Donald E. Robar
/s/ HOWARD PHILLIPS Director November 18, 1998
Howard Phillips
/s/ WILLIAM F. GRIECO Director November 18, 1998
William F. Grieco
<PAGE>
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
