-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AejjHitByF9vPxu6VEzmwXw4n6aIpUSTZE6MtPqaph+oBxTKsA3r99EhWrW9Noqc PwPBuppCnmCm7XnnvMLTYQ== 0000915127-98-000016.txt : 19980518 0000915127-98-000016.hdr.sgml : 19980518 ACCESSION NUMBER: 0000915127-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHC INC /MA/ CENTRAL INDEX KEY: 0000915127 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 042601571 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22916 FILM NUMBER: 98625347 BUSINESS ADDRESS: STREET 1: 200 LAKE ST STE 102 CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 5085362777 MAIL ADDRESS: STREET 1: 200 LAKE ST STREET 2: STE 102 CITY: PEABODY STATE: MA ZIP: 01960 10-Q 1 3RD QUARTER 1998 U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998. | | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ___________ Commission file number 0-23524 PHC, INC. (Exact name of small business issuer as specified in its charter) Massachusetts 04-2601571 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Lake Street, Suite 102, Peabody, MA 01960 (Address of principal executive offices) (Zip Code) 978-536-2777 (Issuer's telephone number) _______________________________________________________________________________ (Former Name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 __ No X Applicable only to corporate issuers Number of shares outstanding of each class of common equity, as of May 7, 1998: Class A Common Stock 4,932,303 Class B Common Stock 730,292 Transitional Small Business Disclosure Format (Check one): Yes X No PHC, Inc. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - March 31,1998 and June 30, 1997. Condensed Consolidated Statements of Operations - Three months ended March 31, 1998 and March 31, 1997; Nine months ended March 31, 1998 and March 31, 1997. Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 1998 and March 31, 1997. Notes to Condensed Consolidated Financial Statements-March 31, 1998. Item 2. Management's Discussion and Analysis or Plan of Operation PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 6. Exhibits and Reports on Form 8K Signatures PART I. FINANCIAL INFORMATION Item 1 Financial Statements PHC INC. AND SUBSIDIARIES (UNAUDITED) CONSOLIDATED BALANCE SHEETS Mar. 31 June 30 1998 1997 ASSETS Current assets: Cash & Cash Equivalents....................... $ 92,591 $ 844,471 Accounts receivable, net of allowance for bad debts of $2,062,093 at Mar. 31, 1998, $ 1,942,602 at June 30, 1997 9,378,264 9,066,763 Prepaid expenses.............................. 255,494 346,091 Other receivables and advances................ 467,706 249,218 Deferred Income Tax Asset..................... 515,300 515,300 Other Receivables, related party.............. 236,980 80,000 ___________ ___________ Total current assets........................ 10,946,335 11,101,843 Accounts Receivable, noncurrent.................. 645,000 605,000 Loan Receivable.................................. 118,284 134,284 Property and equipment, net...................... 3,426,581 3,525,195 Deferred income taxes............................ 154,700 154,700 Deferred financing costs, net of amortization.... 85,695 60,575 Goodwill, net of accumulated amortization........ 2,218,901 1,644,252 Other assets..................................... 125,034 214,150 Other receivables, noncurrent, related party.... 2,996,452 2,983,177 ___________ ____________ Total........................................... $20,716,982 $20,423,176 ___________ ____________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................... 2,269,118 $ 2,529,126 Notes payable--related parties................. 51,596 51,600 Current maturities of long term debt........... 1,018,039 560,914 Revolving credit note and secured term note.... 1,731,938 1,789,971 Current portion of obligations under capital leases........................................ 111,729 97,038 Accrued Payroll, Payroll Taxes and Benefits.... 525,960 303,731 Accrued expenses and other liabilities......... 548,567 672,154 Net current liabilities of discontinued operations.................................... 1,084,382 334,349 ___________ ____________ Total Current liabilities................... 7,341,329 6,338,883 ___________ ____________ Long-term debt................................... 3,031,530 3,021,540 Obligations under capital lease.................. 1,442,063 1,434,816 Notes payable related parties.................... -- 23,696 Convertible debentures........................... -- 2,734,375 Net long term liabilities of discontinued operations....................................... 1,394,373 1,145,285 ___________ ____________ Total noncurrent liabilities................... 5,867,966 8,359,712 ___________ ____________ Tota liabilities............................... 13,209,295 14,698,595 ___________ ____________ Stockholders' Equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, 950 and 500 shares issued and outstanding March 31,1998 and June 30, 1997 liquidation preference $950,000 and $504,333 respectively......................... 10 5 Class A common stock, $.01 value; 20,000,000 shares authorized, 4,932,303 and 2,877,836 shares issued Mar. 98 and June 97.................... 49,323 28,778 Class B common stock, $.01 par value; 2,000,000 shares authorized, 730,292 and 730,360 issued Mar. 98 and June 97, convertible into one share of Class A common stock....................... 7,303 7,304 Class C common stock, $.01 par value; 200,000 shares authorized, 199,816 issued and outstanding June 97...................................... -- 1,998 Additional paid-in capital.................... 15,216,280 10,398,630 Treasury stock, 8,656 shares at cost.......... (37,818) (37,818) Accumulated Deficit........................... (7,727,411) (4,674,316) ___________ ____________ Total Stockholders' Equity.................... 7,507,687 5,724,581 ___________ ____________ Total....................................... $20,716,982 $20,423,176 ___________ ____________ See Notes to Consolidated Financial Statements PHC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended March 31 March 31 1998 1997 1998 1997 Revenues: Patient Care, net ............. $ 5,362,955 $6,110,505 $15,503,447 $15,420,374 Management Fees................ 182,290 134,537 644,983 274,597 ___________ __________ ___________ ____________ Total revenue.............. 5,545,245 6,245,042 16,148,430 15,694,971 ___________ __________ ___________ ____________ Operating expenses: Patient care expenses........... 2,822,708 3,000,828 8,509,056 7,468,614 Contract expenses............... -- 92,200 -- 232,098 Provision for doubtful accounts. 537,128 287,644 1,536,377 837,524 Administrative expenses......... 2,075,115 2,084,221 6,702,613 6,227,412 ___________ __________ ___________ ____________ Total operating expenses... 5,434,951 5,464,893 16,748,046 14,765,648 ___________ __________ ___________ ____________ Income (loss) from operations..... 110,294 780,149 (599,616) 929,323 ___________ __________ ___________ ____________ Interest income................... 87,725 73,457 288,323 105,506 Other income...................... 58,960 122,005 180,709 332,641 Interest expense.................. (336,943) (395,056) (935,145) (949,681) Gain (loss) from operations held for sale...................... -- -- -- 36,478 ___________ __________ ___________ ___________ Total other income (expense). (190,258) (199,594) (466,113) (475,056) ___________ __________ ___________ ___________ Income(Loss) before Provision for Taxes............................ (79,964) 580,555 (1,065,729) 454,267 Provision for Income Taxes (Benefit) 98,309 28,536 105,509 30,000 ___________ __________ ___________ ___________ Income(Loss) Continuing Operations.. $(178,273) $ 552,019 $(1,171,238) $ 424,267 Income (Loss) from Discontinued Operations....................... $(807,802) $(472,656) $(1,829,508) $ (341,486) ___________ __________ ___________ ___________ Net Income (Loss).................. $(986,075) $ 79,363 $(3,000,746) $ 82,781 ___________ __________ ___________ ___________ Basic Earnings (loss) per common share: Income (Loss) from continuing operations.................... (.03) .16 (.23) .13 Income (Loss) from discontinued operations.................... (.15) (.14) (.36) (.11) Total............................ (.18) .02 (.58) .02 Basic Weighted average number of shares outstanding............ 5,431,196 3,354,940 5,090,919 3,170,222 Diluted Earnings (loss) per common share: Income (loss) from continuing operations...................... (.03) .12 (.23) .09 Income (loss) from discontinued operations...................... (.15) (.10) (.36) (.07) Total............................. (.18) .02 (.58) .02 Diluted Weighted average number of shares outstanding............... 5,431,196 4,506,690 5,090,919 4,855,753 See Notes to Consolidated Financial Statements
PHC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended March 31 1998 1997 Cash flows from operating activities: Net income (loss)....................... $(3,000,746) $ 82,781 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Non-Cash charge of Net cash provided (used) by discontinued operations............... 999,121 335,183 Depreciation and amortization........... 334,066 342,340 Increase in accounts receivable......... (710,969) (4,978,221) (Increase) Decrease in prepaid expenses and other current assets............... 90,597 (340,449) (Increase) Decrease in other assets..... (6,932) 1,743 Decrease in net assets of operations held for sale................................ -- 56,682 Increase (Decrease) in accounts payable.. (452,565) 476,002 Increase (decrease) in accrued expenses and other liabilities...................... 291,201 (105,709) _________ _________ Net cash used in operating activities..... (2,456,227) (4,129,648) __________ _________ Cash flows from investing activities: Acquisition of property and equipment.............................. (112,911) (198,956) Loan Receivable......................... (13,275) (1,461,645) Costs related to business acquisition............................ (626,267) (945,116) __________ _________ Net cash used in investing activities..... (752,453) (2,605,717) __________ _________ Cash flows from financing activities: Issuance of Common Stock................ 2,049,480 1,027,767 Net debt activity....................... 407,320 2,835,439 Convertible debt........................ -- 2,656,250 __________ _________ Net cash provided by financing activities.............................. 2,456,800 6,519,456 __________ _________ NET INCREASE (DECREASE) IN CASH........... (751,880) (215,909) Beginning cash balance.................... 844,471 284,044 __________ _________ ENDING CASH BALANCE....................... $ 92,591 $ 68,135 __________ _________ See Notes to Consolidated Financial Statements PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 1998 Note A - The Company PHC, Inc. ("PHC") operates substance abuse treatment centers in several locations in the United States, a psychiatric hospital in Michigan, out-patient psychiatric centers in Nevada, Kansas and Michigan and a long-term care facility in Massachusetts. PHC, Inc. also manages a psychiatric practice in New York through BSC-NY, Inc. The consolidated financial statements include PHC and its subsidiaries, all of which are 100% owned except Pioneer Counseling of Virginia, Inc. which is owned 80% by PHC, Inc. (collectively the "Company"): PHC's subsidiaries, PHC of Utah, Inc., ("PHU"), PHC of Virginia, Inc. ("PHV"), and PHC of Rhode Island, Inc. ("PHRI") provide treatment of addictive disorders and chemical dependency. PHC of Michigan, Inc. ("PHM"), operates Harbor Oaks Hospital. PHM provides inpatient psychiatric care to children, adolescents and adults and operates a partial hospitalization program that includes outpatient treatment services. PHC of Nevada, Inc. ("PHN"), operates Harmony Healthcare which was purchased on November 1, 1995. PHN provides outpatient psychiatric care to children, adolescents and adults. PHC of Kansas, Inc. ("PHK"), operates Total Concept EAP which was purchased on March 15, 1996. PHK operates Employee Assistance Programs and provides outpatient behavioral health care to children, adolescents and adults. North Point-Pioneer, Inc. ("NPP"), operates five outpatient behavioral health centers under the name of Pioneer Counseling Centers. Pioneer Counseling of Virginia, Inc., ("PCV") provides psychiatric services to adults, adolescents and children through outpatient clinics located in Salem, Virginia and Blacksburg, Virginia. Pioneer Counseling of Virginia, Inc. is owned 80% by PHC, Inc., 10% by Dr. H. Patel and 10% by Dr. M. Patel. BSC-NY, Inc. ("BSC"), is a provider of management and administrative services to psychotherapy and psychological practices in the greater New York City Metropolitan Area. Quality Care Centers of Massachusetts, Inc. ("Quality Care") operates a long-term care facility known as the Franvale Nursing and Rehabilitation Center. This facility is currently under a Purchase and Sale Agreement (see Note C) and the operating results of Quality Care have been classified as Discontinued Operations in the Condensed Consolidated Financial Statements. STL, Inc. ("STL") operated day care centers prior to July, 1993. Since that time, PHC has phased out its day care center operations and the operating results of STL have been classified as "gain from operations held for sale" in the Condensed Consolidated Financial Statements. Note B - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending June 30, 1998. The accompanying financial statements should be read in conjunction with the June 30, 1997 consolidated financial statements and footnotes thereto included in the Company's 10-KSB filed on October 14, 1997 and amended on October 29, 1997. Note C - Subsequent Events On April 14, 1998 the State completed the resurvey of the Company's Franvale Nursing and Rehabilitation Center ("Franvale") to determine if the facility had corrected all patient care and safety deficiencies cited by the Massachusetts Department of Public Health in it's January 29, 1998 routine survey. As a result of the resurvey the facility was found to be in substantial compliance with regulatory requirements. Despite the successful survey the state has not lifted the ban on admissions at the facility. As a result of the decrease in census resulting from the inability of Franvale to admit new patients, the monetary penalties and the expenses that have been incurred by the Company in an attempt to cure the cited deficiencies, the Company anticipates an adverse financial impact on future quarters in addition to the negative impact reflected in the results for the period ended March 31, 1998. On May 7, 1998 the company announced it's intention to close the Rhode Island facility by May 31, 1998. Continued efforts to turn around operations and return the Good Hope Center to profitability have been unsuccessful. PHC of Rhode Island, Inc. is committed under a long term lease for the property; however, the continuing monthly expenses under the lease are less than the monthly operating losses currently being incurred. Discussions are ongoing with the landlord for early termination of the lease. Item 2. Management's Discussion and Analysis or Plan of Operation PHC, INC. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net patient care revenue decreased 12.2% to $5,362,955 for the three months ended March 31, 1998 from $6,110,505 for the three months ended March 31, 1997. This decrease in revenue is due primarily to a sharp decline in census in the chemical dependency facilities. This decrease reflects only Patient Care revenues for the psychiatric and substance abuse facilities since Franvale, the long-term care facility is reported as discontinued operations. Management fees increased by 35% to $182,290 for the three months ended March 31, 1998 from $134,537 for the three months ended March 31, 1997. This increase in revenue is due to increases in BSC-NY, Inc. related fees for the management of Psychological and Psychotherapy practices in New York. Net patient care revenue increased .5% to $15,503,447 for the nine months ended March 31, 1998 from $15,420,374 for the six months ended March 31, 1997. This marginal increase is due to the management fee increase for the nine months as noted for the three months ended March 31, 1998. Liquidity and Capital Resources A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. Net accounts receivable from patient care increased during the quarter ended March 31, 1998 by 4.5%, approximately $405,000. This is primarily the result of a change in Accounts Receivable Financing from a Purchase and Sale of Receivables to an asset based lending arrangement. The Company continues to closely monitor its accounts receivable balances and is working to reduce amounts due consistent with growth in revenues. The former owners of Behavioral Stress Centers, Inc., now BSC-NY, Inc., agreed to accept full payment for the earn-out consideration required to be paid to them for the year ended October 31, 1997 pursuant to the Agreement and Plan of Merger in PHC, Inc. common stock. The total amount of the earn-out for which PHC, Class A Common Stock was issued is $467,288. According to the original agreement 50% of this would have been paid in cash. As a result of this agreement 227,347 shares of PHC, Inc. Class A Common Stock were issued on March 26, 1998. In February 1998 the Company entered into an Accounts Receivable funding arrangement with HealthCare Financial Partners, Inc. The agreement provides for advance funding of the Accounts Receivable of five of the PHC, Inc. subsidiaries. In conjunction with this agreement the Company liquidated the Accounts Receivable Purchase and Sale agreement with Finova Capital. On March 10, 1998 the company issued a warrant to purchase 52,500 shares of PHC, Inc. Class A Common Stock, exercisable at $2.38 per share, in conjunction with a $350,000 financing provided to PHC, Inc. On March 18, 1998 the company issued 950 shares of Series B Convertible Preferred Stock at $1,000 each. which provided net proceeds to the company of $855,000. The company also issued warrants to purchase 49,990 shares of PHC, Inc. Class A Common Stock exercisable at $2.31. On May 15, 1998 the Company entered into a joint venture with Lexington Healthcare Group, Inc. to provide Psychiatric services to Nursing Homes in Connecticut through Behavioral Rehab Services of Connecticut, Inc. PHC, Inc. will be the managing party in the agreement and BSC-NY, Inc. will provide billing services and technical support. As of May 15, 1998 the Behavioral Rehab Services of Connecticut, Inc. has signed contracts to provide services to five nursing homes in Connecticut. The Company believes that it has the necessary liquidity and capital resources and contingent funding commitments to sustain existing operations for the foreseeable future. The Company also intends to renew the expansion of its operations through the acquisition or establishment of additional treatment facilities after the sale of Franvale is consummated and the Good Hope Center is closed. The Company's expansion plans will be dependent upon obtaining adequate financing as opportunities arise. FORWARD LOOKING STATEMENTS This quarterly report contains certain forward-looking statements regarding the Company, its business prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitations, the Company's ability to successfully and timely develop and finance new projects, the impact of competition on the Company's revenues, and changes in reimbursement rates, patient mix, and demand for the Company's services. When used, words such as "believes", "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report, news releases, and other reports filed with Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. PART II OTHER INFORMATION Item 1. Legal Proceedings. In January 1996, the Company received notice that Mullikin Medical Center, A Medical Group, Inc. ("Mullikin"), located in Artesia, California, filed a petition with the U.S. Patent Trademark Office (the "PTO") seeking cancellation of the registration of the PIONEER HEALTHCARE mark. This cancellation proceeding is currently pending before the PTO. Although the Company regards Mullikan's petition to be without merit, an adverse decision could result in required discontinuance of the PIONEER HEALTHCARE mark and inconsequential money damages. On January 26, 1998 the Company's wholly owned subsidiary Quality Care Centers of Massachusetts, Inc., d/b/a Franvale Nursing & Rehabilitation Center was served with a complaint filed by Healthcare Services Group, Inc. in the Norfolk County Superior Court (Civil Action No. 98-00132). The complaint alleges claims for breach of contract and quantum meruit and seeks recovery of approximately Sixty Seven Thousand Five Hundred Dollars ($67,500.00) in connection with a prior business arrangement between the parties. On February 5, 1998, the court approved Healthcare Services Group, Inc.'s Motion To Attach Real Estate and issued an Attachment in the amount of Seventy Thousand Dollars ($70,000.00) against the real estate held by Franvale. The Company is defending this claim and does not believe that an adverse outcome would have a material effect on the Company. Item 6. Exhibits and Reports on Form 8K (a) Exhibit List Exhibit No. Description 10.137 First Amendment to Mortgage between PHC, of Michigan Inc. and HCFP Funding, Inc. (b) Reports on Form 8K On April 29, 1998 the Company filed a Current Report on Form 8-K regarding the changes in Registrant's Certifying Accountant to BDO Seidman, LLP. On May 7, 1998 the Company filed a report on Form 8K-A regarding the agreement of termination by Richard A. Eisner & Company, LLP. Signatures In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 15, 1998 /s/ Bruce A. Shear President Chief Executive Officer Date: May 15, 1998 /s/ Paula C. Wurts Controller Assistant Treasurer Exhibit Index Description 27 Financial Data Schedule 99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. 10.137 First Amendment to Mortgage between PHC, of Michigan Inc. and HCFP Funding, Inc. Exhibit 10.137 FIRST AMENDMENT TO MORTGAGE This First Amendment is made to the Mortgage recorded in Liber 7442, Pages 186-1 96, on May 5, 1997, Macomb County Records ("Mortgage") between PHC OF MICHIGAN, INC., a Massachusetts corporation, having its principal office at 200 Lake Street, Suite 102, Peabody, Massachusetts 01960 ("Mortgagor") and HCFP FUNDING, INC., a Delaware corporation having its principal office at 2 Wisconsin Circle, Fourth Floor, Chevy Chase, Maryland 20815 ("Mortgagee"). RECITALS A. Mortgagor, PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Rhode Island, Inc. and Pioneer Counseling of Virginia, Inc. are sister corporations ("Affiliates"). B. Mortgagee loaned money to each of the Affiliates on February 18, 1998 ("Loans"), pursuant to and secured by a Loan and Security Agreement. The consideration for this First Amendment is set forth in that Loan and Security Agreement. C. The Mortgage benefits each of the Affiliates, and each of the Affiliates acknowledges the Mortgage and debt secured thereby as sufficient consideration for entering into this First Amendment. The parties agree as follows: 1. The Mortgage is amended to add the following provisions: a. This is a future advance mortgage. The maximum principal amount, excluding protective advances, that may be secured by this Mortgage is $4,000,000. As a result, each of the loans made in February of 1998, will relate back to the secured position of the Mortgage and be secured by the Mortgage. b. The debt secured by the Mortgage has been amended and restated per the provisions of the Loan and Security Agreement. c. Any default under the terms of the Loan and Security Agreement or the Loan Documents (as defined in the Loan and Security Agreement) is an event of default under the Mortgage. d. A default by any one of the Affiliates under the Loan and Security Agreement will be treated as a default by each of the Affiliates and shall entitle Mortgagee to pursue all rights and remedies as set forth in the Mortgage and the Loan and Security Agreement. Except for these revisions, the Mortgage as originally executed remains in full force and effect. Executed in Chevy Chase, Maryland on April ________, 1998. WITNESSES: HCFP FUNDING, INC., a Delaware corporation ________________________________ By: ____________________________________ _____________________________ __ Its: _____________________________________ The foregoing instrument was acknowledged before me in Montgomery County, Maryland this ______ day of April, 1998 by __________ as _________________ of HCFP Funding, Inc. ___________________________________________ Notary Public Montgomery County, Maryland My Commission Expires: ___________________ G:\LEGAL\OOPHCAmMortg.doc 2 Executed in _____________________, Massachusetts on April ________, 1998. WITNESSES: PHC OF MICHIGAN, INC., a Massachusetts corporation ________________________________ By: _________________________________ Bruce A. Shear, President ________________________________ The foregoing instrument was acknowledged before me in _______________ County, Massachusetts this _______ day of April, 1998 by Bruce A. Shear as President of PHC of Michigan, Inc. _______________________________________________ Notary Public _______________ County, Massachusetts My Commission Expires: ________________________ Executed in ___________, __________ on April _________, 1998. WITNESSES: PHC OF UTAH, INC., a Massachusetts corporation _____________________________________ By: ________________________________ Bruce A. Shear, President _____________________________________ The foregoing instrument was acknowledged before me in __________ County, Massachusetts this __________ day of April, 1998 by Bruce A. Shear as President of PHC of Utah, Inc. __________________________________________ Notary Public _______________ County, Massachusetts My Commission Expires: __________________ G:\LEGAL\OOPHCAmMortg.doc 3 Executed in _________________________, Massachusetts on April ________, 1998. WITNESSES: PHC OF VIRGINIA, INC., a Massachusetts corporation _______________________________ By: _______________________________________ Bruce A. Shear, President ______________________________ The foregoing instrument was acknowledged before me in _______________ County, Massachusetts this _______ day of April, 1998 by Bruce A. Shear as President of PHC of Virginia, Inc. ____________________________________________ Notary Public ______________ County, Massachusetts My Commission Expires: __________________ Executed in ___________, Massachusetts on April _________, 1998. WITNESSES: PHC OF RHODE ISLAND, INC., a Massachusetts corporation _____________________________________ By: ________________________________ Bruce A. Shear, President _____________________________________ The foregoing instrument was acknowledged before me in __________ County, Massachusetts this __________ day of April, 1998 by Bruce A. Shear as President of PHC of Rhode Island, Inc. ________________________________________ Notary Public _______________ County, Massachusetts My Commission Expires: _________________ G:\LEGAL\OOPHCAmMortg.doc 4 Executed in ___________________________, Massachusetts on April ________, 1998. WITNESSES: PIONEER COUNSELING OF VIRGINIA, INC., a Massachusetts corporation _____________________________________ By: _______________________________ Bruce A. Shear, President _____________________________________ The foregoing instrument was acknowledged before me in _______________ County, Massachusetts this _______ day of April, 1998 by Bruce A. Shear as President of Pioneer Counseling of Virginia, Inc. ___________________________________________ Notary Public _______________ County, Massachusetts My Commission Expires: ___________________ This instrument prepared by and when recorded return to: Stephen L. Burlingame Fraser Trebilcock Davis & Foster, P.C. 1000 Michigan National Tower Lansing, Michigan 48933 G:\LEGAL\OOPHCAmMortg.doc 5 Exhibit CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE LITIGATION REFORM ACT OF 1995 PHC, Inc. (the "Company") desires to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this Exhibit 99.1 in its Form 10-QSB in order to do so. The Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for the Company's current quarter and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. During its last fiscal year and in certain other fiscal years of its operation, the Company has generated losses and there can be no assurance that future losses will not occur. The Company has experienced a significant increase in accounts receivable in recent years and there can be no assurance that this trend will not continue, and that if it does, that it will not have a material adverse effect on the Company's cash flow and financial performance. The Company historically experiences and expects to continue to experience a decline in revenue in its fiscal quarters ending December 31 due to a seasonality decline in revenue from the Company's substance abuse facilities during such period. Payment for the company's substance abuse treatment is provided by private insurance carriers and managed care organizations; payment for long-term and subacute care is provided by private insurance carriers, managed care organizations and the Medicare and Medicaid programs; payment for psychiatric services is provided by private insurance carriers, managed care organizations and the Medicare and Medicaid programs. In general, revenues derived from the Medicare and Medicaid programs in connection with the long-term and subacute care services provided by the Company have been less profitable to the Company than revenues derived from private insurers and managed care organizations in connection with the substance abuse treatment provided by the Company and changes in the sources of the Company's revenues could significantly alter the Company's profitability. Additionally, the Company experiences greater delays in the collection of amounts reimbursable by the Medicare and Medicaid programs than in the collection of amounts reimbursable by private insurers and managed care organizations. Accordingly, a change in the Company's service mix from substance abuse to long-term care could have a materially adverse effect on the Company as would an increase in the percentage of the Company's patients who are insured by Medicare or Medicaid. Cost containment pressures from private insurers in the Medicare and Medicaid programs may begin to restrict the amount that the Company can charge for its services. There can be no assurance that the Company's existing facilities will continue to meet, or that proposed facilities will meet, the requirements for reimbursement by third party or government payors. The Company has substantial receivables from Medicare and Medicaid which constitute a concentration of credit risk should these agencies defer or be unable to make reimbursement payments as due. The Company often experiences significant delays in the collection of amounts reimbursable by third-party payors. Although the Company believes it maintains an adequate allowance for doubtful accounts, if the amount of receivables which eventually becomes uncollectible exceeds such allowance, the Company could be materially adversely affected. If a growing number of managed care organizations and insurance companies adopt policies which limit the length of stay for substance abuse treatment, the Company's business would be materially adversely affected. There can be no assurance that occupancy rates at the Company's facilities will continue at present levels. Similarly, there can be no assurance that the patient census will not decrease in the future. There can be no assurance that the Company will be successful in identifying appropriate acquisition opportunities, or if it does, that the Company will be successful in acquiring such facilities or that such acquired facilities will be profitable. The failure of the company to implement its acquisition strategy could have a materially adverse effect an the Company's financial performance. Moreover, the inherent risks of expansion could also have a material adverse effect on the Company's business. Additionally, the company's acquisition program will be directed by the President and Chief Executive officer of the Company and the Company does not intend to seek stockholder approval for any such acquisitions unless required by applicable law or regulations. Accordingly, investors will be substantially dependent upon the business judgment of management in making such acquisitions. Furthermore, the company's acquisition strategy is highly dependent on access to capital, of which there can be no assurance. The Company and the healthcare industry in general are subject to extensive federal, state and local regulation with respect to licensure and conduct of operations. There can be no assurance that the Company will be able to obtain new licenses to affect its acquisition strategy or maintain its existing licenses and reimbursement program participation approvals. It is not possible to accurately predict the content or impact of future legislation and regulations affecting the healthcare industry. In addition, both the Medicare and Medicaid programs are subject to statutory and regulatory changes and there can be no assurances that payments under those programs to the Company will, in the future, remain at a level comparable to the present level or be sufficient to cover the cost allocable to such patients. Bruce A. Shear the President and Chief Executive officer of the Company together with his affiliates is able to control all matters requiring approval of the stockholders, including the election of a majority of the directors, as a result of his ownership of the Company's stock. There can be no assurance that the Company will be successful in hiring or retaining the personnel it requires for continued growth, or that the Company will be able to continue to attract and retain highly qualified personnel, particularly skilled healthcare personnel. The healthcare business is highly competitive and subject to excess capacity. The Company has entered into relationships with large employers, healthcare institutions, labor unions and other key clients to provide treatment for chemical dependency and substance abuse as well as other services and the loss of any of these key clients would require the Company to expend considerable effort to replace patient referrals and would result in revenue losses to the Company and attendant loss in income. Existing environmental contamination at certain of the Company's facilities and potential future environmental contamination at facilities acquired by the company could have a materially adverse effect on the Company's operations. On October 31, 1994, the Company was served with a summons for a Civil Action in the Superior Court Department of the Trial Court of the Commonwealth of Massachusetts by NovaCare, Inc. ("NovaCare"), an entity which contracted with the Company in 1992 to provide rehabilitation therapy and related administrative services to the Company's long-term care facility (the "Action"). The complaint alleged that the Company owed NovaCare contractual damages in the amount of approximately $587,000, plus interest, attorney fees, costs of collection, and double or triple damages pursuant to a Massachusetts statute prohibiting unfair and deceptive trade practices. The Company filed a counterclaim alleging that NovaCare breached the contract in question and that the Company may be owed damages in excess of the amount sought by NovaCare. On February 13, 1996, the company settled the Action by agreeing to pay NovaCare an amount less than its claim. The Company is not paying NovaCare accrued interest, attorney's fees, costs of collection, or multiple damages. A portion of the settlement amount has already been paid. The balance of the settlement amount is payable over twelve (12) months with interest on the unpaid balance at 9.5%. In the event that the Company defaults on its obligation to pay the settlement amount, it has agreed to entry of judgment against it in the amount of $457, 637.46 (the "Judgment"). The Judgment represents the full unpaid balance of NovaCare's claim against the Company, including interest, attorney's fees, and costs of collection. Any amounts paid by the Company to NovaCare after February 9, 1996 shall be deducted from the Judgment. Until the settlement amount is paid, NovaCare will continue to hold a mortgage on a day care property owned by the Company in Saugus, Massachusetts. As of Fiscal Year Ended June 30, 1997, this obligation has been paid in full. Interruption by fire, earthquakes or other catastrophic events, power failures, work stoppages, regulatory actions or other causes to any of the Company's operations could have a materially adverse impact on the Company. The company has and in the future may enter into transactions in which it acquires businesses or obtains financing for a consideration that includes the issuance of stock, warrants, options or convertible debt at a price less than the value at which the Company's stock may then be trading in the public markets or which are convertible into or exercisable for Common Stock at a conversion rate or exercise price less than such value. Such transactions may result in significant dilution to the existing holders of the Company's stock. The Company has authorized 1,000,000 shares of Preferred Stock, the terms of which may be fixed and which may be issued by the Company's Board of Directors, without stockholder approval. The issuance of the Preferred Stock could have the effect of making it more difficult for a third party to acquire the Company and may result in the issuance of stock that dilutes the existing stockholders and has liquidation, redemption, dividend and other preferences superior to the Company's outstanding Class A Common Stock. NOTE: THIS DOES NOT DISCUSS PREFERRED STOCK, REDEMPTION OF WARRANTS, THE EFFECTS OF DE-LISTING FROM NASDAQ, PENNY STOCK RULES OR THIN FLOAT. THOSE SUBJECTS ARE, HOWEVER, INCLUDED IN THE RISK-FACTOR SECTION OF THE 06/97 S-3. EX-27 2 FDS - FINANCIAL DATA SCHEDULE
5 This schedule contains financial information extracted from the consolidated balance sheet and the consolidated statement of income filed as part of the report on Form 10-QSB and is qualified in its entirety by reference to such report on Form 10-QSB. 0000915127 PHC, Inc. 1 US 9-MOS JUN-30-1998 JUL-1-1997 MAR-31-1998 1.000 92,591 0 12,085,357 2,062,093 0 10,946,335 4,662,328 1,235,747 20,716,982 7,341,329 0 0 10 56,626 7,451,051 20,716,982 0 16,148,430 0 16,748,046 466,113 1,536,377 935,145 (1,065,729) 105,509 (1,171,238) (1,829,508) 0 0 (3,000,746) (.58) (.58)
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