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 for the fiscal year ended June 30, 2002 [ ] Transition report under section
13 or 15(d) of the Securities Exchange Act of 1934 for the transition period
from to
Commission file number: 0-22916
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
Securities registered under Section 12(b) of the Act:
NONE.
Securities registered under Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(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.
No Disclosure X
The issuer's revenues for the fiscal year ended June 30, 2002 were $22,698,268 .
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 August 1, 2002, was $7,439,461.90. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At August 1, 2002, 12,880,916 shares of the issuer's Class A Common Stock and
726,991 shares of the issuer's Class B Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes__ No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Our company is a national health care company, which provides psychiatric
services primarily to individuals who have alcohol and drug dependency, related
disorders and to individuals in the gaming and transportation industries. We
operate substance abuse treatment facilities in Utah and Virginia, four
outpatient psychiatric facilities in Michigan, two outpatient psychiatric
facilities in Nevada, one outpatient psychiatric facility in Kansas and an
inpatient psychiatric facility in Michigan. We also operate a website,
Wellplace.com, which provides education, training and materials to behavioral
health professionals in addition to providing Internet support to all of our
other subsidiaries. We also provide help line services through contracts with
major railroads and the State of Nebraska. Through our newest subsidiary in
Michigan the company conducts studies of the effects of psychiatric
pharmaceuticals on a controlled population through contracts with major
manufacturers of these pharmaceuticals. Until February 2001 we also provided
management and administrative services to psychotherapy and psychological
practices in New York.
Our company provides behavioral health services and products through
inpatient and outpatient facilities and online to behavioral health
professionals. Our 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 facilities,
which permit us to provide our clients with efficient and customized treatment
without the significant costs associated with the management and operation of
general acute care hospitals. We tailor these programs and services to
"safety-sensitive" industries and concentrate our marketing efforts on the
transportation, heavy equipment, manufacturing, law enforcement, gaming and
health services industries. Our psychiatric facility provides inpatient
psychiatric care and intensive outpatient treatment, referred to as partial
hospitalization, to children, adolescents and adults. Our outpatient mental
health clinics provide services to employees of major employers, as well as to
managed care, Medicare and Medicaid clients. The psychiatric services are
offered in a larger, more traditional setting than PHC's substance abuse
facilities, enabling PHC to take advantage of economies of scale to provide
cost-effective treatment alternatives.
The company treats employees who have been referred for treatment as a
result of compliance with Subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as the Drug Free Workplace Act), which requires employers who
are Federal contractors or Federal grant recipients to establish drug-free
awareness programs which, among other things, inform employees about available
drug counseling; rehabilitation and employee assistance programs. We also
provide treatment under the Department of Transportation implemented
regulations, which broaden the coverage and scope of alcohol and drug testing
for employees in "safety sensitive" positions in the transportation industry.
The company was incorporated in 1976 and is a Massachusetts corporation.
Our corporate offices are located at 200 Lake Street, Suite 102, Peabody, MA
01960 and our telephone number is (978) 536-2777.
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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, Native Americans 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.
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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), 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 as an alternative to termination of employment.
Although the company does not directly 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 32-bed, freestanding alcohol and drug
treatment hospital, which the company has been operating since 1984. It is the
oldest facility dedicated to substance abuse 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
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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 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.
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"), shown as Contract support
services on the accompanying income statement, 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. Four major transportation companies
subscribed to these services as of June 30, 2002. This operation is physically
located in Highland Ridge Hospital, but a staff dedicated to PDS2 provides the
services. PDS2 is currently operated by the parent entity, PHC, Inc.
MOUNT REGIS - Mount Regis is a 26-bed, freestanding alcohol and drug
treatment center located in Salem, Virginia, near Roanoke. The company acquired
the center in 1987. It 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, an outpatient clinic, at
its Salem Virginia location. 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.
Mount Regis Center's programs are 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 that 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 key to the prevention of 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 has enabled 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.
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The company offers inpatient and partial hospitalization psychiatry
services through Harbor Oaks Hospital. The company also currently operates seven
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. An
attending physician and a case manager with continuing oversight of the patient
as the patient receives care in different locations or programs handle case
management. The integrated delivery system allows for better patient tracking
and follow-up, and fewer repeat procedures and therapeutic or diagnostic errors.
Qualified, dedicated staff members take a full history on each new patient and
through test and evaluation procedures they provide a thorough diagnostic
write-up of the patient's condition. In addition a physician does a complete
physical examination for each new patient. This information allows the
caregivers to determine which treatment alternative is best suited for the
patient and to design an individualized recovery program for the patient.
Managed health care organizations, state agencies, physicians and patients
themselves refer patients to our facilities. These facilities have a patient
population ranging 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 - The Company acquired Harbor Oaks Hospital, a 64-bed
psychiatric hospital located in New Baltimore, Michigan, approximately 20 miles
northeast of Detroit, in September 1994. Harbor Oaks Hospital is licensed by the
Michigan Department of Commerce and it 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.
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. Both adults and adolescents can benefit from this
program.
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. State authorization allowed the company to increase the
number of beds in the adjudicated residential unit to twelve on May 1, 1998 and
twenty on June 26, 1998.
HARMONY HEALTHCARE - Harmony Healthcare, which consists of two psychiatric
clinics in 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 and the Venetian with a rapid
response program to provide immediate assistance 24 hours a day. Harmony also
provides outpatient psychiatric care and inpatient psychiatric case management
through a capitated rate behavioral health carve-out with Pacific Care
Insurance. In addition, Harmony began clinical trials in the last quarter of the
current fiscal year.
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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 four 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 four 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 PHARMACEUTICAL RESEARCH, INC. - PPR works with major manufacturers
of psychiatric pharmaceuticals to assist in the study of the effects of certain
pharmaceuticals in the treatment of specific mental illness. These studies are
conducted primarily through our facilities in Michigan, Harbor Oaks Hospital and
North Point-Pioneer with the permission and assistance of patients who are in
treatment.
Internet Operations
WELLPLACE - Behavioral Health Online designs, develops and maintains the
company's web site, Wellplace.com in addition to providing Internet support
services and maintaining the web sites of all of the other subsidiaries of the
company. The company's web sites provide behavioral health professionals with
the educational tools required to keep them abreast of behavioral health
breakthroughs and keeps individuals informed of current issues in behavioral
health of interest to them.
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Operating Statistics
The following table reflects selected financial and statistical information
for all psychiatric services.
Year Ended June 30,
2002 2001
_____________________________
Inpatient
Net patient service revenues $ 14,130,471 $ 13,507,124
Net revenues per patient day (1) $ 413 $ 418
Average occupancy rate (2) 76.9% 72.0%
Total number of licensed beds
at end of period 122 122
Source of Revenues:
Private (3) 76.82% 82.0%
Government (4) 23.18% 18.0%
Partial Hospitalization
and
Outpatient
Net Revenues:*
Individual $ 4,678,493 $ 5,283,278
Contract $ 2,300,140 $ 2,297,071
Sources of revenues:
Private 98.1% 97.9%
Government 1.9% 2.1%
Other Psychiatric Services:
PDS2 (5) $ 842,345 $ 944,567
Practice Management (6) $ 0 $ 345,111
(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) PDS2, Pioneer Development and Support Services, provides clinical support,
referrals management and professional services for a number of the
company's national contracts and a smoking cessation help line for the
state of Nebraska.
(6) Practice Management revenue was produced through BSC-NY and PHC, Inc.
During the fiscal year ended June 30, 2001 the company closed it practice
management services as outlined in this report under "Description of
Business" and detailed in footnote A to the financial statements included
in this report.
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Business Strategy
The company's objective is to become the 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 that 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 four individuals dedicated to marketing among the
company's facilities. Each facility performs marketing activities in its local
region. The Senior Vice President of the company coordinates the company's
national marketing efforts. In addition, employees at certain facilities perform
local marketing activities independent of the Senior Vice President. The
company, with the support of its owned integrated outpatient systems and
management services, continues 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 integrated systems of comprehensive outpatient mental health
clinics complement the company's inpatient facilities. These clinics are
strategically located in Nevada, Virginia, Kansas City, Michigan, and Utah. 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, Conrail, CSX, the IUE,
MCC, MGM, Station Casinos, Union Pacific Railroad, Union Pacific Railroad
Hospital Association, VBH, and others.
In addition to its direct patient care services; the company maintains its
web site, Wellplace.com, which provides articles and information of interest to
the general public as well as the behavioral health professional. The company's
Internet Company also provides the added benefit of web availability of
information for various EAP contracts held and serviced by those subsidiaries
providing direct treatment services.
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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 company
developed its dual diagnosis service in response to demand from insurers,
employers and treatment facilities. The company's Internet Company provides the
competitive edge for service information and delivery for our direct patient
care programs.
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. The company's psychiatric patients either have insurance
or pay at least a portion of treatment costs based on their ability to pay. 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. The company treats non-contract
patients and bills them 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 Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") survey and accredit the company's inpatient facilities
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
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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 affect 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.
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 have instituted moratoria on some types of DoN's or
otherwise stated 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.
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Licensure and Certification
State regulatory authorities must license all of the company's facilities.
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 has procedures in place 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, 2002 13.36% 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 under the Act.
Generally, TEFRA limits the amount of reimbursement a facility may receive to a
target amount per discharge, adjusted annually for inflation. The facility's
reasonable Medicare operating costs divided by Medicare discharges, plus a per
diem allowance for capital costs during its base year of operations determines
the target amount. 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.
- 12 -
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 is
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. The company receives reimbursement on a per diem basis,
inclusive of ancillary costs. The state determines the rate and adjusts it
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
that 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.
The company has an active compliance program in place with a corporate
compliance officer and compliance liaisons at each facility and a toll free
compliance hotline. Compliance in services and trainings are conducted on a
regular basis.
Employees
As of July 31, 2002 the company had 327 employees of which 4 were dedicated
to marketing, 77 (13 part time) to finance and administration and 246 (84 part
time) to patient care. All of the company's 327 employees are leased through
Inovis, which was recently purchased by Team America, 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 Inovis, now Team Inovis, 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 Inovis 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.
- 13 -
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. Harbor Oaks, Mount Regis Center, Harmony Healthcare, Total
Concept and NPP have coverage of $1,000,000 per claim and $3,000,000 in the
aggregate. In addition to this coverage Harbor Oaks and Mount Regis Center each
maintain an umbrella policy of $1,000,000. Highland Ridge has limits of
$1,000,000 per claim and $6,000,000 in the aggregate. In addition, these
entities maintain general liability insurance coverage in similar amounts.
The parent company maintains $1,000,000 of directors and officers'
liability insurance coverage, general liability coverage of $1,000,000 per claim
and $2,000,000 in aggregate and an umbrella policy of $1,000,000. 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.
- 14 -
ITEM 2. DESCRIPTION OF PROPERTY
Executive Offices
The company's executive offices are located in Peabody, Massachusetts. The
company's lease agreement in Peabody covers approximately 4,800 square feet for
a 60-month term, which expires September 17, 2004. The current annual payment
under the lease is $85,728 and increases to $88,896 in the final year. The
company believes that this facility will be adequate to satisfy its needs for
the foreseeable future.
Highland Ridge Hospital
The Highland Ridge premises consist of approximately 24,000 square feet of
space occupying the majority of first floor of a two-story hospital owned by
Valley Mental Health. The lease is for a five-year agreement, which provides for
monthly rental payments of approximately $16,360, which included housekeeping
and maintenance provided by the landlord for the first six months, and includes
changes in rental payments each year based on increases or decreases in the CPI.
In July 1999 the facility began paying approximately $6,500 each month for
housekeeping and maintenance. The lease expires December 31, 2004, and includes
an option to renew for an additional five years. 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 $406,000. The facility is used for both
inpatient and outpatient services. 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.
Harmony, Total Concept, North Point Pioneer and Pioneer Pharmaceutical Research
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. 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
$2,500,000 mortgage on this property. The company believes that these premises
are adequate for its current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
As a consequence of Franvale's bankruptcy and subsequent receivership, a
number of claims were asserted against the Company. In April 2002 the Bankruptcy
Court allowed the Final Report and Account of the Trustee in this matter closing
all claims relating to the bankruptcy. This resulted in the elimination of the
current liability of discontinued operations and an increase in equity of
approximately $800,000.
- 15 -
On or about May 15, 2000, the company was served with a subpoena by the
United States Attorney for the District of Massachusetts. The subpoena
requested, inter alia, patient and financial records relating to Franvale
Nursing and Rehabilitation Center for the period of 1995 through 1998. The
company has reached an agreement in principle with the government to settle all
outstanding billing issues. The final agreement is currently being drafted for
signatures. The company believes that it has adequately accrued for the
settlement of this claim in the accompanying financial statements.
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, 2002.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since the company's public offering which was declared effective on March
3, 1994, until December 2000 the company's Units, Class A Common Stock and Class
A Warrants were traded on the NASDAQ National Market under the symbols "PIHCU,"
"PIHC" and "PIHCW," respectively. In December 2000 the Company's stock was
delisted due to failure to meet listing criteria. Currently the company's Class
A common Stock is traded on the NASDAQ Bulletin Board under the symbol
"PIHC-BB." There is no public trading market for the company's Class B Common
Stock. In March 2001 the company's warrants issued with its initial public
offering expired: therefore, there is currently no market for the company's
warrants or units. 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.
HIGH LOW
2001
First Quarter $ 1.50 $ .50
Second Quarter $ .5625 $ .6250
Third Quarter $ .6094 $ .1250
Fourth Quarter $ .59 $ .19
2002
First Quarter $ .48 $ .30
Second Quarter $ .63 $ .34
Third Quarter $ .45 $ .35
Fourth Quarter $ .99 $ .37
2003
First Quarter (through August 1, 2002) $ .81 $ .56
On August 1, 2002, the last reported sale price of the Class A Common Stock
was $.65. On August 1, 2002 there were 696 holders of record of the company's
Class A Common Stock and 313 holders of record of the company's Class B Common
Stock.
DIVIDEND POLICY
The company has never paid any cash dividends on its Common Stock. During
the fiscal year ended June 30, 2002 the company was precluded under capital law
from paying cash dividends, however, the company accrued dividends on preferred
stock according to the preferred stock agreement and paid all dividends in
common stock, as required, upon conversion of the preferred stock. Although
there are now no restrictions on the Company's ability to pay dividends, the
Company anticipates that, in the future, earnings will be retained for use in
the business or for other corporate purposes, and it is not anticipated that
cash dividends in respect to 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, the financial position of the Company and such other
factors, as the Company's Board of directors, in its discretion, deems relevant.
- 17 -
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, 2002 and 2001.
It should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein. During fiscal year 2001 BSC-NY, Inc.
was closed, as part of the divestiture of unprofitable business, as outlined in
this report under "Description of Business" and detailed in footnote A to the
consolidated financial statements included in this report.
Overview
The company presently provides behavioral health care services through two
substance abuse treatment centers, a psychiatric hospital and seven outpatient
psychiatric centers (collectively called "treatment facilities"). The company's
revenue for providing behavioral health services through these facilities is
derived from contracts with managed care companies, Medicare, Medicaid, state
agencies, railroads, gaming industry corporations and individual clients. The
profitability of the company is largely dependent on the level of patient census
and the payor mix at these treatment facilities. Patient census is measured by
the number of days a client remains overnight at an inpatient facility or the
number of visits or encounters with clients at out patient clinics. Payor mix is
determined by the source of payment to be received for each client being
provided billable services. 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. Although the company has changed the focus and
reduced expenses of its' internet operation, Behavioral Health Online, Inc., to
provide technology and internet support for the company's other operations, it
also continues to provide behavioral health information and education through
its web site at Wellplace.com. The expenses of the Internet operation decreased
approximately 78% through the consolidation of operations and elimination of
excess leased space. The company's most recent addition, Pioneer Pharmaceutical
Research, contracts with major manufacturers of psychiatric pharmaceuticals to
assist in the study of the effects of certain pharmaceuticals in the treatment
of specific mental illness.
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 on going 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. The
current administration has put forth proposals to mandate equality in the
benefits available to those individuals suffering from mental illness. If passed
this legislation will improve access to the companies programs. Managed care has
had a profound impact on the company's operations, in the form of shorter
lengths of stay, extensive certification of benefits requirements and, in some
cases, reduced payment for services.
Critical Accounting Policies
The preparation of our financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. On an on-going basis, we evaluate
our estimates and assumptions, including but not limited to those related to
revenue recognition, accounts receivable reserves and the impairment of
long-lived assets, goodwill and other intangible assets. We base our estimates
on historical experience and various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
- 18 -
Revenue recognition and accounts receivable:
Patient care revenues and accounts receivable 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 contractual 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
provided and subsequent settlements are recorded in operations in the year of
settlement. The provision for contractual allowances is deducted directly from
revenue and the net revenue amount is recorded as accounts receivable. The
allowance for doubtful accounts does not include the contractual allowances.
Allowance for doubtful accounts:
Reserves for bad debt are maintained at a percentage of outstanding
accounts receivable based on the company's historic collection results, the age
of the receivable and other relevant information.
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.
Organization costs:
Organization costs are expensed as incurred as required by the American
Institute of Certified Public Accounts Statement of Position 98-5 "Reporting the
Costs of Start-up Activities".
Goodwill:
The excess of the purchase price over the fair market value of net assets
of an acquisition is recorded as goodwill. The company's net goodwill relates to
the treatment services segment of the company and is evaluated at least annually
for impairment.
Results of Operations
Years Ended June 30, 2002 and 2001
The company experienced a significant increase in profitability from its
ongoing operations during the fiscal year ended June 30, 2002. Total revenues
excluding BSC-NY, Inc., the practice management operation closed in the previous
fiscal year, increased 1.3% to $22,698,268 for the year ended June 30, 2002 from
$22,404,725 for the year ended June 30, 2001. The stability of the company's
core business revenues and reduced operating expenses, resulted in an increase
in income from operations of 82.7% to $1,764,274 for the year ended June 30,
2002 from $937,486 before closing expenses of the practice management operation
for the year ended June 30, 2001 and an increase in net income before dividends
of $1,148,294 to $1,083,895 for the fiscal year ended June 30, 2002 from a loss
of $64,399, excluding BSC-NY, Inc. closing costs of $5,186,306, for the fiscal
year ended June 30, 2001. The company has returned to profitability having
recorded its sixth consecutive profitable quarter from ongoing operations with
the quarter ended June 30, 2002.
- 19 -
Total net patient care revenue from all facilities, remained relatively
stable at $21,109,104 for the year ended June 30, 2002 as compared to
$21,087,473 for the year ended June 30, 2001. This stability of core business
revenues coupled with reductions in expenses resulted in increased net income.
Although patient census increased as shown in "Operating Statistics" on page 7
of this report, a change in payor mix resulted in lower net revenue per patient
day. Net inpatient care revenue from psychiatric services increased 4.6% to
$14,130,471 for the year ended June 30, 2002 from $13,507,124 for the fiscal
year ended June 30, 2001. Net partial hospitalization and outpatient care
revenue decreased 7.9% to $6,978,633 for the year ended June 30, 2002 from
$7,580,349 for the year ended June 30, 2001. This decrease is due in part to the
decrease in the number of employees covered under our contracts in the aftermath
of September 11, 2001. Revenues from Pioneer Development and Support Services
("PDS2") decreased 10.8% to $842,345 for the year ended June 30, 2002 from
$944,567 for the year ended June 30, 2001. This is due to the completion of a
large short-term contract in the fiscal year ended June 30, 2001 and the
elimination of the related revenues. All revenues reported in the accompanying
statements of operations are shown net of estimated contractual adjustments and
charity care provided. When payment is made, if the contractual adjustment is
found to have been understated or overstated appropriate adjustments are made in
the period the payment is received in accordance with the AICPA Audit and
Accounting Guide for Health Care Organizations.
Patient care expenses increased by approximately $1,028,772 due to the
increase in patient census at our inpatient facilities for the year ended June
30, 2002. Inpatient census increased by approximately 1,900 patient days, 6%,
for the year ended June 30, 2002 compared to the year ended June 30, 2001.
Direct patient care payroll and payroll related expenses increased approximately
8% to $9,762,087 for the year ended June 30, 2002 from $8,617,575 for the year
ended June 30, 2001; pharmacy costs increased approximately 9% to $351,531 for
the year ended June 30, 2002 from $322,520 for the year ended June 30, 2001;
laboratory fees increased approximately 48% to $213,973 for the year ended June
30, 2002 from $144,485 for the year ended June 30, 2001; and food expense
increased approximately 8% to $481,363 for the year ended June 30, 2002 from
$445,651 for the year ended June 30, 2001. All of these increases were a result
of increased patient census and increased acuity of patients. We also increased
our census from outside of the facilities' local areas resulting in an increase
in patient transportation expense of approximately 6% to $289,715 for the year
ended June 30, 2002 from $274,493 for the year ended June 30, 2001. Other
patient related expenses increased approximately 259% due to the increase in
patients participating in research studies through our newest subsidiary Pioneer
Pharmaceutical Research. The corresponding revenue increase was approximately
$388,000 or 109% over last year's revenues. We continue to closely monitor the
ordering of hospital supplies, food and pharmaceutical supplies but these
expenses all relate directly to the number of days of inpatient services we
provide and are expected to increase with higher patient census (see "Operating
Statistics" Part I, Item 1).
Website expenses decreased 78.7% to $287,556 for the year ended June 30,
2002 from $1,351,150 for the year ended June 30, 2001. This decrease is due to
the change in focus of the Internet company to internal support of the other
operating locations. Website expenses are expected to continue at this level
while the Internet company's focus remains internal.
In December 2000 the Company's Board of Directors decided to close its'
BSC-NY, Inc. practice management operations due to the deterioration of
operating results. Revenues of BSC-NY, Inc. were dependent on the success of the
professional corporation for which it provided management services. Although
the New York practice management operations reported operating income of
approximately $131,000 for the fiscal year ended June 30, 2000, adverse business
conditions resulted in a loss of approximately $399,000 for the six months ended
- 20 -
December 31, 2000 before closing expenses. These adverse operating conditions
were caused by the decline in revenues produced by the professional corporation
which had closed down its business operations. Closing expenses for the practice
management company were $5,186,306 and included $1,545,609 in goodwill
impairment, $3,401,650 in receivables due from the Professional Corporation and
$239,047 in lease termination and other expenses.
Contract expenses related to PDS2 decreased 17.6% to $704,363 for the year
ended June 30, 2002 from $855,128 for the year ended June 30, 2001. This
decrease is due to the completion of a large short-term contract and the
elimination of related expenses.
Total administrative expenses for all facilities increased 14.5% to
$8,533,571 for the year ended June 30, 2002 from $7,452,714 for the year ended
June 30, 2001. This increase in administrative expense is due to the increase in
expenses for Pioneer Pharmaceutical Research and the non-cash equity based
compensation charge of approximately $264,000.
Interest expense decreased 24.2% to $790,955 for the year ended June 30,
2002 from $1,043,030 for the year ended June 30, 2001. This decrease is due to
the refinancing of debt resulting in lower interest rates and the decrease in
prime rate, which dictates the interest rate on the majority of the company's
long-term debt.
The Company's income taxes of $15,446 and $44,450 for the years ended June
30, 2002 and June 30, 2001, respectively, are significantly below the Federal
statutory rate of 34% primarily related to the availability of net operating
loss carry-forward. Total income tax expense for fiscal 2002 and 2001 represents
state income taxes for certain subsidiaries with no available net operating loss
carry-forwards.
Bad debt expense decreased 71.2% to $716,681 for the fiscal year ended June
30, 2002 from $2,490,307 for the fiscal year ended June 30, 2001. This is due
primarily to the elimination of bad debt related to the closed practice
management company and the overall decrease in the age of outstanding accounts
receivable.
The environment the company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the company has increased staff, standardized some
procedures for collecting receivables and instituted a more aggressive
collection policy, which has resulted in an overall decrease in its accounts
receivable. Although the company's receivables have decreased, the company
continues to reserve for bad debts based on managed care denials and past
difficulty in collections. The growth of managed care has negatively impacted
reimbursement for behavioral health services with a higher rate of denials
requiring higher reserves.
Liquidity and Capital Resources
The company`s net cash provided by operating activities was $1,576,109 for
the year ended June 30, 2002 compared to cash used by operating activities of
$461,277 for the year ended June 30, 2001. Cash flow from operations in fiscal
2002 consists of net income of $1,083,895 plus depreciation and amortization of
$202,776, decrease in accounts receivable of $440,638 and non-cash equity based
charges of $336,745 less cash used for net changes in other operating assets and
liabilities of $487,945. Cash flow from operations would have been $156,506
higher in fiscal 2002 without the legal expenses related to the final
disposition of the Franvale bankruptcy.
- 21 -
Cash used in investing activities in fiscal 2002 consisted of $124,362 in
capital expenditures compared to $186,842 and $70,226 in capital expenditures
and website development costs, respectively in fiscal 2001.
Cash used in financing activities in fiscal 2002 primarily consisted of
$1,113,344 in debt repayments compared to $63,806 in net borrowings during
fiscal 2001. Other fiscal 2002 financing activities are summarized below.
During the fiscal years ended June 30, 2000 and 2001 the company issued 8%
series C convertible preferred stock in a private placement. As of June 30, 2002
all of this preferred stock has been converted with the issuance of
approximately 4,600,000 shares of class A common stock. Approximately 541,000
additional shares were issued in payment of unpaid accrued dividends on the
preferred stock. The company incurred costs of $198,149 in fiscal 2002, related
to the private placement of the preferred stock conversion shares.
A significant factor in the liquidity and cash flow of the company is the
timely collection of its accounts receivable. Current accounts receivable from
patient care, net of allowance for doubtful accounts decreased approximately 7%
to $5,768,419 on June 30, 2002 from $6,220,715 on June 30, 2001. This decrease
is a result of better accounts receivable management due to increased staff,
standardization of some procedures for collecting receivables and a more
aggressive collection policy. The increased staff has allowed the company to
concentrate on current accounts receivable and resolve any problem issues before
they become uncollectable. The company's collection policy calls for earlier
contact with insurance carriers with regard to payment, use of fax and
registered mail to follow-up or resubmit claims and earlier employment of
collection agencies to assist in the collection process. Our collectors will
also seek assistance through every legal means, including the State Insurance
Commissioner's office, when appropriate, to collect claims. At the same time,
the company continues to closely monitor reserves for bad debt based on
potential insurance denials and past difficulty in collections.
In May 2001, in order to support the company's continued revenue growth,
the company increased its accounts receivable funding revolving credit agreement
with Heller Healthcare Finance, Inc. on behalf of three of its subsidiaries. The
amended agreement provides for funding of up to $3,000,000 based on outstanding
receivables. The outstanding balance on this receivables financing on June 30,
2002 was $1,468,644, reflecting a $642,942 decrease from June 30, 2001. In
November 2001 the company refinanced all of the outstanding mortgage debt with
Heller Healthcare Finance. This resulted in the consolidation of several
outstanding notes, the reduction of interest on the debt from prime plus 5% to
prime plus 3.5% and the reduction in the principal payments due each month.
Total proceeds from the refinancing transaction during fiscal 2002 amounted to
$748,912. Principal payments on long-term debt totaled $1,219,314 in fiscal 2002
compared to $639,157 in fiscal 2001.
- 22 -
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes as of June 30, 2002 are as
follows:
Year Ending Term Capital Operating
June 30, Notes Leases Leases Total
_______________________________________________________________________________
2003 $ 765,415 $ 13,556 $ 776,551 $1,555,522
2004 823,659 10,536 748,119 1,582,314
2005 1,255,415 8,126 539,195 1,802,736
2006 47,598 5,037 181,607 234,242
2007 32,307 -- 111,239 143,546
Thereafter 269,966 -- -- 269,966
_________ _________ ___________ ___________
Total minimum payments $ 3,194,360 $ 37,255 $2,356,711 $5,588,326
=========== ========= =========== ==========
In addition to the above term notes, the company also has $500,000 in
outstanding convertible debentures, which include the provision that the holders
of the debentures may put all or any portion of the debentures to the company at
the original purchase price plus unpaid interest upon 30 days written notice
beginning December 3, 2001. The holders of the debentures have exercised the put
provision in the agreement as to 50% of the outstanding debentures. The company
will begin making monthly payments of $25,000 plus accrued interest in October
2002, which will further reduce indebtedness and interest costs. .
The company believes that, with the refinancing debt mentioned above, its
revolving credit facility through its primary lender and cash flow from
operations, it will have sufficient cash and financing available to fund its
growing operations for the foreseeable future. The company is concentrating on
its core business and expansion of its pharmaceutical research operations
through additional contracts, which will increase revenues considerably and
provide for additional cash from operations.
The liquidation of the assets and liabilities of Franvale resulted in a
non-cash increase in equity of $804,046 in the quarter ended June 30, 2002. In
April 2002 the bankruptcy was finalized and all obligations were recorded. (see
Note A to the accompanying consolidated financial statements for additional
information.) This increase in equity, coupled with the increase in equity from
fiscal 2002 net income, contributed to a positive stockholders' equity of
$615,985 for the company as of June 30, 2002 compared to a total stockholders'
deficit of $1,281,120 as of June 30, 2001.
The company has operated ongoing operations profitably for six consecutive
quarters. The current positive business environment towards behavioral health
treatment and the new business opportunities give us confidence to foresee
continued improved results.
New accounting standards
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations ("SFAS 141") and No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after July 1, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also may
require, upon adoption of SFAS 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
- 23 -
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purpose of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidelines in SFAS 142. SFAS 142 is required to be applied
in fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized
The Company elected early adoption of SFAS 142 in the quarter ended
September 30, 2001. The Company's net goodwill of $969,099 relating to the
treatment services segment of the Company was evaluated as of July 1, 2001. The
adoption of SFAS 142 resulted in a decrease in amortization expense of $65,700
for the year ended June 30, 2002.
The impact of the adoption of SFAS 142 is summarized as follows:
For the Year Ended
June 30,
2002 2001
___________ ____________
Reported net income (loss) applicable to
common shareholders $ 985,484 $ (5,634,323)
Add back: Goodwill amortization -- 65,700
___________ ____________
Adjusted net income (loss) 985,484 (5,568,623)
Basic earnings per share:
Reported net income(loss)applicable to
common shareholders $ 0.10 $ (0.66)
Goodwill amortization -- .01
___________ ____________
Adjusted net income (loss) $ 0.10 $ (0.65)
Diluted earnings per share:
Reported net income (loss)applicable to
common shareholders $ 0.09 $ (0.66)
Goodwill amortization -- .01
___________ ____________
Adjusted net income (loss) $ 0.09 $ (0.65)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" and APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business". SFAS No.144 becomes effective for the fiscal years
beginning after December 15, 2001. The Company will adopt SFAS No. 144 in the
first quarter of fiscal 2003. The Company does not expect the adoption of SFAS
No. 144 to impact its financial position and results of operations.
- 24 -
In July 2002, the FASB issued SFAS No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
cost associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS 146 will be
applied prospectively to any exit or disposal activities initiated after
December 31, 2002. The company expects there will be no effect on its financial
results relating to the adoption of SFAS No. 146.
- 25 -
ITEM 7. FINANCIAL STATEMENTS.
PAGE
Index F-1
Report of independent certified public accountants F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of changes in stockholders'equity (deficit) F-5
Consolidated statements of cash flows F-6, F-7
Notes to consolidated financial statements F-8, F-26
F-1
- 26 -
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
PHC, Inc.
Peabody, Massachusetts
We have audited the accompanying consolidated balance sheets of PHC, Inc. and
subsidiaries as of June 30, 2002 and 2001 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PHC,
Inc. and subsidiaries at June 30, 2002 and 2001 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
BDO Seidman, LLP
Boston, Massachusetts
August 16, 2002
F-2
- 27 -
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2002 2001
___________ __________
ASSETS (Note C)
Current assets:
Cash and cash equivalents $ 204,564 $ 43,732
Accounts receivable, net of allowance for
doubtful accounts of $2,715,760 and
$2,632,525 at June 30, 2002 and 2001,
respectively (Note A) 5,078,419 5,620,715
Prepaid expenses 66,652 63,940
Other receivables and advance 137,032 112,579
Deferred income tax asset (Note F) 766,793 613,980
___________ ___________
Total current assets 6,253,460 6,454,946
Accounts receivable, non-current 690,000 600,000
Other receivables (Note A) 92,068 104,863
Property and equipment, net (Notes A, B and D) 1,259,648 1,338,066
Deferred financing costs, net of amortization
of $122,109 and $114,109 at June 30, 2002
and 2001, respectively 12,000 20,000
Goodwill, net of accumulated amortization of $270,105
at June 30, 2002 and 2001 (Note A) 969,099 969,099
Other assets (Note A) 197,340 236,478
___________ ___________
Total assets $9,473,615 $9,723,452
=========== ==========
LIABILITIES
Current liabilities:
Accounts payable $1,283,389 $1,866,631
Notes payable - related parties (Note E) 200,000 200,000
Current maturities of long-term debt (Note C) 765,415 2,038,077
Revolving credit note (Note C) 1,468,644 2,111,586
Deferred revenue 129,258 --
Current portion of obligations under capital
leases (Note D) 11,020 16,725
Accrued payroll, payroll taxes and benefits 452,177 460,723
Accrued expenses and other liabilities 1,597,642 1,208,469
Convertible debentures (Notes C) 500,000 500,000
Net liabilities of discontinued operations
(Note I) -- 960,552
___________ ___________
Total current liabilities 6,407,545 9,362,763
Long-term debt, less current maturities (Note C) 2,428,945 1,609,649
Obligations under capital leases (Note D) 21,140 32,160
___________ ___________
Total liabilities 8,857,630 11,004,572
___________ ___________
Commitments and contingent liabilities
(Notes D, G, H, I, and J )
STOCKHOLDERS' EQUITY (DEFICIT) (Notes A, C, H,
J and K) Convertible Preferred stock, $.01 par
value; 1,000,000 shares authorized: series C, none
and 150,700 shares issued and outstanding at June 30,
2002 and 2001, respectively, stated value $10 per
share, liquidation preference of $1,507,000 at June
30, 2001 -- 1,507
- 28 -
Class A common stock, $.01 par value; 20,000,000 shares
authorized, 12,919,042 and 8,709,834 shares issued
June 30, 2002 and 2001, respectively 129,190 87,098
Class B common stock, $.01 par value; 2,000,000 shares
authorized, 726,991 issued and outstanding June 30,
2002 and 2001, convertible into one share of Class A
common stock. 7,270 7,270
Additional paid-in capital 18,769,863 18,696,779
Treasury stock, 38,126 and 22,926 common shares at
cost at June 30, 2002 and 2001, respectively (30,988) (24,894)
Notes receivable - common stock (80,000) (80,000)
Accumulated deficit (18,179,350) (19,968,880)
___________ ___________
Total stockholders' equity (deficit) 615,985 (1,281,120)
___________ ___________
Total liabilities and stockholders'
equity (deficit) $ 9,473,615 $ 9,723,452
=========== ===========
See accompanying notes to consolidated financial statements
F-3
- 29 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended June 30,
2002 2001
___________ _____________
Revenues:
Patient care, net (Note A) $21,109,104 $ 21,087,473
Management fees -- 345,111
Pharmaceutical study 742,380 354,618
Website services 4,439 18,067
Contract support services 842,345 944,567
___________ _____________
Total revenues 22,698,268 22,749,836
___________ _____________
Operating expenses:
Patient care expenses 10,691,823 9,663,051
Cost of contract support services 704,363 855,128
Provision for doubtful accounts 716,681 2,490,307
Website expenses 287,556 1,351,150
Practice management closing expenses (Note A) -- 5,186,306
Administrative expenses 8,533,571 7,452,714
___________ _____________
Total operating expenses 20,933,994 26,998,656
___________ _____________
Income (loss) from operations 1,764,274 (4,248,820)
___________ _____________
Other income (expense):
Interest income 10,852 23,519
Interest expense (790,955) (1,043,030)
Other income, net 115,170 62,076
___________ _____________
Total other expense, net (664,933) (957,435)
___________ _____________
Income (loss) before income taxes 1,099,341 (5,206,255)
Income taxes (Notes A and F) 15,446 44,450
___________ _____________
Net income (loss) 1,083,895 (5,250,705)
Dividends (Note J) (98,411) (383,618)
___________ _____________
Income (loss) applicable to common shareholders $ 985,484 $ (5,634,323)
========== =============
Basic income (loss) per common share (Note A) $ .10 $ (.66)
___________ _____________
Basic weighted average number of shares
outstanding 10,232,286 8,518,408
========== =============
Fully diluted income (loss) per common share
(Note A) $ .09 $ (.66)
___________ _____________
Fully diluted weighted average number of
shares outstanding 11,012,861 8,518,408
========== =============
See accompanying notes to consolidated financial statements
F-4
- 30 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity (Deficit) (See Notes
A, C, H, J and K)
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
_________ __________ ________ ________ __________ _________
Balance - June 30, 2000 7,019,608 $ 70,196 726,991 $7,270 136,000 $1,360
Costs related to private
placements
Issuance of shares for earn-out
obligations 414,815 4,148
Issuance of notes receivable for
employee stock purchase
Conversion of preferred stock 1,130,646 11,308 (19,300) (193)
Common stock issued for accrued
dividends 29,514 295
Issuance of preferred stock at a
discount 34,000 340
Beneficial conversion feature of
preferred stock
Dividends on preferred stock
Shares issued for employee bonuses 92,663 925
Issuance of warrants for services
Issuance of employee stock
purchase plan shares 22,588 226
- 31 -
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
_________ __________ ________ ________ __________ _________
Purchase of treasury stock in
exchange for note
Repurchase of shares on open
market
Net loss - year ended June 30,
2001
_________ __________ ________ ________ __________ _________
Balance - June 30, 2001 8,709,834 87,098 726,991 7,270 150,700 1,507
Costs related to private
placements
Dividends on preferred stock
Issuance of shares for options
exercised 1,250 13
Repurchase of shares on open
market
Issuance of warrants for services
Shares issued for employee bonuses 71,750 717
Conversion of preferred stock 3,483,583 34,836 (150,700) (1,507)
Common stock issued for accrued
dividends 511,800 5,118
Issuance of shares for warrants
exercised 31,624 316
Issuance of employee stock
purchase plan shares 25,871 259
Issuance of shares for services
provided 83,330 833
Reclassification of net
liabilities of discontinued
operations
- 32 -
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
_________ __________ ________ ________ __________ _________
Net income-year ended June 30,
2002
____________ __________ ________ ________ __________ _________
Balance - June 30, 2002 12,919,042 $ 129,190 726,991 $ 7,270 $ 0 $ 0
=========== ========= ======= ======= ======== =========
See accompanying notes to consolidated financial statements.
- 33 -
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity (Deficit) (See Notes
A, C, H, J and K)
Notes
Additional Receivable
Paid-in Stock Treasury Stock Accumulated
Capital Purchase Shares Amount Deficit Total
____________ __________ _________ __________ ____________ ___________
Balance - June 30, 2000 $ 17,895,162 $ -- 2,776 $ (12,122) $(14,334,557) $3,627,309
Costs related to private
placements (45,102) (45,102)
Issance of shares for earn-out
obligations 293,352 297,500
Issuance of notes receivable for
employee stock purchase (90,000) (90,000)
Conversion of preferred stock (11,115) 0
Common stock issued for accrued
dividends 3,211 3,506
Issuance of preferred stock
at a discount 339,660 (90,000) 250,000
Beneficial conversion feature of
preferred stock 166,500 (166,500) 0
Dividends on preferred stock (127,118) (127,118)
Shares issued for employee
bonuses 29,741 30,666
- 34 -
Notes
Additional Receivable
Paid-in Stock Treasury Stock Accumulated
Capital Purchase Shares Amount Deficit Total
____________ __________ _________ __________ ____________ ___________
Issuance of warrants for services 14,640 14,640
Issuance of employee stock
purchase plan shares 10,730 10,956
Purchase of treasury stock in
exchange for note 10,000 11,750 (10,000) 0
Repurchase of shares on open
market 8,400 ( 2,772) ( 2,772)
Net loss - year ended June 30,
2001 (5,250,705) (5,250,705)
____________ __________ _________ __________ ____________ ___________
Balance - June 30, 2001 18,696,779 (80,000) 22,926 (24,894) (19,968,880) (1,281,120)
Costs related to private
placements (198,149) (198,149)
Dividends on preferred stock (98,411) (98,411)
Issuance of shares for options
exercised 612 625
Repurchase of shares on open
market 15,200 (6,094) (6,094)
Issuance of warrants for services 5,461 5,461
Shares issued for employee bonuses 29,780 30,497
Conversion of preferred stock (31,690) 1,639
Common stock issued for accrued
dividends 213,644 218,762
Issuance of shares for warrants
exercised 9,684 10,000
- 35 -
Notes
Additional Receivable
Paid-in Stock Treasury Stock Accumulated
Capital Purchase Shares Amount Deficit Total
____________ __________ _________ __________ ____________ ___________
Issuance of employee stock
purchase plan shares 9,575 9,834
Issuance of shares for services
provided 34,167 35,000
Reclassification of net
liabilities of
discontinued operations 804,046 804,046
Net income-year ended June
30,2002 1,083,895 1,083,895
____________ __________ _________ __________ ____________ ___________
Balance - June 30, 2002 $ 18,769,863 $ (80,000) 38,126 $ (30,988) $(18,179,350) $ 615,985
============ ========= ========== =========== ============= ===========
See accompanying notes to consolidated financial statements
F-5
- 36 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended June 30,
2002 2001
____________________________
Cash flows from operating activities:
Net income (loss) $ 1,083,895 $(5,250,705)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 202,776 262,227
Goodwill impairment -- 1,545,609
Write down of accounts receivable from
professional corporation -- 3,401,650
Compensatory stock options and stock and
warrants issued for obligations 72,745 5,306
Equity based compensation charge 264,000 40,000
Changes in operating assets and liabilities:
Accounts receivable 440,638 649,407
Prepaid expenses and other current assets (2,712) 56,541
Other assets (113,675) (22,873)
Accounts payable (462,580) 152,775
Accrued expenses and other liabilities 247,528 (377,532)
Net liabilities of discontinued
operations (156,506) (923,682)
___________ __________
Net cash provided by (used in)
operating activities 1,576,109 (461,277)
___________ __________
Cash flows from investing activities:
Acquisition of property and equipment (124,362) (186,842)
Website development costs -- (70,226)
Disposition of property, equipment and
intangibles -- 3,689
___________ __________
Net cash used in investing
activities (124,362) (253,379)
___________ __________
Cash flows from financing activities:
Borrowing (repayment) revolving debt, net (642,942) 556,437
Proceeds from borrowings 748,912 146,526
Principal payments on long-term debt (1,219,314) (639,157)
Deferred financing costs 8,000 26,554
Preferred stock dividends -- (6,767)
Issuance of preferred stock at a discount -- 250,000
Cost related to preferred stock issuance (198,149) (45,102)
Purchase of treasury stock (6,094) (2,772)
Issuance of common stock 18,672 10,956
Notes receivable for stock purchase -- (90,000)
___________ __________
Net cash provided by (used in)
financing activities (1,290,915) 206,675
___________ __________
Net increase in cash and cash equivalents 160,832 (507,981)
Cash and cash equivalents, beginning of year 43,732 551,713
activities
Cash and cash equivalents, end of year $ 204,564 $ 43,732
========= ========
Supplemental cash flow information: Cash paid
during the period for:
Interest $ 782,416 $1,040,276
Income taxes $ 25,164 $ 94,780
See accompanying notes to consolidated financial statements F-6
- 37 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Year Ended June 30,
2002 2001
____________________________
Supplemental disclosures of non-cash investing and
financing activities:
Conversion of preferred stock at stated value $ 1,507,000 $ 193,000
Issuance of stock in lieu of cash for dividends
due 218,762 3,506
Accrued dividends on series C preferred stock 98,411 120,351
Increase in equity as a result of the
reclassification of net liabilities of
discontinued operations 804,046 --
Issuance of warrants in connection with preferred
stock conversion 53,848 --
Issuance of stock for the earn-out liability -- 297,500
Beneficial conversion feature of preferred stock -- 166,500
Preferred stock discount -- 90,000
Purchase of treasury stock in exchange for note -- 10,000
See accompanying notes to consolidated financial statements
F-7
- 38 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and business segments:
PHC, Inc. and its wholly owned subsidiaries (the "company") is a national health
care company specializing in behavioral health services including the treatment
of substance abuse, which includes alcohol and drug dependency and related
disorders and the provision of psychiatric services. The company also provides
management, administrative and online behavioral health services. The company
primarily operates under three business segments:
1. Behavioral health treatment services, including two substance abuse
treatment facilities: Highland Ridge Hospital, located in Salt Lake City,
Utah, which has recently begun a treatment program for psychiatric
patients; and Mount Regis Center, located in Salem Virginia, and eight
psychiatric treatment locations which include Harbor Oaks Hospital, a
64-bed psychiatric hospital located in New Baltimore, Michigan and seven
outpatient behavioral health locations (two in Las Vegas, Nevada operating
as Harmony Healthcare, one in Shawnee Mission, Kansas operating as Total
Concept and four locations operating as Pioneer Counseling Center in the
Detroit, Michigan metropolitan area);
2. Behavioral health administrative services, including delivery of
management, administrative and help line services. PHC, Inc. provides
management and administrative services for its behavioral health treatment
subsidiaries. BSC-NY, Inc., a subsidiary of PHC, Inc., which closed in
fiscal 2001, provided management services on behalf of physician owned
behavioral health practices in the greater New York City metropolitan area
(see below). Pioneer Development and Support Services ("PDS2") provides
help line services primarily through contracts with major railroads and the
State of Nebraska. Pioneer Pharmaceutical Research, Inc. conducts studies
of the effects of psychiatric pharmaceuticals on a controlled population
through contracts with major manufacturers of these pharmaceuticals; and
3. Behavioral health online services, provides internet support services for
all of the other subsidiaries and their contracts and provides behavioral
health education, training and products for the behavioral health
professional, through its website Wellplace.com.
In December 2000 the Company's Board of Directors decided to close its' BSC-NY,
Inc. practice management operations due to the deterioration of operating
results. The table below summarizes the practice management closing expenses for
the year ended June 30, 2001.
Goodwill impairment $1,545,609
Write down of the receivable
due from the professional corporation 3,401,650
Lease termination and other expenses 239,047
___________
Total $5,186,306
On October 5, 1998 Quality Care Centers of Massachusetts, Inc., which operated
the company's long-term care facility, Franvale Nursing and Rehabilitation
Center, filed for protection under the Chapter 7 Bankruptcy Code. In April 2002,
the bankruptcy court accepted the report of the trustee and the bankruptcy was
closed. This event resulted in the reclassification of the net liabilities of
discontinued operations of $804,046 to stockholders' equity in the fourth
quarter of fiscal 2002.
F-8
- 39 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
Revenues and accounts receivable:
Patient care revenues and accounts receivable 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 contractual 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
provided and subsequent settlements are recorded in operations in the year of
settlement. The provision for contractual allowances is deducted directly from
revenue and the net revenue amount is recorded as accounts receivable. The
allowance for doubtful accounts does not include the contractual allowances.
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. Approximately 15% and 11% of the company's total
revenue is derived from Medicare and Medicaid payors for the years ended June
30, 2002 and 2001, respectively.
Long-term assets include accounts receivable non-current, other receivables,
non-current, related party and other receivables. Accounts receivable,
non-current consists of amounts due from former patients for service. This
amount represents estimated amounts collectable under supplemental payment
agreements, arranged by the company and its' collection agencies, entered into
because of the patients' inability to pay under normal payment terms. All of
these receivables have been extended beyond their original due date. Accounts of
former patients that do not comply with these supplemental payment agreements
are written off when deemed unrecoverable.
Charity care amounted to approximately $415,700 and $491,000 for the years ended
June 30, 2002 and June 30, 2001, respectively. Patient care revenue is stated
net of charity care in the accompanying consolidated statements of operations.
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 include short-term highly liquid investments with maturities of
less than three months, when purchased.
F-9
- 40 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
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 consists of deposits, deferred expenses and web development costs.
Organization Costs:
Organization costs are expensed as incurred as required by the American
Institute of Certified Public Accountants Statement of Position 98-5 "Reporting
the Costs of Start-up Activities".
Goodwill:
The excess of the purchase price over the fair market value of net assets
acquired was amortized on a straight-line basis over twenty years through June
30, 2001. During fiscal year 2001, the company recorded goodwill impairment of
$1,545,609 in connection with the closing of its practice management operations
in accordance with Statement of Financial Accounting Standard (SFAS) No. 121,
which required that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
The company adopted SFAS 142 in the first quarter of fiscal 2002. SFAS 142
requires, among other things, that companies no longer amortize goodwill, but
instead test goodwill for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the purpose of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life.
The Company's net goodwill of $969,099 relating to the treatment services
segment of the Company was evaluated under SFAS 142 as of July 1, 2001. The
Company ceased amortization of goodwill resulting in a decrease in expenses of
$65,700 for the year ended June 30, 2002. The company will continue to test
goodwill for impairment at least annually in accordance with the guidelines of
SFAS 142.
F-10
- 41 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
The impact of the adoption of SFAS 142 is summarized as follows:
For the Year Ended
June 30,
2002 2001
__________ _____________
Reported net income (loss) applicable to
common shareholders $ 985,484 $ (5,634,323)
Add back: Goodwill amortization -- 65,700
__________ _____________
Adjusted net income (loss) 985,484 (5,568,623)
Basic earnings per share:
Reported net income (loss) applicable to
common shareholders $ 0.10 $ (0.66)
Goodwill amortization -- .01
__________ _____________
Adjusted net income (loss) $ 0.10 $ (0.65)
Diluted earnings per share:
Reported net income (loss) applicable to
common shareholders $ 0.09 $ (0.66)
Goodwill amortization -- .01
__________ _____________
Adjusted net income (loss) $ 0.09 $ (0.65)
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 based on
their short-term maturity and prevailing interest rates.
Basic and diluted income (loss) per share:
The income (loss) per share is computed by dividing the income (loss) applicable
to common shareholders, net of dividends charged directly to retained earnings,
by the weighted average number of shares of common stock outstanding for each
fiscal year. All dilutive common stock equivalents have been included in the
calculation of diluted earnings per share for the fiscal year ended June 30,
2002: however, because their effect would be anti-dilutive, no common stock
equivalents were included in the calculations of diluted loss per share for the
fiscal year ended June 30, 2001.
The weighted average number of common shares outstanding used in the computation
of earnings per share is summarized as follows:
F-11
- 42 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
Years Ended June 30,
2002 2001
__________ _____________
Denominator for basic earnings per share-
weighted average shares 10,232,286 8,518,408
Effect of dilutive securities:
Employee stock options 439,431 --
Warrants 91,144 --
Convertible debentures 250,000 --
__________ _____________
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversions 11,012,861 8,518,408
========== ===========
The following table summarizes securities, which were outstanding as of June 30,
2002 and 2001 but not included in the calculation of diluted net earnings per
share because such shares are antidilutive:
Years Ended June 30,
2002 2001
__________ _____________
Employee stock options 191,500 1,141,000
Warrants 1,013,800 1,623,362
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 SFAS No. 123,
"Accounting for Stock-Based Compensation", 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.
All of the company's employees are employed under leasing arrangements. The
company believes that its leased employees meet the common law definition of
employee and therefore qualify as employees for purposes of applying SFAS
No.123. The company's employee leasing arrangement meets the employee definition
requirements under FASB Interpretation No.44 "Accounting for Certain
Transactions involving Stock Compensation".
Income taxes:
The company follows the liability method of accounting for income taxes, as set
forth in SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 prescribes an
asset and liability approach, which requires the recognition of, deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of the assets and
liabilities. The company's policy is to record a valuation allowance against
deferred tax assets unless it is more likely than not that such assets will be
realized in future periods. The company considers estimated future taxable
income or loss and other available evidence when assessing the need for its
deferred tax valuation allowance.
F-12
- 43 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
New accounting standards:
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations ("SFAS 141") and No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after July 1, 2001 and for
purchase business combinations completed on or after July 1, 2001.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of," and APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business." SFAS No. 144 becomes effective for the fiscal years beginning after
December 15, 2001. The Company will adopt SFAS No. 144 in the first quarter of
fiscal 2003. The Company does not expect the adoption of SFAS No. 144 to impact
its financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Cost Associated with
Exit or Disposal Activities". SFAS No. 146 requires companies to recognize cost
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS 146 will be
applied prospectively to any exit or disposal activities initiated after
December 31, 2002. The company expects there will be no effect on its financial
results relating to the adoption of SFAS No. 146.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
June 30,
2002 2001
__________ _____________
Land $ 69,259 $ 69,259
Buildings 1,136,963 1,136,963
Furniture and equipment 1,123,258 1,023,636
Motor vehicles 92,871 92,871
Leasehold improvements 443,733 418,992
__________ _____________
2,866,084 2,741,720
Less accumulated depreciation and
amortization 1,606,436 1,403,654
__________ _____________
Property and equipment, net $1,259,648 $1,338,066
========== ==========
F-13
- 44 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is summarized as follows:
June 30,
2002 2001
____________ ___________
9% mortgage note due in monthly installments of
$4,850, including interest through July 1,
2012, when the remaining principal balance is
payable, collateralized by a first mortgage
on the PHC of Virginia, Inc, Mount Regis
Center facility. $406,068 $ 426,702
Note Payable issued in conjunction with the final
earn-out on the BSC-NY, Inc. acquisition
due in monthly installments of $11,567
including interest at 11% through July 2005
(see Note K). 361,564 454,939
Note Payable issued in conjunction with the final
earn-out on the BSC-NY, Inc. acquisition due
in monthly installments of $3,653 including
interest at 11% through July 2005
(see Note K). 114,178 143,665
Note Payable due in monthly installments of $429
including interest at 8.69% through May 2004. 9,119 13,347
Note Payable due in monthly installments of $5,088
including interest at 9% through October 2002. 20,352 81,408
Note Payable due in monthly installments of $665
including interest at 10.8% through November
2005. 22,538 27,774
Term mortgage note payable with principal installments
of $45,000 beginning December 2001 through
November 2002 and increasing annually by $5,000
through November 2004 at which time the
remaining balance of approximately $830,500
becomes due. The note bears interest at prime
plus 3.5% (8.25% at June 30, 2002) is
collateralized by all assets of PHC of
Michigan, Inc., guaranteed by PHC, Inc. and
may be renewed at the end of three years. 2,260,541 --
Term mortgage notes refinanced in November 2001. -- 2,499,891
____________ ___________
Total 3,194,360 3,647,726
Less current maturities 765,415 2,038,077
____________ ___________
Long-term portion $ 2,428,945 $1,609,649
=========== ==========
Maturities of long-term debt are as follows as
of June 30, 2002:
Year Ending
June 30, Amount
_____________ _________
2003 $ 765,415
2004 823,659
2005 1,255,415
2006 47,598
2007 32,307
Thereafter 269,966
___________
$3,194,360
F-14
- 45 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The company has a revolving credit note under which a maximum of $3,000,000 may
be outstanding at any time. At June 30, 2002 and 2001 the outstanding balance
was $1,468,644 and $2,111,586, respectively. Advances are made based on a
percentage of accounts receivable and principal is payable upon receipt of
proceeds of the accounts receivable. Interest is payable monthly at prime plus
2.25% (7% at June 30, 2002). 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 and guaranteed by
PHC.
On December 7, 1998 the company issued the principal sum of $500,000 of
convertible debentures with interest at 12% per annum that are due on December
2, 2004. Interest is payable quarterly. The debentures and any unpaid interest
are convertible into shares of common stock at the rate of $1,000 for 500 shares
of common stock, which equates to $2.00 per share of common stock. The traded
market price of the company's common stock at the date of issuance of the
convertible debentures was $1.188 per share and accordingly there was no
beneficial conversion feature. The holders of the debentures have the right to
put all or any portion of the debentures to the company at the original purchase
price plus unpaid interest upon 30 days written notice beginning December 3,
2001. Accordingly, the $500,000 is classified as a current liability on the
accompanying Balance Sheet. The company has the right to call the debentures
upon the same terms as above. If called, the holders of the debentures then have
20 days from the date of written notice to exercise their conversion privilege
as to any debentures not then already converted. In July 2002 the holders of the
debentures have exercised the put provision in the agreement as to 50% of the
outstanding debentures. The company will begin making monthly payments of
$25,000 each plus accrued interest in October 2002.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 2001, the company was obligated under various capital leases for
equipment providing for monthly payments of approximately $1,100 and $1,400 for
fiscal 2002 and 2001, respectively and terms expiring from July 2002 through
June 2006.
The carrying value of assets under capital leases included in property and
equipment is as follows:
June 30,
2002 2001
__________ __________
Equipment and improvements $ 50,271 $ 73,888
Less accumulated amortization (33,108) (39,940)
__________ __________
$ 17,163 $ 33,948
========== ==========
F-15
- 46 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 2002:
Year Ending
June 30,
____________
2003 $ 13,556
2004 10,536
2005 8,126
2006 5,037
_________
Total future minimum lease payments 37,255
Less amount representing interest 5,095
_________
Present value of future minimum
lease payments 32,160
Less current portion 11,020
_________
Long-term obligations under capital leases $ 21,140
=========
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows:
June 30,
2002 2001
__________ __________
Notes payable, Tot Care, Inc., company owned by
the President and principal stockholder,
interest at 12% and payable on demand $100,000 $100,000
Note payable, President and principal stockholder,
interest at 12% payable on demand 100,000 100,000
__________ __________
Total $200,000 $200,000
========== ==========
F-16
- 47 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE F - INCOME TAXES
The company has the following deferred tax assets included in the accompanying
balance sheets:
Year Ended
June 30,
2002 2001
__________ __________
Temporary differences attributable to:
Allowance for doubtful accounts $1,086,000 $1,053,000
Depreciation 72,000 89,000
Reserves not currently deductible and other 173,000 208,000
Operating loss carryforward 3,383,000 3,578,000
__________ __________
Total deferred tax asset 4,714,000 4,928,000
Less:
Valuation allowance (3,947,207) (4,314,020)
__________ __________
Subtotal 766,793 613,980
Current portion (766,793) (613,980)
__________ __________
Long-term portion $ -- $ --
=========== ==========
The company had no deferred tax liabilities at June 30, 2002 and 2001. The
company anticipates that it will have sufficient taxable income in future fiscal
years to realize its net deferred tax asset. During the past four years, the
company has closed three facilities that contributed most significantly to its
past losses, the Franvale Nursing and Rehabilitation Center, the Good Hope
Center and the Pioneer Counseling of Virginia clinics. The company has also
closed its practice management business and has implemented procedures to
improve the operating efficiency of its remaining centers.
Income tax expense is as follows:
Year Ended
June 30,
2002 2001
__________ __________
Current state income taxes $ 15,446 $ 44,450
=========== ==========
The above current state income taxes are significantly below the Federal
statutory rate of 34% primarily related to the availability of net operating
loss carry-forward. Total income tax expense for fiscal 2002 and 2001 represents
state income taxes for certain subsidiaries with no available net operating loss
carry-forwards. In fiscal 2002 the company's deferred tax benefit of $152,813
was offset by current tax accrual changes of similar amounts.
F-17
- 48 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE F - INCOME TAXES (CONTINUED)
At June 30, 2002 the company had a federal net operating loss carryforward
amounting to approximately $10,000,000. The Company's Federal net operating loss
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service and are subject to certain limitations in the event of
cumulative changes in the ownership interest of significant stockholders over a
three-year period in excess of 50%. The Federal carryforward expires beginning
in 2011 through 2020.
The company has provided a significant valuation allowance against its deferred
tax asset at June 30, 2002 and 2001 due to the uncertainty of its full
recoverability given the company's history of operating losses. No additional
valuation allowance was provided on the company's net deferred tax asset of
$766,793 and $613,980 at June 30, 2002 and 2001, respectively, based on
managements estimated projection of future taxable income.
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
Operating leases:
The company leases office and treatment facilities, furniture and equipment
under operating leases expiring on various dates through May 2005. Rent expense
for the years ended June 30, 2002 and 2001 was approximately $799,000 and
$812,000 respectively. Rent expense includes certain short-term rentals. Minimum
future rental payments under non-cancelable operating leases, having remaining
terms in excess of one year as of June 30, 2001 are as follows:
Year Ending
June 30, Amount
____________ __________
2003 $ 776,551
2004 748,119
2005 539,195
2006 181,607
2007 111,239
_________
$2,356.711
==========
Litigation:
Various legal proceedings, claims and investigations of a nature considered
normal to its business operations are pending against the company. The most
significant of these matters is described below.
On or about May 15, 2000, the company was served with a subpoena by the United
States Attorney for the District of Massachusetts. The subpoena requested, inter
alia, patient and financial records relating to Franvale Nursing and
Rehabilitation Center for the period of 1995 through 1998. The company has
reached an agreement in principle with the government to settle all outstanding
billing issues. The final agreement is currently being drafted for signatures.
The company believes that it has adequately accrued for the settlement of this
claim in the accompanying financial statements.
F-18
- 49 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE H - STOCK PLANS
[1] Stock plans:
The company has three stock plans: a stock option plan, an employee
stock purchase plan and a nonemployee directors' stock option plan.
The stock option plan provides for the issuance of a maximum of
1,750,000 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 of the Board of
Directors 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
250,000 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, 2002, options for 65,500 shares
were granted under this plan. A maximum of 250,000 shares may be
issued under this plan. Each outside director is granted an option to
purchase 10,000 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.
Under the above plans, at June 30, 2002, 884,565 shares were available
for future grant or purchase.
The company had the following activity in its stock option plans for
fiscal 2002 and 2001:
Number Weighted-Average
Of Exercise Price
Shares Per Share
__________ ________________
Balance - June 30, 2000 782,500 $1.46
Granted 420,500 $0.28
Cancelled (62,000) $0.25
Repriced Options
Original (791,500) $1.38
Repriced 791,500 $0.25
__________ __________
Balance - June 30, 2001 1,141,000 $0.33
Granted 245,000 $0.51
Expired (111,000) $0.27
__________ __________
Balance - June 30, 2002 1,275,000 $0.37
========== ===========
F-19
- 50 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE H - STOCK PLANS (CONTINUED)
[2] Stock-based compensation:
The following tables summarize information about stock options outstanding
and exercisable at June 30, 2002:
Options Outstanding
___________________________________________________________________________
Weighted-Average
Number Outstanding Remaining Contractual
Exercise Price At June 30, 2002 Life (years)
___________________________________________________________________________
$ .19 5,000 3.5
.22 8,000 3.5
.25 665,000 2.35
.30 332,500 3.75
.35 40,000 8.25
.45 33,000 4.5
.55 148,000 5
.75 14,000 5
.81 6,000 7.5
1.03 6,000 6.5
2.06 6,000 5.5
3.50 6,000 4.5
6.63 5,500 3.5
_______ __________ ________
$ .37 1,275,000 3.4
======= ========== ========
Options Exercisable
___________________________________________________________________________
Weighted-Average
Number Exercisable Remaining Contractual
Exercise Price At June 30, 2002 Life (years)
___________________________________________________________________________
$ .19 2,500 3.5
.22 4,000 3.5
.25 566,500 1.85
.30 166,250 3.75
.35 10,000 8.25
.45 8,250 4.5
.55 37,000 5
.75 3,500 5
.81 4,500 7.5
1.03 6,000 6.5
2.06 6,000 5.5
3.50 6,000 4.5
6.63 5,500 3.5
_______ __________ ________
$ .37 826,000 2.7
======= ========== ========
F-20
- 51 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE H - STOCK PLANS (CONTINUED)
[2] Stock-based compensation: (continued)
The Company re-priced 791,500 options in January 2001. As a result of this
modification, 572,750 of the options remaining at June 30, 2002 are subject
to variable accounting from the date of the modification. The compensation
expense related to 502,250 of the vested re-priced options amounted to
approximately $264,000 and $40,000, for the year ended June 30, 2002 and
2001, respectively. Approximately $250,000 of the expense related to the
current fiscal year was recorded in the fourth quarter of fiscal 2002 due
to the increase in share price during that quarter.
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. 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, the net income (loss) per share would have been changed to
the pro forma amounts indicated below:
Year Ended
June 30,
2002 2001
_________________________
Net income (loss)
applicable to common
Shareholders As reported $ 985,484 $ (5,634,323)
Pro forma $ 947,118 (5,721,161)
Basic net income (loss)
Per share As reported $ .10 $ (.66)
Pro forma $ .09 $ (.67)
Diluted net income (loss)
Per share As reported $ .09 $ (.66)
Pro forma $ .09 $ (.67)
The fair value of the company's stock options used to compute pro forma net
income (loss) and net income (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 2002 and 2001: dividend yield of
0%; expected volatility of 30%; a risk-free interest rate of 6.0% and 6.5%
respectively; 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, 2002 and 2001 was $.16 and $.10, respectively.
F-21
- 52 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE I - DISCONTINUED OPERATIONS
On May 26, 1998, PHC, Inc.'s wholly owned subsidiary, Quality Care, which
operated 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.
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.
In April 2002 the bankruptcy court accepted the trustees' final bankruptcy
report, closing the bankruptcy. This final disposition resulted in a non-cash
increase in stockholders' equity of $804,046.
Net liabilities of discontinued operations consists of the following:
June 30,
2002 2001
____________ ____________
Debt forgiveness and reserve for contingencies $ 2,641,537 $ 2,641,537
Less legal and other expenses incurred to date (1,837,491) (1,680,986)
Reclassified to stockholders' equity (804,046) --
____________ ____________
Net liabilities of discontinued operations $ -- $ 960,551
============ ============
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, 2002:
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
_________ _________________________________________ ______________ _______________ ___________
03/03/1997 Consultant warrant for investor relations
$16,306 value passed as an adjustment 20,000 shares $ .50 per share March 2002
09/17/1998 Consultant warrant for investor relations
$12,776 value passed as an adjustment 40,000 shares $ .50 per share March 2002
09/19/1997 Private Placement warrants with common stock
issuance Equity transaction 86,207 shares $2.90 per share Sept 2002
F-22
- 53 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
_________ _________________________________________ ______________ _______________ ___________
03/10/1998 Warrants issued as a penalty for late
registration of private placement shares.
Equity transaction 3,000 shares $2.90 per share March 2003
03/10/1998 Warrants issued as additional interest on debt
$48,809 value charged to interest expense over
term of loan 71,186 shares $1.76 per share March 2003
07/10/1998 Warrants issued with extension of debt
$28,740 value charged to interest expense
over term of loan 69,347 shares $1.37 per share July 2003
07/10/1998 Warrants issued with extension of debt as price
guarantee $14,779 value charged to interest
expense over term of loan 25,827 shares $1.16 per share July 2003
12/31/1998 Warrants issued with convertible debenture
$9,240 value charged to professional fees
over term of debentures 30,298 shares $ .83 per share Dec 2004
12/31/1998 Warrants issued for convertible debentures
finder's fee $25,873 value charged to
professional fees over term of debentures 72,724 shares $1.51 per share Dec 2003
12/31/1998 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of debentures 13,288 shares $1.51 per share Dec 2003
12/31/1998 Warrants issued for convertible debentures
finders fee $3,246 value charged to
professional fees over term of debentures 19,311 shares $1.17 per share Dec 2003
12/01/1998 Warrants issued for convertible debentures
finders fee $1,302 value charged to
professional fees over term of debentures 12,119 shares $ .83 per share Dec 2003
01/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of debentures 12,119 shares $ .83 per share Jan 2004
02/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of debentures 12,119 shares $ .83 per share Feb 2004
03/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of debentures 12,078 shares $ .83 per share Mar 2004
04/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of debentures 12,078 shares $ .83 per share Apr 2004
05/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of debentures 12,078 shares $ .83 per share May 2004
06/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of debentures 12,037 shares $ .83 per share June 2004
01/05/1999 Warrants issued for investment banker services
$18,100 value charged to professional fees over
service period 48,071 shares $1.13 per share Jan 2004
04/05/1999 Warrants issued for investment banker services
$18,100 value charged to professional fees
over service period 47,680 shares $1.14 per share Apr 2004
02/23/1999 Consultant warrant for investor relations
$1,307 value charged to professional fees 3,724 shares $ .97 per share Feb 2004
04/21/1999 Consultant warrant for web site development
services $1,547 value charged to professional
fees 6,039 shares $ .83 per share Apr 2004
05/18/1999 Consultant warrant for web site advisory services
$1,848 value charged to professional fees 6,020 shares $ .83 per share Apr 2004
04/21/1999 Warrant issued for management consultant services
$1,547 value charged to professional fees 5,373 shares $ .93 per share Apr 2004
05/18/1999 Warrant issued for management consultant services
$370 value charged to professional fees 1,204 shares $ .83 per share May 2004
07/01/1999 Warrants issued for convertible debentures
finders fee $5,745 value charged to professional
fees over term of debentures 12,037 shares $ .83 per share July 2004
08/01/1999 Warrants issued for convertible debentures
finders fee $4,187 value charged to professional
fees over term of debentures 12,037 shares $ .83 per share Aug 2004
07/05/1999 Warrants for investment banker services
$12,944 value charged to professional fees
over service period 47,369 shares $1.15 per share July 2004
10/05/1999 Warrants for investment banker services
$6,042 value charged to professional fees over
service period 47,369 shares $1.15 per share Oct 2004
F-23
- 54 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
_________ _________________________________________ ______________ _______________ ___________
03/31/2000 Warrants issued for services $10,000
value charged to website development 11,334 shares $1.32 per share Mar 2005
05/26/2000 Warrants issued as additional interest on debt
$33,264 value charged to interest expense 60,000 shares $1.50 per share May 2005
06/28/2000 Warrants issued with preferred stock placement
Equity transaction 125,000 shares $3.00 per share June 2005
06/28/2000 Warrants issued with preferred stock placement
Equity transaction 115,710 shares $1.41 per share June 2005
12/20/2000 Warrants issued for investment banker services
$1,938 value charged to professional fees 52,530 shares $ .20 per share Dec 2005
03/20/2001 Warrants issued for investment banker services
$969 value charged to professional fees 25,195 shares $ .21 per share Mar 2006
04/15/2001 Warrants issued for investor relations
consulting services $1,136 value charged
to professional fees 10,061 shares $ .25 per share Apr 2006
05/15/2001 Warrants issued for investor relations
consulting services $2,577 value charged
to professional fees 10,000 shares $ .25 per share May 2006
06/15/2001 Warrants issued for investor relations
consulting services $2,577 value charged
to professional fees 10,000 shares $ .25 per share June 2006
06/20/2001 Warrants issued for investment banker services
$5,383 value charged to professional fees 25,000 shares $ .21 per share June 2006
07/20/2001 Warrants issued for investor relations
consulting services $1,786 value charged
to professional fees 12,000 shares $ .35 per share July 2006
02/08/2002 Warrants issued for investor relations
consulting services $391 value charged
to professional fees 3,000 shares $ .42 per share Feb 2007
03/01/2002 Warrants issued for investor relations
consulting services $1,476 charged
to professional fees 25,000 shares $.37 per share Mar 2007
03/01/2002 Warrants issued for investor relations
consulting services $398 charged
to professional fees 20,000 shares $ .37 per share Mar 2007
03/01/2002 Warrants issued for investor relations
consulting services $310 charged
to professional fees 3,000 shares $ .38 per share Mar 2007
04/01/2002 Warrants issued for investor relations
consulting services $310 value charged
to professional fees 3,000 shares $ .38 per share Apr 2007
05/01/2002 Warrants issued for investor relations
consulting services $790 charged
to professional fees 3,000 shares $ .59 per share May 2007
05/07/2002 Warrants issued as a finders fee in connection
with preferred stock conversion.
Equity transaction. 151,783 shares $ .62 per share May 2005
05/07/2002 Warrants issued as a finders fee in connection
with preferred stock conversion.
Equity transaction. 50,594 shares $ .62 per share May 2005
Warrants issued for services or in connection with debt are valued at fair value
at grant date using the Black-Scholes pricing model and charged to operations
consistent with the underlying reason the warrants were issued. Charges to
operations in connection with these warrants amounted to $5,461 and $14,640 in
fiscal 2002 and 2001, respectively.
On June 28, 2000 the company issued 136,000 shares of series C 8% convertible
preferred stock, with a stated and liquidation value of $10.00 per share, at a
discount for $1,000,000, which resulted in a dividend charge to retained
earnings of $360,000 for the year ended June 30, 2000. In conjunction with this
transaction the company also issued a warrant to purchase 125,000 shares of
class A common stock, which resulted in a charge to retained earnings of $14,963
in the year ended June 30, 2000. The investor was required to purchase an
additional 34,000 shares of series C preferred stock as provided in the
agreement for $250,000. This additional purchase of 34,000 shares was completed
in August 2000 resulting in an additional dividend charge to retained earnings
in fiscal year 2001 of $90,000.
F-24
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002 and 2001
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
The series C preferred stock was convertible into shares of class A common
stock. In February 2001 the Series C preferred stock agreement was amended to
allow for conversion at 90% of the market value of class A common Stock. This
beneficial conversion feature resulted in a dividend charge to retained earnings
of $166,500 for the year ended June 30, 2001. As part of the amendment, the
holders of the series C preferred stock also agreed to limit its conversions of
preferred stock so that such conversions will not in the aggregate convert into
greater than 20% of the outstanding common stock of the corporation, 821,705
additional shares of class A common stock, from the date of the agreement
through July 31, 2001. Through June 30, 2001, 1,160,160 shares of class A common
stock had been issued upon conversion of 19,300 shares of series C convertible
preferred stock, including accrued dividends outstanding on those preferred
shares. During the fiscal year ended June 30, 2002 the remaining series C
preferred stock were converted resulting in the issuance of 3,483,583 shares of
class A common stock. In addition 511,800 shares of class A common stock were
issued in payment of accrued dividends in fiscal 2002.
Accrued dividends included in accrued expenses and other liabilities in the
accompanying consolidated balance sheet were $120,350 at June 30, 2001. No
dividends were accrued and unpaid at June 30, 2002.
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 through June 30, 2002 are
reflected in the table above. The value of the additional shares issuable as a
result of these dilution provisions was not material.
NOTE K - ACQUISITIONS
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 advanced 150,000
shares of PHC, Inc. Class A common stock and funds to the professional
corporation, which were in turn issued to the former owners of Behavioral Stress
Centers, Inc. to acquire the assets of the medical practices previously serviced
by BSC.
In December 2000 the company's Board of Directors decided to close BSC due to
the deterioration of its operating results. Although the company had no
ownership interest in the professional corporation, BSC was dependent on the
success of its operations through its management services agreement. During
fiscal 2001, the professional corporation closed its business operations and the
net amount due from the professional corporation of $3,401,650 was deemed
unrecoverable and charged to practice management closing expenses (see note A).
F-25
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NOTE L - BUSINESS SEGMENT INFORMATION
The company's behavioral health treatment services have similar economic
characteristics, services, patients and clients. Accordingly, all behavioral
health treatment services are reported on an aggregate basis under one segment.
The company's segments are more fully described in Note A above. Residual income
and expenses from closed facilities are included in the administrative services
segment. The following summarizes the company's segment data:
BEHAVIORAL HEALTH
TREATMENT ADMINISTRATIVE ONLINE
SERVICES SERVICES SERVICES ELIMINATIONS TOTAL
For the Year ended _____________ _________________ _________ _______________ ________
June 30, 2002
Revenues - external
customers $21,114,504 $1,579,325 $ 4,439 $ 0 $ 22,698,268
Revenues - intersegment 162,468 1,896,000 300,000 (2,358,468) 0
Segment net income (loss) 3,421,774 (2,060,457) (277,422) 0 1,083,895
Total assets 7,834,299 1,541,976 97,340 0 9,473,615
Capital expenditures 89,957 34,405 0 0 124,362
Depreciation & amortization 140,130 50,628 20,078 0 202,776
June 30, 2001
Revenues - external
customers $21,087,473 $ 1,644,296 $ 18,067 0 $ 22,749,836
Revenues - intersegment 0 1,932,792 35,245 $(1,968,037) 0
Segment net income (loss) 2,936,935 (7,384,801) (802,839) 0 $ (5,250,705)
Total assets 8,503,698 1,094,172 125,582 0 $ 9,723,452
Capital expenditures 126,566 43,063 87,439 0 $ 257,068
Depreciation & amortization $ 187,876 $ 53,179 $ 21,172 0 $ 262,227
F-26
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PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the company as of June 30, 2002 are as
follows:
Name Age Position
______________________________________________________________________________
Bruce A. Shear 47 Director, President and Chief Executive
Officer
Robert H. Boswell 54 Senior Vice President
Michael R. Cornelison 52 Executive Vice President
Paula C. Wurts 53 Controller, Treasurer and Assistant Clerk
Gerald M. Perlow, M.D. (1)(2) 64 Director and Clerk
Donald E. Robar (1)(2) 65 Director
Howard W. Phillips 72 Director
William F. Grieco (1) 48 Director
David E. Dangerfield 61 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 Senior Vice President of the company
since February 1999 and as executive vice president of the company from 1992 to
1999. 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.
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MICHAEL R. CORNELISON has served as Executive Vice President and Chief
Operating Officer of the company since June 1999. Mr. Cornelison also served as
the Director of Michigan Operations from December of 1997 through April 1998 and
Vice President of Operations from April 1998 through June of 1999. Prior to
joining the company Mr. Cornelison spent eleven years as a psychiatric hospital
administrator for both Universal Health Services and Charter Medical Systems.
Mr. Cornelison attended Washington State University and received a degree in
Business Management from LaSalle University in 1975. Mr. Cornelison has served
two terms as member of the Board of Governors of the Federation of American
Health Systems.
PAULA C. WURTS has served as the Controller of the company since 1989, as
Assistant Clerk since January 1996, as Assistant Treasurer from 1993 until April
2000 when she became Treasurer. 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 retired cardiologist who
practiced medicine 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 and the American College of Physicians. From 1987 to 1990, Dr. Perlow
served as the Director, Division of Cardiology, at AtlantiCare Medical Center in
Lynn, Massachusetts. Dr. Perlow served as a consultant to Wellplace.com,
formerly Behavioralhealthonline.com, in fiscal year 2000 and has been a
contributing journalist to Wellplace.com since 1999. 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 from February 1996 until April 2000. 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. From 1995 until 1999 Mr. Phillips served as 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 2001 Mr. Grieco has been Senior Vice President and
General Counsel of IDX Systems Corporation, a healthcare information technology
company. From August 1999 to October 2001 Mr. Grieco was a Managing Director of
Arcadia Strategies, LLC, a legal and business consulting organization. From
November 1995 to July 1999 he 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, a general service law
firm. 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.
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DAVID E. DANGERFIELD has served as a Director of the company since December
2001. Since 1977, he has served as the Executive Director for Valley Mental
Health in Salt Lake City, Utah. Since 1974, Mr. Dangerfield has been a partner
for Professional Training Associates (PTA). In 1989, he became a consultant
across the nation for managed mental health care and the enhancement of mental
health delivery services. David Dangerfield serves as a Board member of the
Mental Health Risk Retention Group and Mental Health Corporation of America,
which are privately held corporations, and the Utah Hospital Association, which
is a state organization. Mr. Dangerfield graduated from the University of Utah
in 1972 with a Doctorate of Social Work after receiving his Masters of Social
Work from the University in 1967.
Compliance With Section 16(A) Of The Exchange Act
Based on a review of Forms 3 and 4 furnished to the company, all directors,
officers and beneficial owners of more than ten percent of any class of equity
securities of the company registered pursuant to Section 12 of the Securities
Exchange Act filed on a timely basis reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year.
ITEM 10. Executive compensation.
Employment agreements
The company has not entered into any employment agreements with its
executive officers. The company owns and is the beneficiary on a $1,000,000 key
man life insurance policy on the life of Bruce A. Shear.
Executive Compensation
Four executive officers of the company received compensation in the 2002
fiscal year, which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the company for services rendered to these
executives in fiscal year 2002, 2001, and 2000:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
(a) (b) (c) (d) (e) (g) (i)
Securities
Name and Other Annual Underlying All Other
Principal Year Salary Bonus Compensation Options/SARs Compensation
Position ($) ($) ($) (#) ($)
______________________ ____ ____________ _______ _______________ ____________ ______________
Bruce A. Shear 2002 $310,000(1) $37,500 $71,390 (2) 20,000 $ 3,400
President and Chief 2001 $310,000(1) -- $19,571 (3) 67,000 $ 6,285
Executive Officer 2000 $300,195(1). -- $10,159 (4) 50,000 $22,517
Robert H. Boswell 2002 $137,000 $ 7,000 $67,301 (5) 25,000 $ 3,725
Senior Vice President 2001 $126,000 $16,309 $15,521 (6) 41,000 $ 3,864
2000 $116,000 $32,200 $12,846 (7) 26,666 $14,261
Michael R. Cornelison 2002 $114,333 -- $60,356 (8) 10,000 $ 1,700
Executive Vice President 2001 $ 96,000 $15,910 $14,160 (9) 41,000 $ 3,864
2000 $ 88,750 $13,000 $11,537(10) 5,000 $ 2,252
Paula C. Wurts 2002 $111,800 $ 2,000 $36,825(11) 25,000 $ 3,725
Controller, Treasurer 2001 $100,800 $ 6,414 $13,867(12) 41,000 $ 3,864
And Assistant Clerk 2000 $90,800 $13,500 $ 9,642(13) 33,334 $17,263
(1) Although the Board of Director authorized base salary effective July 1,
1995 is $310,000 base salary was drawn as listed above.
(2) This amount represents $3,983 contributed by the company to the company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $4,768 in premiums
paid by the company with respect to life insurance for the benefit of Mr.
Shear, $336 in club membership dues paid by the company for the benefit of
Mr. Shear, $2,678 personal use of a company car held by Mr. Shear and
$59,625 based on the intrinsic value of the repricing of options held by
Mr. Shear.
(3) This amount represents $3,799 contributed by the company to the company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $4,768 in premiums
paid by the company with respect to life insurance for the benefit of Mr.
Shear, $208 in club membership dues paid by the company for the benefit of
Mr. Shear, $2,921 personal use of a company car held by Mr. Shear and
$7,875 based on the intrinsic value of the repricing of options held by Mr.
Shear.
(4) This amount represents $3,383 contributed by the company to the company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $4,837 in premiums
paid by the company with respect to life insurance for the benefit of Mr.
Shear and $1,938 personal use of a company car held by Mr. Shear.
- 60 -
(5) This amount represents a $6,000 automobile allowance, $2,323 contributed by
the company to the company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $640 in membership dues paid by the company for the benefit of
Mr. Boswell, $363 in benefit derived from the purchase of shares through
the employee stock purchase plan, and $57,975 based on the intrinsic value
of the repricing of options held by Mr. Boswell.
(6) This amount represents a $6,000 automobile allowance, $1,195 contributed by
the company to the company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $22 in Class A Common Stock issued to employees, $219 in
benefit derived from the purchase of shares through the employee stock
purchase plan, and $8,085 based on the intrinsic value of the repricing of
options held by Mr. Boswell.
(7) This amount represents a $6,000 automobile allowance, $952 contributed by
the company to the company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $3,000 in relocation expenses paid to Mr. Boswell and $2,894
in benefit derived from the purchase of shares through the employee stock
purchase plan.
(8) This amount represents a $7,800 automobile allowance, $243 in medical
expenses reimbursed by the company and $52,313 based on the intrinsic value
of the repricing of options held by Mr. Cornelison.
(9) This amount represents a $7,050 automobile allowance, $22 in Class A Common
Stock issued to employees and $7,088 based on the intrinsic value of the
repricing of options held by Mr. Cornelison.
(10) This amount represents a $4,700 automobile allowance, $6,050 as a result of
the exercise of options and $787 in benefit derived from the purchase of
shares through the employee stock purchase plan.
(11) This amount represents a $4,800 automobile allowance, $4,319 contributed by
the company to the company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $181 in benefit derived from the purchase of shares through the
employee stock purchase plan and $27,525 based on the intrinsic value of
the repricing of options held by Ms. Wurts.
(12) This amount represents a $4,800 automobile allowance, $4,319 contributed by
the company to the company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $22 in Class A Common Stock issued to employees, $146 in benefit
derived from the purchase of shares through the employee stock purchase
plan and $4,580 based on the intrinsic value of the repricing of options
held by Ms. Wurts.
(13) This amount represents a $4,800 automobile allowance, $3,878 contributed by
the company to the company's Executive Employee Benefit Plan on behalf of
Ms. Wurts and $964 in benefit derived from the purchase of shares through
the employee stock purchase plan.
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 $5,000 stipend per year and $1,250 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").
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COMPENSATION COMMITTEE
The Compensation Committee consists of Mr. Donald Robar and Dr. Gerald
Perlow. The compensation Committee met once during fiscal 2002. Mr. Shear does
not participate in discussions concerning, or vote to approve, his salary.
AUDIT COMMITTEE
The Audit Committee consists of Mr. Donald Robar, Dr. Gerald Perlow and Mr.
William Grieco. The Audit Committee met two times during fiscal 2002. All
committee members attended both meetings.
OPTION PLANS
Stock Plan
The Board of Directors adopted the company's Stock Plan on August 26, 1993
and the stockholders of the company approved the plan on November 30, 1993 and
amended the plan on December 26, 1997, December 23, 1998 and December 19, 2001.
The Stock Plan provides for the issuance of a maximum of 1,750,000 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 Board of Directors administers the Stock Plan. 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, 2002, the company issued additional
options to purchase 245,000 shares of Class A Common Stock under the 1993 Stock
Plan at a price per share ranging from $.35 to $.75. 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.
A total of 1,250 options were exercised at $.25 each during the fiscal year
ended June 30, 2002. No options were exercised during the fiscal year ended June
30, 2001.
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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. The plan was amended on December 19, 2001 to
allow for a total of 250,000 shares of class A common stock to be issued under
the plan.
As of June 30, 2002 a total of 112,185 shares of class A common stock have
been issued under the plan since the first offering which began on February 1,
1997 through the latest completed offering which ended in January 2001. Eight
employees are participating in the current offering period under the plan, which
began on February 1, 2002 and will end on January 31, 2003.
Non-Employee Director Stock Plan
The Board of Directors adopted the company's Non-Employee Director Stock
Plan (the "Director Plan") on October 18, 1995. The Stockholders of the company
approved the plan on December 15, 1995 and amended the plan on December 26, 1997
and December 19, 2001. Non-qualified options to purchase a total of 250,000
shares of Class A Common Stock are available for issuance under the Director
Plan.
The Board of Directors or a committee of the Board administers the Director
Plan. 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 plan was amended December 19,
2001 to increase the number of options issued each year from 2,000 per director
to 10,000 per director. 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 February 18, 1997, the company issued options to purchase 6,000 shares
of Class A Common Stock under the Director Plan at an exercise price of $3.50
per share. On January 22, 1998, the company issued options to purchase 6,000
shares of Class A Common Stock under the Director Plan at an exercise price of
$2.06. On February 23, 1999, the company issued options to purchase 6,000 shares
of Class A Common Stock under the Director Plan at an exercise price of $1.03.
On December 28, 1999, the company issued options to purchase 6, 000 shares of
class A common stock under the Director Plan at an exercise price of $.81. On
January 11, 2001 the company issued options to purchase 6,000 shares of class A
common stock under the Director Plan at an exercise price of $.22. On December
19, 2001 the company issued options to purchase 30,000 shares of class A common
stock under the Director Plan at an exercise price of $.35. As of June 30, 2002,
none of the options issued had been exercised.
- 63 -
The following table provides information about options granted to the named
executive officers during fiscal 2002 under the company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
(a) (b) (c) (d) (e)
% of Total
Number of Options/SARs
Securities Granted to
Underlying Employees Exercise or
Options/SARs in Fiscal Base Price Expiration
Name Granted (#) Year ($/Share) Date
_______________________________________________________________________________
Bruce A. Shear 20,000 8.2% $ .55 04/18/2007
Robert H. Boswell 7,500 3.1% $ .45 12/19/2006
10,000 4.1% $ .55 04/18/2007
7,500 3.1% $ .55 04/18/2007
Michael R. Corneliso 10,000 4.1% $ .55 04/18/2007
Paula C. Wurts 7,500 3.1% $ .45 12/19/2006
10,000 4.1% $ .55 04/18/2007
7,500 3.1% $ .55 04/18/2007
All Directors and
Officers as a
group (9 Persons) 203,000 82.8% $.35-$.55 12/19/2006-04/18/2007
The following table provides information about options exercised by the
named executive officers during fiscal 2002 and the number and value of options
held at the end of fiscal 2002.
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares Value at FY-End (#) FY-End (#)at
Exercise Realized Exercisable/ Exercisable/
(#) ($) Unexercisable Unexercisable
________________ ___________ _________ _____________ ________________
Bruce A. Shear -- -- 237,000/163,500 $118,630/$ 85,115
Robert H. Boswell -- -- 196,666/146,583 $ 97,650/$ 76,567
Michael R. Cornelison -- -- 161,000/130,500 $ 82,140/$ 68,820
Paula C. Wurts -- -- 137,084/83,667 $ 65,475/$ 42,593
All Directors and
Officers as a
group (9 persons) -- -- 1,079,750/718,250 $502,650/$353,343
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. In September 1998, all 21,875 options due to
expire, were extended for an additional five years. Also in September 1998, all
183,875 shares underlying the then outstanding employee stock options were
repriced to the current market price, using the existing exercise durations. In
January 2001, all 791,500 shares underlying the then outstanding employee stock
options were repriced to $0.25, which was greater than the then current market
price, using the existing exercise durations. The computed effect of the option
repricing of $251,159 and $55,831 was charged to salaries in the quarter ended
June 30, 2002 and 2001.
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ITEM 11. 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 common stock of the company currently outstanding) as of August
1, 2002 by each person known by the company to beneficially own more than 5% of
any class of the company's voting securities, each director of the company, each
of the named executive officers as defined in 17 CFR 228.402(a)(2) and all
directors and officers of the company as a group. Unless otherwise indicated
below, to the knowledge of the company, all persons listed below have sole
voting and investment power with respect to their shares of Common Stock, except
to the extent authority is shared by spouses under applicable law. In preparing
the following table, the company has relied on the information furnished by the
persons listed below:
Name and Address Amount and Nature Percent of
Title of Class of Beneficial Owner of Beneficial Owner Class (14)
____________________ ___________________ ___________________ __________
Class A Common Stock Gerald M. Perlow 69,875(1) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 78,925(2) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Bruce A. Shear 423,495(3) 3.3%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Robert H. Boswell 179,150(4) 1.4%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 88,875(5) *
P. O. Box 2047
East Hampton, NY 11937
William F. Grieco 63,875(6) *
115 Marlborough Street
Boston, MA 02116
Paula C. Wurts 107,977(7) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Michael R. Cornelison 143,409(8) 1.1%
c/o PHC, Inc.
200 Lake Street
Peabody, Ma 01960
David E. Dangerfield 2,500(9) *
5965 South 900 East
Salt Lake City, UT 84121
All Directors and 1,158,081(10) 8.5%
Officers as a
Group (9 persons)
- 65 -
Name and Address Amount and Nature Percent of
Title of Class of Beneficial Owner of Beneficial Owner Class (14)
____________________ ___________________ ___________________ __________
Class B Common Stock The Shaar Fund Ltd. 1,234,327(12) 9.5%
c/o Citco Funds
Services, Curacao
Kaya Flamboyan 9
Curacao, Netherland
Antilles
Bruce A. Shear 671,259(13) 92.3%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and 671,259 92.3%
Officers as a
Group (9 persons)
* Less than 1%
1. Includes 48,125 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $.22 to $6.63 per share.
2. Includes 51,625 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $.22 to $6.63 per share.
3. Includes 163,500 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.55 per share.
4. Includes an aggregate of 146,583 shares of Class A Common Stock issuable
pursuant to currently exercisable stock options at an exercise price range
of $.25 to $.55 per share.
5. Includes 49,625 shares issuable pursuant to currently exercisable stock
options having an exercise price range of $.22 to $.45 per share.
6. Includes 42,125 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.22
to $3.50 per share.
7. Includes 83,667 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.55 per share.
8. Includes 130,500 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.55 per share.
9. Includes 2,500 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price of $ .55 per
share.
10. Includes an aggregate of 718,250 shares issuable pursuant to currently
exercisable stock options. Of those options, 5,500 have an exercise price
of $6.63 per share, 6,000 have an exercise price of $3.50 per share, 6,000
have an exercise price of $2.06 per share, 6,000 have an exercise price of
$1.03 per share, 4,500 have an exercise price of $.81 per share, 37,000
have an exercise price of $.55 per share, 3,750 have an exercise price of
$.45 per share, 10,000 have an exercise price of $.35 per share, 133,250
have an exercise price of $.30 per share, 502,250 have an exercise price of
$.25 per share and 4,000 have an exercise price of $.22 per share.
11. Each share of class B common stock is convertible into one share of class A
common stock automatically upon any sale or transfer or at any time at the
option of the holder.
12. Includes 125,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock warrants, having an exercise price of $3.00.
13. 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.
- 66 -
14. 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).
By virtue of the fact that Mr. Shear owns 92% of the class B shares and the
class B shareholders have the right to elect all of the directors except the two
directors elected by the class A shareholders, Mr. Shear has the right to elect
the majority of the members of the Board of directors and may be deemed to be in
control of the company.
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 1, 2002:
Bruce A. Shear 22.66%
All Directors and Officers as a Group
(9 persons) 26.19%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Related Party Indebtedness
For approximately the last thirteen 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, 2002, the company
owed an aggregate of $200,000 to related parties.
During the period ended June 30, 2002, the company paid Mr. Shear and
affiliates approximately $381,600 in principal and accrued interest under
various unsecured notes to meet short term working capital requirements. As of
June 30, 2002, the company owed Bruce A. Shear $100,000 on a promissory note,
which is dated August 13, 1998, bears interest at the rate of 12% per year and
is payable on demand 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.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
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).
3.1.1Articles of Amendment filed with the Commonwealth of Massachusetts. (Filed
with the 10-QSB dated May 1997).
3.1.2Restated Articles of Organization of the Registrant, as amended. (Filed as
exhibit 3.1.2 to the company's report on Form 10-QSB dated May 14, 2001.
Commission file number 0-22916).
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 Designation of Series C Convertible Preferred Stock of PHC,
Inc. adopted by the Board of Directors on June 15, 2000 and June 26, 2000.
(Filed as exhibit 4.39 to the company's report on Form 10-QSB dated May 14,
2001. Commission file number 0-22916).
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 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 exhibit 4.18 to the company's Registration Statement on
Form SB-2 dated April 15, 1997. Commission file number 333-25231).
4.4 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 10-KSB, filed with
the Securities and Exchange Commission on October 14, 1997. Commission file
number 0-22916).
4.5 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 0-22916).
4.6 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 exhibit 4.30 to the company's Registration Statement on
Form SB-2 dated July 24, 1998. Commission file number 333-59927).
4.7 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 exhibit 4.31 to the company's Registration Statement on
Form SB-2 dated July 24, 1998. Commission file number 333-59927).
4.8 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. (Filed as exhibit
4.14 to the company's report on Form 10-KSB, filed with the Securities and
Exchange Commission on October 14, 1997. Commission file number 0-22916).
4.9 Warrant Guaranty Agreement for Common Stock Purchase Warrants issuable by
PHC, Inc. dated August 14, 1998 for Warrants No 2 and No. 3. (Filed as
exhibit 4.19 to the company's report on Form 10-KSB, filed with the
Securities and Exchange Commission on October 14, 1997. Commission file
number 0-22916).
4.10 12% Convertible Debenture by and between PHC, Inc., and Dean & Co., dated
December 3, 1998 in the amount of $500,000. (Filed as exhibit 4.20 to the
company's report on Form 10-QSB dated February 12, 1999. Commission file
number 0-22916).
4.11 Securities Purchase Agreement for 12% Convertible Debenture by and between
PHC, Inc. and Dean & Co., a Wisconsin nominee partnership for Common Stock.
(Filed as exhibit 4.21 to the company's report on Form 10-QSB dated
February 12, 1999. Commission file number 0-22916).
- 68 -
Exhibit
No. Description
4.12 Warrant Agreement to purchase up to 25,000 shares of Class A Common Stock
by and between PHC, Inc., and Dean & Co., dated December 3, 1998. (Filed as
exhibit 4.22 to the company's report on Form 10-QSB dated February 12,
1999. Commission file number 0-22916).
4.13 Warrant Agreement by and between PHC, Inc., and National Securities
Corporation dated January 5, 1999 to purchase 37,500 shares of Class A
Common Stock. (Filed as exhibit 4.23 to the company's report on Form 10-QSB
dated February 12, 1999. Commission file number 0-22916).
4.14 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares, 15,000 shares, 5,000 shares, 5,000 shares, 50,000 shares and
10,000 shares of Class A Common Stock dated December 31, 1998; 5,000 shares
of Class A Common Stock dated December 1, 1998; 10,000 shares of Class A
Common Stock dated January 1, 1999; and 10,000 shares of Class A Common
Stock dated February 1, 1999. (Filed as exhibit 4.24 to the company's
report on Form 10-QSB dated February 12, 1999. Commission file number
0-22916).
4.15 Warrant Agreement by and between PHC, Inc., and Barrow Street Research for
3,000 shares of Class A Common Stock dated February 23, 1999. (Filed as
exhibit 4.24 to the company's Registration Statement on Form S-3 dated
April 13, 1999. Commission file number 333-76137).
4.16 Warrant Agreement by and between PHC, Inc., and George H. Gordon for 10,000
shares of Class A Common Stock dated March 1, 1999. (Filed as exhibit 4.25
to the company's Registration Statement on Form S-3 dated April 13, 1999.
Commission file number 333-76137).
4.17 Warrant Agreement by and between PHC, Inc., and George H. Gordon for 10,000
shares of Class A Common Stock dated April 1, 1999. (Filed as exhibit 4.26
to the company's Registration Statement on Form S-3 dated June 1, 1999.
Commission file number 333-76137).
4.18 Warrant Agreement by and between PHC, Inc., and George H. Gordon for 10,000
shares of Class A Common Stock dated May 1, 1999. (Filed as exhibit 4.27 to
the company's Registration Statement on Form S-3 dated May 14, 1999.
Commission file number 0-22916).
4.19 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares of Class A Common Stock dated April 1, 1999. (Filed as
exhibit 4.28 to the company's report on Form 10-KSB dated October 13, 1999.
Commission file number 0-22916).
4.20 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares of Class A Common Stock dated July 1, 1999. (Filed as exhibit
4.29 to the company's report on Form 10-KSB dated October 13, 1999.
Commission file number 0-22916).
4.21 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares of Class A Common Stock dated August 1, 1999. (Filed as
exhibit 4.30 to the company's report on Form 10-KSB dated October 13, 1999.
Commission file number 0-22916).
4.22 Warrant to purchase up to 37,500 shares of Class A Common Stock by and
between PHC, Inc., and National Securities Corporation dated April 5, 1999.
(Filed as exhibit 4.31 to the company's report on Form 10-KSB dated October
13, 1999. Commission file number 0-22916).
4.23 Warrant to purchase up to 37,500 shares of Class A Common Stock by and
between PHC, Inc., and National Securities Corporation dated July 5, 1999.
(Filed as exhibit 4.32 to the company's report on Form 10-KSB dated October
13, 1999. Commission file number 0-22916).
4.24 Warrant to purchase 40,000 shares of Class A Common Stock by and between
PHC, Inc. and CCRI, Inc. and Warrant to purchase 40,000 shares of Class A
Common Stock by and between PHC, Inc. and M&K Partners both dated 3/3/97;
replaces warrant for 160,000 shares dated 3/3/97 by and between PHC, Inc.
and CCRI, Inc. (Filed as exhibit 4.34 to the company's report on Form
10-QSB filed with the Securities and Exchange Commission on May 11, 2000.
Commission file 0-22916).
- 69 -
Exhibit
No. Description
4.25 Common Stock Purchase Warrant by and between PHC, Inc. and The Shaar Fund
Ltd. dated June 28, 2000. (Filed as exhibit 4.36 to the company's
Registration Statement on Form S-3 dated July 14, 2000. Commission file
number 333-41494).
4.26 Common Stock Purchase Warrant by and between PHC, Inc. and Heller
Healthcare Finance, Inc. for 60,000 shares of Class A Common Stock. (Filed
as exhibit 4.37 to the company's report on Form 10-KSB, filed with the
Securities and Exchange Commission on September 29, 2000. Commission file
number 0-22916).
4.27 Equity Purchase Warrant to purchase 1% equity in Behavioral Health Online
by and between PHC, Inc., and Heller Healthcare Finance dated March 16,
1998. (Filed as exhibit 4.38 to the company's quarterly report on Form
10-QSB, filed with the Securities and Exchange Commission on November 14,
2000. Commission file number 0-22916).
4.28 Warrant Agreement issued to Union Atlantic Capital, LC. to purchase 25,000
Class A Common shares dated March 20, 2001. (Filed as exhibit 4.40 to the
company's report on Form 10-QSB dated May 14, 2001. Commission file number
0-22916).
4.29 Warrant Agreement issued to Marshall Sternan to purchase 10,000 Class A
Common shares dated April 15, 2001. (Filed as exhibit 4.41 to the company's
report on Form 10-QSB dated May 14, 2001. Commission file number 0-22916).
4.30 Equity Purchase Warrant to purchase 1% equity in Behavioral Health Online
by and between PHC, Inc., and Heller Healthcare Finance dated December 18,
2000. (Filed as exhibit 4.36 to the company's report on Form 10-KSB dated
September 25, 2001. Commission file number 0-22916).
5.1 Opinion of Arent Fox Kintner Plotkin & Kahn, PPLC dated May 1, 2000..
(Filed as an exhibit to the company's Registration Statement on Form S-3
dated June 6, 2000. Commission file number 333-76137).).
5.2 Opinion of Arent Fox Kintner Plotkin & Kahn, PPLC. (Filed as exhibit 5.2 to
the company's report on Form SB-2 dated June 19, 2002. Commission file
number 333-76137).
10.1 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 10-KSB on September 28,
1994)
10.2 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).
10.3 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 10-QSB, filed with the Securities and Exchange Commission on
February 25, 1997. Commission file number 0-22916).
10.4 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 10-KSB, with the Securities and Exchange Commission on October 14,
1997. Commission file number 0-22916)
10.5 Master Contract by and between Family Independence Agency and Harbor Oaks
Hospital effective January 1, 1997. (Filed as exhibit 10.123 to the
company's report on Form 10-KSB, filed with the Securities and Exchange
Commission on October 14, 1997. Commission file number 0-22916).
- 70 -
Exhibit
No. Description
10.6 Financial Advisory Agreement, Indemnification Agreement and 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 10-KSB, filed with the
Securities and Exchange Commission on October 14, 1997. Commission file
number 0-22916).
10.7 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 exhibit 10.139 to the company's Registration Statement
on Form SB-2 dated July 24, 1998. Commission file number 333-59927).
10.8 Credit Line Deed of Trust by and between PHC of Virginia, Inc., and HCFP
Funding II, Inc. dated July 1998. (Filed as exhibit 10.140 to the company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission file
number 333-59927).
10.9 Promissory Note for $50,000 dated May 18, 1998 by and between PHC, Inc. and
Tot Care, Inc. (Filed as exhibit 10.142 to the company's Registration
Statement on Form SB-2 dated July 24, 1998. Commission file number
333-59927).
10.10 Promissory Note for $50,000 dated June 9, 1998 by and between PHC, Inc.
and Tot Care, Inc. (Filed as exhibit 10.143 to the company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission
file number 333-59927).
10.11 Amendment No. 1 to Loan and Security Agreement in the amount of
$4,000,000 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 exhibit 10.57 to the company's report on Form 10-KSB dated
October 13, 1998. Commission file number 0-22916).
10.12 Promissory Note by and between PHC, Inc. and Bruce A. Shear dated August
13, 1998, in the amount of $100,000. (Filed as exhibit 10.58 to the
company's report on Form 10-QSB dated November 3, 1998. Commission file
number 0-23524).
10.13 Financial Advisory and Consultant Agreement by and between National
Securities Corporation and PHC, Inc. dated 01/05/99 (Filed as exhibit 10.61
to the company's report on Form 10-QSB dated February 12, 1999. Commission
file number 0-22916).
10.14 Promissory Note by and between PHC, Inc. and Mellon US Leasing Corporation
dated November 1999, in the amount of $160,000. (Filed as exhibit 10.68 to
the company's report on Form 10-QSB dated November 15, 1999.
10.15 Amendment number 1 to Loan and Security Agreement dated February 17, 2000
by and between PHC of Michigan, Inc., PHC, of Utah, Inc., PHC of Virginia,
Inc., PHC of Rhode Island, Inc. and Pioneer Counseling of Virginia, Inc.
and Heller Healthcare Finance, Inc., f/k/a HCFP Funding in the amount of
$2,500,000. (Filed as exhibit 10.70 to the company's report on Form 10-QSB
filed with the Securities and Exchange Commission on May 11, 2000.
Commission file 0-22916).
10.16 Registration Rights Agreement by and between PHC, Inc. and The Shaar Fund
Ltd. dated June 28, 2000. (Filed as exhibit 10.72 to the company's
Registration Statement on Form S-3 dated July 14, 2000. Commission file
number 333-41494).
10.17 Release Notice by and between PHC, Inc. and The Shaar Fund Ltd. dated June
28, 2000. (Filed as exhibit 10.73 to the company's Registration Statement
on Form S-3 dated July 14, 2000. Commission file number 333-41494).
10.18 Escrow Instruction by and between PHC, Inc.; The Shaar Fund Ltd. and
Cadwalader, Wickersham & Taft (an Escrow Agent) dated June 28, 2000. (Filed
as exhibit 10.74 to the company's Registration Statement on Form S-3 dated
July 14, 2000. Commission file number 333-41494).
- 71 -
Exhibit
No. Description
10.19 Securities Purchase Agreement by and between PHC, Inc. and The Shaar Fund
Ltd. dated June 28, 2000 to purchase 125,000 shares of Class A Common
Stock. (Filed as exhibit 10.75 to the company's Registration Statement on
Form S-3 dated July 14, 2000. Commission file number 333-41494).
10.20 Promissory Note for $532,000 dated May 30, 2000 by and between PHC, Inc.
and Irwin J. Mansdorf, Ph.D. (Filed as exhibit 10.76 to the company's
report on Form 10-KSB, filed with the Securities and Exchange Commission on
September 29, 2000. Commission file number 0-22916).
10.21 Promissory Note for $168,000 dated May 30, 2000 by and between PHC, Inc.
and Yakov Burstein, Ph.D. (Filed as exhibit 10.77 to the company's report
on Form 10-KSB, filed with the Securities and Exchange Commission on
September 29, 2000. Commission file number 0-22916).
10.22 Settlement Agreement and Mutual Releases by and between PHC, Inc. and
Yakov Burstein, Ph.D. and Irwin J. Mansdorf, Ph.D. dated May 30, 2000.
(Filed as exhibit 10.78 to the company's report on Form 10-KSB, filed with
the Securities and Exchange Commission on September 29, 2000. Commission
file number 0-22916).
10.23 Amendment number 2 to Loan and Security Agreement originally dated
February 18, 1998 by and among PHC, of Utah, Inc., PHC of Virginia, Inc.
and PHC of Michigan, Inc. and Heller Healthcare Finance, Inc. in the amount
of $3,000,000 amended as of May 24, 2001. (Filed as exhibit 10.46 to the
company's report on Form 10-KSB dated September 25, 2001. Commission file
number 0-22916).
10.24 The Company's 1993 Stock Purchase and Option Plan, as amended. (Filed as
exhibit 10.47 to the company's report on Form S-8 dated January 29, 2002.
Commission file number 333-81528).
10.25 The Company's 1995 Employee Stock Purchase Plan, as amended. (Filed as
exhibit 10.48 to the company's report on Form S-8 dated January 29, 2002.
Commission file number 333-81528).
10.27 The Company's 1995 Non-Employee Director Stock Option Plan, as amended.
(Filed as exhibit 10.49 to the company's report on Form S-8 dated January
29, 2002. Commission file number 333-81528).
10.28 Amendment Number 3 dated December 6, 2001 to Loan and Security Agreement
dated February 18, 1998 by and between PHC of Michigan, Inc., PHC of Utah,
Inc., and PHC of Virginia, Inc. and Heller Healthcare Finance, Inc.
providing collateral for the Loan and Security Agreement in the amount of
$3,000,000. (Filed as exhibit 10.50 to the company's quarterly report on
Form 10-QSB, filed with the Securities and Exchange Commission on February
12, 2002. Commission file number 0-22916).
10.29 Consolidating Amended and Restated Secured Term Note in the amount of
$2,575,542 dated December 6, 2001 by and between PHC of Michigan, Inc. and.
Heller Healthcare Finance, Inc. (Filed as exhibit 10.51 to the company's
Registration Statement on Form 10-QSB, filed with the Securities and
Exchange Commission on February 12, 2002. Commission file number 0-22916).
10.30 Amended and Restated Revolving Credit Note in the amount of $3,000,000
dated December 6, 2001 by and between PHC of Michigan, Inc., PHC of Utah,
Inc. and PHC of Virginia, Inc. and. Heller Healthcare Finance, Inc. (Filed
as exhibit 10.52 to the company's Registration Statement on Form 10-QSB,
filed with the Securities and Exchange Commission on February 12, 2002.
Commission file number 0-22916).
10.31 Amended and Restated Consolidated Mortgage Note in the amount of
$5,688,598 dated December 6, 2001 by and between PHC of Michigan, Inc and
Heller Healthcare Finance, Inc. (Filed as exhibit 10.53 to the company's
Registration Statement on Form 10-QSB, filed with the Securities and
Exchange Commission on February 12, 2002. Commission file number 0-22916).
- 72 -
Exhibit
No. Description
10.32 Third Amended and Restated Cross-Collateralization and Cross-Default
Agreement dated December 6, 2001 by and between PHC, Inc., PHC of Michigan,
Inc., PHC of Utah, Inc. and PHC of Virginia, Inc. and. Heller Healthcare
Finance, Inc. (Filed as exhibit 10.54 to the company's quarterly report on
Form 10-QSB, filed with the Securities and Exchange Commission on February
12, 2002. Commission file number 0-22916).
10.33 Overline Credit Advance in the amount of $100,000 dated January 11, 2002
by and between PHC of Michigan, Inc., PHC of Utah, Inc., PHC of Virginia,
Inc. and Heller Healthcare Finance, Inc. (Filed as exhibit 10.56 to the
company's quarterly report on Form 10-QSB, filed with the Securities and
Exchange Commission on February 12, 2002. Commission file number 0-22916).
21.1 List of Subsidiaries. (Filed as exhibit 21.1 to the company's report on
Form SB-2 dated June 19, 2002. Commission file number 333-76137).
*99.1 Written Statement of Chief Executive Officer and Chief Financial Officer
certifying the 10-KSB Annual Report.
* Filed herewith
(b) REPORTS ON FORM 8-K.
The company filed no reports on Form 8-K during the quarter ended June 30,
2002.
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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: September 19, 2002 By: /S/ BRUCE A. SHEAR
Bruce A. Shear, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, the following
persons on behalf of the registrant and in the capacities and on the dates
indicated have signed this report below.
SIGNATURE TITLE(S) DATE
/s/ BRUCE A. SHEAR President, Chief September , 2002
Bruce A. Shear Executive Officer and
Director (principal
executive officer)
/s/ PAULA C. WURTS Controller and Treasurer September 19, 2002
Paula C. Wurts (principal financial
and accounting officer)
/s/ GERALD M. PERLOW Director September 19, 2002
Gerald M. Perlow
/s/ DONALD E. ROBAR Director September 19, 2002
Donald E. Robar
________________ Director September , 2002
Howard Phillips
/s/ WILLIAM F. GRIECO Director September 19, 2002
William F. Grieco
_____________________ Director September , 2002
David E. Dangerfield
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Exhibit 99.1
WRITTEN STATEMENT
OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
The undersigned hereby certify that, to the best of the knowledge of the
undersigned, the Annual Report on Form 10-KSB for the fiscal year ended June 30,
2002 filed by PHC, Inc. with the Securities and Exchange Commission fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that the information contained in the report fairly
presents, in all material respects, the financial condition and results of
operations of the issuer.
Date: September 19, 2002 By: /s/ Bruce A. Shear
Bruce A. Shear, President
and Chief Executive Officer
Date: September 19, 2002 By: /s/ Paula C. Wurts
Paula C. Wurts, Controller
and Chief Financial Officer
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