0000915127-01-500028.txt : 20011009
0000915127-01-500028.hdr.sgml : 20011009
ACCESSION NUMBER: 0000915127-01-500028
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010926
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-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-22916
FILM NUMBER: 1744826
BUSINESS ADDRESS:
STREET 1: 200 LAKE ST STE 102
CITY: PEABODY
STATE: MA
ZIP: 01960
BUSINESS PHONE: 9785362777
MAIL ADDRESS:
STREET 1: 200 LAKE ST
STREET 2: STE 102
CITY: PEABODY
STATE: MA
ZIP: 01960
10-K
1
kl0k0925.txt
ANNUAL REPORT 2001 PHC, INC.
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, 2001
[ ] 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, 2001 were $22,749,836.
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 31, 2001, was $3,878,821. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At August 31, 2001, 8,688,158 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
- 1 -
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 trucking industry. 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,
Behavioralhealthonline.com, which provides education, training and materials to
behavioral health professionals in addition to providing internet support to all
of our other subsidiaries. Through our newest subsidiary we work with major
manufacturers of psychiatric pharmaceuticals to assist in the study of the
effects of certain FDA approved products in the treatment of specific mental
illness. Until February 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, oil and gas exploration, 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.
- 2 -
PSYCHIATRIC SERVICES INDUSTRY
Substance Abuse Facilities
Industry Background
The demand for substance abuse treatment services increased rapidly in the
last decade. The company believes that the increased demand is related to
clinical advances in the treatment of substance abuse, greater societal
willingness to acknowledge the underlying problems as treatable illnesses,
improved health insurance coverage for addictive disorders and chemical
dependencies and governmental regulation which requires certain employers to
provide information to employees about drug counseling and employee assistance
programs.
To contain costs associated with behavioral health issues in the 1980s,
many private payors instituted managed care programs for reimbursement, which
included pre-admission certification, case management or utilization review and
limits on financial coverage or length of stay. These cost containment measures
have encouraged outpatient care for behavioral problems, resulting in a
shortening of the length of stay and revenue per day in inpatient chemical abuse
facilities. The company believes that it has addressed these cost containment
measures by specializing in treating relapse-prone patients with poor prognoses
who have failed in other treatment settings. These patients require longer
lengths of stay and come from a wide geographic area. The company continues to
develop alternatives to inpatient care including partial day and evening
programs in addition to on site and off site outpatient programs.
The company believes that because of the apparent unmet need for certain
clinical and medical services, its strategy has been successful despite national
trends towards outpatient treatment, shorter inpatient stays and rigorous
scrutiny by managed care organizations.
Company Operations
The company has been able to secure insurance reimbursement for longer-term
inpatient treatment as a result of its success with poor prognosis patients. The
company's two substance abuse facilities work together to refer patients to the
center that best meets the patient's clinical and medical needs. Each facility
caters to a slightly different patient population including high-risk,
relapse-prone chronic alcoholics, drug addicts, minority groups and dual
diagnosis patients (those suffering from both substance abuse and psychiatric
disorders). The company concentrates on providing services to insurers, managed
care networks and health maintenance organizations for both adults and
adolescents. The company's clinicians often work directly with managers of
employee assistance programs to select the best treatment facility possible for
their clients.
Each of the company's facilities operates a case management program for
each patient including a clinical and financial evaluation of a patient's
circumstances to determine the most cost-effective modality of care from among
outpatient treatment, detoxification, inpatient, day care, specialized relapse
treatment and others. In addition to any care provided at one of the company's
facilities, the case management program for each patient includes aftercare.
Aftercare may be provided through the outpatient services provided by a
facility. Alternatively, the company may arrange for outpatient aftercare, as
well as family and mental health services, through its numerous affiliations
with clinicians located across the country once the patient is discharged.
- 3 -
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 34-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
- 4 -
also offers extensive aftercare assistance at programs strategically located in
areas of client concentration throughout the United States. Highland Ridge
maintains a comprehensive array of professional affiliations to meet the needs
of discharged patients and other individuals not admitted to the hospital for
treatment.
Highland Ridge periodically conducts or participates in research projects.
Highland Ridge was the site of a 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, 2001. 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 25-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
- 5 -
main advantage is its ability to provide an integrated delivery system of
inpatient and outpatient care. As a result of integration, the company is better
able to manage and track patients.
The company 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
- 6 -
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.
TOTAL CONCEPT EAP - Total Concept, an outpatient clinic located in Overland
Park, 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
FDA approved products 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
BEHAVIORAL HEALTH ONLINE, INC. - Behavioral Health Online designs, develops
and maintains the company's web site, Behavioralhealthonline.com. The web site
provides behavioral health professionals with the educational tools required to
keep them abreast of behavioral health breakthroughs and keep individuals
informed of current issues in behavioral health of interest to them. The
original site, Behavioralhealthonline.com, was launched in May 1999. The company
launched its new updated site Wellplace.com in September 2000. Wellplace also
provides Internet support to the other operating Pioneer subsidiaries.
Operating Statistics
The following table reflects selected financial and statistical information
for all psychiatric services.
Year Ended June 30,
2001 2000
____________________________________
Inpatient
Net patient service revenues $ 13,507,124 $ 11,768,434
Net revenues per patient day (1) $ 418 $ 403
Average occupancy rate (2) 72.0% 65.1%
Total number of licensed
beds at end of period 123 123
Source of Revenues:
Private (3) 82.0% 81.9%
Government (4) 18.0% 18.1%
Partial Hospitalization
and Outpatient
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Year Ended June 30,
2001 2000
____________________________________
Net Revenues:*
Individual $ 5,283,278 $ 5,027,238
Contract $ 2,297,071 $ 1,880,168
Sources of revenues:
Private 97.9% 97.6%
Government 2.1% 2.4%
Other Psychiatric
Services:
PDS2 (5) $ 944,567 $ 653,930
Practice Management (6) $ 345,111 $ 1,048,990
(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.
(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.
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.
- 8 -
The company employs five 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 majority of the
company's national marketing efforts. In addition, employees at certain
facilities perform national 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 system 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 launched its
web site, Wellplace.com formerly Behavioralhealthonline.com, in May 1999. The
articles published on the web site are 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.
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,
- 9 -
employees 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. 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
workers, psychologists, nurses, dietitians, therapists and counselors, must meet
the minimal requirements of licensure related to their specific discipline, in
addition to each facility's own internal quality assurance criteria. The company
participates in the federally mandated National Practitioners Data Bank, which
monitors professional accreditation nationally.
In response to the increasing reliance of insurers and managed care
organizations upon utilization review methodologies, the company has adopted a
comprehensive documentation policy to satisfy relevant reimbursement criteria.
Additionally, the company has developed an internal case management system,
which provides assurance that services rendered to individual patients are
medically appropriate and reimbursable. Implementation of these internal
policies has been integral to the success of the company's strategy of providing
services to relapse-prone, higher acuity patients.
Government Regulation
The company's business and the development and operation of the company's
facilities are subject to extensive federal, state and local government
regulation. In recent years, an increasing number of legislative proposals have
been introduced at both the national and state levels that would effect major
- 10 -
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.
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.
- 11 -
Medicare Reimbursement
Currently the only facility of the company that receives Medicare
reimbursement is Harbor Oaks. For the fiscal year ended June 30, 2001 12.68% 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.
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
- 12 -
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, 2001 the company had 378 employees of which 5 were dedicated
to marketing, 98 (19 part time) to finance and administration and 275 (127 part
time) to patient care. All of the company's 378 employees are leased from
Inovis, formerly International Personnel Resources, LTD. ("IPR"), a national
employee-leasing firm. The company has elected to lease its employees to provide
more favorable employee health benefits at lower cost than would be available to
the company as a single employer and to eliminate certain administrative tasks
which otherwise would be imposed on the management of the company. The agreement
provides that 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.
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, 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 maintains an umbrella policy of $1,000,000. Mount
Regis has limits of $2,000,000 per claim and $4,000,000 in the aggregate.
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.
- 13 -
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 $80,640 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 $425,000. 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, NPP and BSC each lease their premises. The company
believes that each of these premises is leased at fair market value and could be
replaced without significant time or expense if necessary. 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 have been asserted against the Company or may be asserted
against the Company in the future. To date, such claims are as follows:
On or about September 14, 1998, the Company and its wholly owned
subsidiary, Franvale, were each served with document subpoenas in connection
with an on going investigation of Franvale being conducted by the Commonwealth
of Massachusetts. In December 2000 the company finalized a settlement agreement
with the Commonwealth in this case, which required payment of $660,000 in three
installments between December 31, 2000 and June 30, 2001. This obligation has
been paid in full.
- 14 -
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 is fully cooperating with the investigation and currently is engaged in
resolution discussions.
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, 2001.
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
___________ ___________
2000
First Quarter $ 1.3125 $ .3125
Second Quarter $ 1.3125 $ .5625
Third Quarter $ 3.50 $ .688
Fourth Quarter $ 2.094 $ 1.00
2001
First Quarter $ 1.50 $ .50
Second Quarter $ .5625 $ .6250
Third Quarter $ .6094 $ .1250
Fourth Quarter $ .59 $ .19
2002
First Quarter
(through August 31, 2001) $ .50 $ .30
On August 31, 2001, the last reported sale price of the Class A Common
Stock was $.50. On August 31, 2001 there were 683 holders of record of the
company's Class A Common Stock and 312 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. The
company is precluded under capital law from paying cash dividends, however, the
company does accrue dividends on preferred stock according to the preferred
stock agreement. The company's ability to pay cash dividends in the future will
depend on the company's future earnings, if any, the financial position of the
- 15 -
company and such other factors as the company's Board of Directors, in its
discretion, deems relevant.
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, 2001 and 2000.
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 outlined in this report under "Description of Business" and
detailed in footnote A to the 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. As of the last month of the fiscal year, monthly
expenses of the internet operation have been decreased by approximately 70%
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 FDA approved products 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.
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.
Results of Operations
Years Ended June 30, 2001 and 2000
The company experienced a significant increase in profitability from its
ongoing operations. Total revenues increased by 11.6% to $22,749,836 for the
year ended June 30, 2001 from $20,378,760 for the year ended June 30, 2000.
Total revenues excluding BSC-NY, Inc., the practice management operation closed
in the current fiscal year, increased 15.9% to $22,404,725 for the year ended
June 30, 2001 from $19,329,770 for the year ended June 30, 2000. This increase
in total revenues resulted in an increase in income from operations of $671,176
for the year ended June 30, 2001 over the year ended June 30, 2000 to $937,486
from $266,310 before closing expenses of the practice management operation. The
- 16 -
company experienced continued progress on its return to profitability for its
operating facilities. Excluding the practice management closing expenses, the
company decreased its net loss to $64,399 for the year ended June 30, 2001 from
$612,671 for the year ended June 30, 2000.
Total net patient care revenue from all facilities, increased 12.9% to
$21,087,473 for the year ended June 30, 2001 from $18,675,840 for the year ended
June 30, 2000. This increase in revenue is due primarily to the increase in
census at our inpatient facilities. Net inpatient care revenue from psychiatric
services increased 14.8% to $13,507,124 for the fiscal year ended June 30, 2001
from $11,768,434 for the fiscal year ended June 30, 2000 and net partial
hospitalization and outpatient care revenue increased 9.7% to $7,580,349 for the
year ended June 30, 2001 from $6,907,406 for the year ended June 30, 2000.
Revenues from Pioneer Development and Support Services ("PDS2") increased 44.4%
to $944,567 for the year ended June 30, 2001 from $653,930 for the year ended
June 30, 2000. 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 $369,500 due to the
increase in patient census at our inpatient facilities for the year ended June
30, 2001. Inpatient census increased by approximately 3,000 patient days, 10%,
for the year ended June 30, 2001 compared to the year ended June 30, 2000.
Pharmacy costs increased approximately 32% to $322,520 for the year ended June
30, 2001 from $245,338 for the year ended June 30, 2000; and food expense
increased approximately 14% to $445,651 for the year ended June 30, 2001 from
$389,697 for the year ended June 30, 2000. We also increased our census from
outside the facilities local areas resulting in an increase in patient
transportation expense of approximately 28% to $274,493 for the year ended June
30, 2001 from $214,737 for the year ended June 30, 2000. Close monitoring of
orders for laboratory tests and the fees associated with the tests resulted in a
decrease in laboratory fees of approximately 34% to $144,485 for the year ended
June 30, 2001 from $218,810 for the year ended June 30, 2000. 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 increased 72.6% to $1,351,150 for the year ended June 30,
2001 from $783,004 for the year ended June 30, 2000. This increase is due to the
build-up of the start-up operations in the first nine months of the year. During
the last three months of the year the company changed the focus of the internet
Company to internal support of the other operating locations and decreased on
going monthly expenses by approximately 70%.
In December 2000 the Company's Board of Directors decided to close its'
BSC-NY, Inc. practice management operations due to recent deterioration of
operating results. Revenues of BSC-NY, Inc. were dependent on the success of the
professional corporation, Rubenfaer Physician Services, P.C. 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 December 31, 2000 before closing
expenses. These adverse operating conditions were caused by the decline in
revenues produced by the professional corporation which has 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.
- 17 -
Contract expenses related to PDS2 increased 56.9% to $855,128 for the year
ended June 30, 2001 from $545,176 for the year ended June 30, 2000. This
increase is due to an increased number of contracts and additional services
provided to long term contracts.
Total administrative expenses for all facilities increased 1.2% to
$7,452,714 for the year ended June 30, 2001 from $7,361,578 for the year ended
June 30, 2000. This minimal increase in administrative expense is due to the
increase in expenses for Pioneer Pharmaceutical Research and increased
administrative costs indirectly related to increases in census which were
partially offset by decreases resulting from the close of BSC-NY, Inc. in fiscal
year 2001 and the close of Pioneer Counseling of Virginia in fiscal year 2000.
Interest expense increased 24.2% to $1,043,030 for the year ended June 30,
2001 from $837,706 for the year ended June 30, 2000. This increase is due to
administrative fees charged on the short term funds required to pay the amount
due to the state of Massachusetts in legal settlement of the Franvale litigation
(see Part I, "Legal Proceedings") and interest expense incurred on debt due
former owners of closed operations.
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. In response to today's healthcare environment, 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 also seek assistance through every legal means, including the
State insurance commissioner's office, when appropriate, to collect claims. This
early concentration on claim collection allows facility staff to become aware of
minor billing errors early and correct them before the claim can be denied for
timely and accurate submission. Any valid claims denied due to billing errors on
the part of the company which require write-off are charged to bad debt expense
in the period the account is written off. Any invalid claims result in a charge
against revenue not reserves. An amount is recorded as a contractual adjustment
only if an agreement with the insurance carrier is on file before the patient is
admitted. 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. The collection difficulties experienced are due to
the denial of claims that had been previously approved. Managed care companies
frequently deny claims although authorization for treatment is on file. The
company has limited success in challenging these denials. Accordingly, the
company has adopted a more aggressive reserve policy to reserve amounts sooner
to address these changing conditions in the healthcare environment.
Liquidity and Capital Resources
The company used cash in operations of $461,277 for the year ended June 30,
2001. The net loss of $5,250,705, included non-cash charges of $262,227 for
depreciation and amortization and goodwill and accounts receivable write downs
totaling $4,947,259 related to the practice management closing. Additionally,
expenses related to a decrease in net liabilities of discontinued operations of
$923,682, used for legal fees and the Franvale State settlement were offset by a
decrease in accounts receivable of $649,407. During the fiscal year the company
also used cash in the acquisition of furniture and equipment of $186,842 and
website development of $70,226. The company was required to finance its
shortfall in cash from operations through debt and equity transactions as
follows:
- 18 -
NUMBER
TRANSACTION OF MATURITY
DATE TYPE SHARES PROCEEDS DATE TERMS STATUS
______________________________________________________________________________
08/99 Extension of $310,000 12/31/99 $45,000 on Paid
existing over signing in full
line Note plus prime
Payable plus 2.25%
annual
interest
rate
11/99 Revolving $979,000 11/30/01 prime plus Outstanding
term Note ($579,000 5% annual
maximum paid interest
advance off rate
$1,000,000. existing plus 1%
Secured by a debt annual
Restated and commitment
Mortgage on $400,000 fee
the Michigan advanced
property and for
guarantee of working
the Parent capital)
Company.
05/00 Term Note $500,000 05/26/02 Prime Outstanding
$500,000 plus 3%
Secured by a annual
restated interest
mortgage on rate
the Michigan plus 1%
property and annual
guarantee of commitment
the parent fee
company.
06/00 Issue series 136,000 $1,000,00006/28/03 8% Outstanding
C preferred dividend 19,300
stock paid shares
upon converted
conversion
08/00 Issue series 34,000 $250,000 08/01/03 8% Outstanding
C preferred dividend
stock paid
upon
conversion
12/00 Overline $330,000 04/30/01 $30,000 Paid
Agreement on in
with Heller signing full
plus
Prime
plus
2.25%
03/01 Extended the $779,166 03/31/03 Prime Outstanding
March 1997 plus 5%
Secured Term
Note
through
March 2003
- 19 -
NUMBER
TRANSACTION OF MATURITY
DATE TYPE SHARES PROCEEDS DATE TERMS STATUS
______________________________________________________________________________
06/01 Overline $400,000 12/17/01 10% on Outstanding
Agreement advance
with Heller of funds
as amended plus
08/09/01 Prime
plus
2.25%
The company also met certain obligations through the issuance of stock, stock
options and warrants totaling approximately $37,000 and $183,000 for the year
ended June 30, 2001 and 2000, respectively.
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 10%
to $6,220,715 on June 30, 2001 from $6,928,490 at June 30, 2000. 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,
2001 was approximately $2,112,000. In March 2001 the company refinanced $779,166
ofthe outstanding mortgage with Heller Healthcare Finance. The company has
approximately $2,000,000 in long-term debt due in the fiscal year ended June 30,
2002. This debt is primarily due to Heller Healthcare Financial, its primary
lender. The company has already begun the process of renewing this debt. 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 company
does not anticipate that the put provision will be exercised since the coupon
rate is paid quarterly at 12% which is a higher rate than would be available
through other sources at this time.
The company believes that, with the renewal of the debt mentioned above and
its revolving credit facility through its primary lender, it will have
sufficient 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 should increase revenues considerably and provide for immediate
cash from operations.
- 20 -
The liquidation of the assets and liabilities of Franvale may result in a
non-cash financial statement gain. In the quarter ended December 31, 1998 the
company was relieved of the HUD mortgage of approximately $6,741,000 and
surrendered the underlying assets amounting to approximately $4,329,000. The
recognition of the gain has been deferred until final resolution of all
contingent liabilities (see Note A to the accompanying financial statements for
additional information regarding this gain.)
The company has now operated profitably from ongoing operations for two
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.
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. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of June 30, 2001, the net carrying amount of goodwill is
$969,099. Amortization expense during the year ended June 30, 2001 was
approximately $74,000. Currently the Company is assessing but has not yet
determined how the adoption of SFAS 141 and SFAS 142 will impact its financial
position and results of operation.
- 21 -
ITEM 7. FINANCIAL STATEMENTS.
AT 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-25
F-1
- 22 -
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, 2001 and 2000 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, 2001 and 2000 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 31, 2001
F2
- 23 -
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2001 2000
___________ ___________
ASSETS (Notes C and D)
Current assets:
Cash and cash equivalents $ 43,732 $ 551,713
Accounts receivable, net of allowance for doubtful
accounts of $2,632,525 and $2,850,470 at
June 30, 2001 and 2000 respectively (Note A) 5,620,715 6,286,490
Prepaid expenses 63,940 120,481
Other receivables and advances 112,579 148,554
Deferred income tax asset (Note F) 613,980 459,280
Other receivables, related party -- 77,500
__________ ____________
Total current assets 6,454,946 7,644,018
Accounts receivable, noncurrent 600,000 642,000
Other receivables, noncurrent, related party, net of
allowance for doubtful accounts of $1,125,054
at June 30, 2000, (Notes A and K) -- 3,239,456
Other receivables (Note A) 104,863 95,214
Property and equipment, net (Notes A, B and D) 1,338,066 1,327,630
Deferred income tax asset (Note F) -- 154,700
Deferred financing costs, net of amortization of
$114,109 and $87,555 at June 30, 2001
and 2000, respectively 20,000 46,554
Goodwill, net of accumulated amortization of
$270,105 and $296,907 at June 30, 2001
and 2000, respectively (Note A) 969,099 2,588,834
Other assets (Note A) 236,478 149,403
__________ ____________
Total assets $9,723,452 $15,887,809
========== ==========
LIABILITIES
Current liabilities:
Accounts payable $1,866,631 $ 1,717,362
Notes payable - related parties (Note E) 200,000 200,000
Current maturities of long-term debt (Note C) 2,038,077 1,622,239
Revolving credit note (Note C) 2,111,586 1,555,149
Current portion of obligations under capital
leases (Note D) 16,725 45,482
Accrued payroll, payroll taxes and benefits 460,723 416,111
Accrued expenses and other liabilities 1,208,469 1,798,400
Convertible debentures (Notes C and J) 500,000 --
Net liabilities of discontinued operations
(Notes A and I) 960,552 1,884,234
__________ ____________
Total current liabilities 9,362,763 9,238,977
Long-term debt, less current maturities (Note C) 1,609,649 2,508,715
Obligations under capital leases (Note D) 32,160 12,808
Convertible debentures (Notes C and J) -- 500,000
__________ ____________
Total liabilities 11,004,572 12,260,500
__________ ____________
- 24 -
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Commitments and contingent liabilities (Notes D, G,
H, I, J, and K)
STOCKHOLDERS' EQUITY (DEFICIT)(Notes C, H, J and K)
Convertible Preferred stock, $.01 par value;
1,000,000 shares authorized:
Series C 150,700 and 136,000 shares issued and
outstanding June 30, 2001 and 2000, respectively,
stated value $10 per share, liquidation preference,
$1,507,000 and $1,360,000, respectively. 1,507 1,360
Class A common stock, $.01 par value; 20,000,000
shares authorized, 8,709,834 and 7,019,608
shares issued June 30, 2001 and 2000, respectively. 87,098 70,196
Class B common stock, $.01 par value; 2,000,000
shares authorized, 726,991 issued and outstanding
June 30, 2001 and 2000 convertible into one share
of Class A common stock. 7,270 7,270
Additional paid-in capital 18,696,779 17,895,162
Treasury stock, 22,926 and 2,776 common shares at
cost June 30, 2001 and 2000, respectively. (24,894) (12,122)
Notes receivable - common stock (80,000) --
Accumulated deficit (19,968,880) (14,334,557)
____________ ____________
Total stockholders' equity (deficit) (1,281,120) 3,627,309
____________ ____________
Total liabilities and stockholders' equity
(deficit) $9,723,452 $15,887,809
============ ============
See accompanying notes to consolidated financial statements F-3
- 25 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended June 30,
2001 2000
___________________________
Revenues:
Patient care, net (Note A) $21,087,473 $18,675,840
Management fees 345,111 1,048,990
Pharmaceutical study 354,618 --
Website services 18,067 --
Contract support services 944,567 653,930
____________ ____________
Total revenues 22,749,836 20,378,760
____________ ____________
Operating expenses:
Patient care expenses 9,663,051 9,293,499
Cost of contract support services 855,128 545,176
Provision for doubtful accounts 2,490,307 2,129,193
Website expenses 1,351,150 783,004
Practice management closing expenses (Note A) 5,186,306 --
Administrative expenses 7,452,714 7,361,578
____________ ____________
Total operating expenses 26,998,656 20,112,450
____________ ____________
Income (loss) from operations (4,248,820) 266,310
Other income (expense):
Interest income 23,519 18,853
Interest expense (1,043,030) (837,706)
Other income, net 62,076 91,712
____________ ____________
Total other expense, net (957,435) (727,141)
Loss before income taxes and change in
accounting principle (5,206,255) (460,831)
Income taxes (Note F) 44,450 79,390
____________ ____________
Loss before change in accounting principle (5,250,705) (540,221)
Change in accounting principle (Note A) -- (72,450)
____________ ____________
Net loss (5,250,705) (612,671)
Dividends (Note J) (383,618) (964,474)
____________ ____________
Loss applicable to common shareholders $(5,634,323) $(1,577,145)
============= ============
Basic and diluted loss per common share (Note A):
Loss before change in accounting principle $ (.66) $ (.22)
Change in accounting principle -- (.01)
____________ ____________
Net Loss $ (.66) $ (.23)
============= ============
Basic and diluted weighted average number of
shares outstanding 8,518,408 6,916,598
============= ============
See accompanying notes to consolidated financial statements F-4
- 26 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity(Deficit) (See Notes
A, C, H, J, K and N)
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
________________________________________________________
Balance - June 30,
1999 5,612,930 $56,129 727,210 $ 7,272 813 $ 8
Costs related to
private placements
Issuance of preferred
stock in lieu of
cash dividends 18 0
Conversion of preferred
stock and related
dividends 1,295,732 12,957 (831) (8)
Shares issued for
employee bonuses 20,450 205
Issuance of warrants
for services
Issuance of shares with
consulting agreement 68,572 686
Issuance of employee
stock purchase
plan shares 12,330 123
Issuance of warrants
for debt and equity
financings
Conversion from class
B to class A 219 2 (219) (2)
Dividends on preferred
stock
Issuance of shares on
exercise of employee
options 9,375 94
Issuance of series C
preferred stock at
a discount 136,000 1,360
Net loss - year ended
June 30, 2000 ________________________________________________________
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
obligation 414,815 4,148
Issuance of notes
receivable for
employee stock
purchase
Conversion of
preferred stock 1,160,160 11,603 (19,300) (193)
Issuance of preferred
stock at a Discount 34,000 340
- 27 -
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity(Deficit) (See Notes
A, C, H, J, K and N)
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
________________________________________________________
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
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
========= ====== ======= ===== ======= =======
See accompanying notes to consolidated financial statements.
- 28 -
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity(Deficit) (See Notes
A, C, H, J, K and N)
Notes
Additional Receivable
Paid-in Stock Treasury Stock Accumulated
Capital Purchase Shares Amount Deficit Total
_________________________________________________________________________
Balance - June 30,
1999 $15,967,176 2,776 $(12,122) $(12,757,411) $3,261,052
Costs related to
private placements (210,689) (210,689)
Issuance of preferred
stock in lieu of
cash dividends 18,000 (18,000) 0
Conversion of preferred
stock and related
dividends 553,755 (566,703) 0
Shares issued for
employee bonuses 25,491 25,696
Issuance of warrants
for services 69,775 69,775
Issuance of shares
with consulting
agreement 38,314 39,000
Issuance of employee
stock purchase plan
shares 13,947 14,071
Issuance of warrants
for debt and equity
financings 49,128 (14,963) 34,165
- 29 -
Notes
Additional Receivable
Paid-in Stock Treasury Stock Accumulated
Capital Purchase Shares Amount Deficit Total
_________________________________________________________________________
Conversion from class
B to class A 0
Dividends on
preferred stock (4,809) (4,809)
Issuance of shares on
exercise of employee
options 11,625 11,719
Issuance of series C
preferred stock at a
discount 1,358,640 (360,000) 1,000,000
Net loss - year ended
June 30, 2000 (612,671) (612,671)
________________________________________________________________________
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)
Issuance 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 (7,904) 3,506
- 30 -
Notes
Additional Receivable
Paid-in Stock Treasury Stock Accumulated
Capital Purchase Shares Amount Deficit Total
_________________________________________________________________________
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
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)
=========================================================================
See accompanying notes to consolidated financial statements F-5
- 31 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended June 30,
2001 2000
______________________________
Cash flows from operating activities:
Net loss $(5,250,705) $(612,671)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 262,227 429,091
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 45,306 182,707
Changes in operating assets and liabilities:
Accounts receivable 649,407 (146,037)
Prepaid expenses and other current
assets 56,541 (18,616)
Other assets (22,873) (25,369)
Accounts payable 152,775 (115,388)
Accrued expenses and other
liabilities (377,532) 123,766
Net liabilities of discontinued
operations (923,682) (537,860)
_____________ ___________
Net cash used in operating
activities (461,277) (720,377)
_____________ __________
Cash flows from investing activities:
Acquisition of property and equipment (186,842) (103,661)
Website development costs (70,226) (45,696)
Disposition of property, equipment and
intangibles 3,689 --
_____________ __________
Net cash used in investing
activities (253,379) (149,357)
_____________ __________
Cash flows from financing activities:
Borrowing (repayment) revolving debt, net 556,437 (114,681)
Proceeds from borrowings 146,526 1,870,050
Principal payments on long-term debt (639,157) (1,509,826)
Deferred financing costs 26,554 (1,487)
Preferred stock dividends (6,767) (4,809)
Issuance of preferred stock at a
discount 250,000 1,000,000
Cost related to preferred stock issuance (45,102) (210,689)
Purchase of treasury stock (2,772) --
Issuance of common stock 10,956 11,719
Notes receivable for stock purchase (90,000) --
_____________ __________
Net cash provided by financing
activities 206,675 1,040,277
- 32 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Year Ended June 30,
2001 2000
______________________________
Supplemental cash flow information:
Cash paid during the period for:
Interest $1,040,276 $852,421
Income taxes $ 94,780 $114,890
See accompanying notes to consolidated financial statements F-6
- 33 -
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Year Ended June 30,
2001 2000
______________________________
Supplemental disclosures of noncash investing and
financing activities:
Issuance of stock for the earn-out
liability $ 297,500 $ --
Beneficial conversion feature of preferred
stock 166,500 --
Purchase of treasury stock in exchange for note 10,000 --
Accrued dividends on series C preferred stock 120,351 --
Conversion of preferred stock at stated value 193,000 831,000
Preferred stock discount 90,000 360,000
Issuance of stock in lieu of cash for
dividends due 3,506 18,000
Dividend on conversion of preferred stock to -- 566,703
common stock
Debt incurred in earn-out agreement -- 997,500
See accompanying notes to consolidated financial statements F-7
- 34 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
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; 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 Overland Park, 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.
Pioneer Pharmaceutical Research, Inc. conducts studies of the effects of
FDA approved psychiatric pharmaceuticals on a controlled population through
contracts with major manufacturers of these pharmaceuticals; and
3. Behavioral health online services, which includes behavioral health
education, training and products for the behavioral health professional,
through its website wellplace.com formerly known as
behavioralhealthonline.com.
In December 2000 the Company's Board of Directors decided to close its' BSC-NY,
Inc. practice management operations due to recent deterioration of operating
results. Revenues of BSC-NY, Inc. were dependent on the success of the
professional corporation, Rubenfaer Physician Services, P.C. 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 December 31, 2000 before closing
expenses. These adverse operating conditions were caused by the decline in
revenues produced by the professional corporation which has closed down its'
business operations. The table below summarizes the practice management closing
expenses for the year ended June 30, 2001.
- 34 -
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
____________
$5,186,306
==========
F-8
- 35 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
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. All financial
information for Franvale is reported in the accompanying financial statements as
net liabilities of discontinued operations. The liquidation of the assets and
liabilities of Franvale may result in a non-cash financial statement gain. Net
liabilities of discontinued operations were $960,552 and $1,884,234 at June 30,
2001 and June 30, 2000, respectively. The significant decrease in 2001 was
primarily due to payment of $660,000 for the Massachusetts state settlement and
legal costs related to the closure.
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 11% of the company's total revenue
is derived from Medicare and Medicaid payors for the years ended June 30, 2001
and 2000.
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
amounts collectable under supplemental payment agreements, arranged by the
company's 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. Other receivables
non current-related party at June 30, 2000 is the amount that was due from the
related professional corporation net of the related allowance for doubtful
accounts. The balance due from the related professional corporation was written
off in fiscal year 2001 with the closure of the management company, BSC-NY,
Inc., as outlined above. This amount consisted of the balance due of funds
advanced to the professional corporation for acquisition costs, management fees,
working capital and interest on the advanced funds (see discussion regarding
BSC-NY, Inc. in Note K).
- 36 -
Charity care amounted to approximately $491,000 and $149,000 for the years ended
June 30, 2001 and June 30, 2000, respectively. Patient care revenue is stated
net of charity care in the accompanying statements of operations.
F-9
- 37 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
Estimates and assumptions:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash equivalents:
Cash equivalents are short-term highly liquid investments with maturities of
less than three months, when purchased.
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. During 2000, unamortized
organization costs of $72,450 related to the acquisition of businesses have been
written off as required by the American Institute of Certified Public Accounts
Statement of Position 98-2 "Reporting the Costs of Start-up Activities".
Goodwill:
The excess of the purchase price over the fair market value of net assets
acquired is being amortized on a straight-line basis over twenty years.
In accordance with Statement of Financial Accounting Standard (SFAS) No. 121,
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of long-lived assets,
the recoverability test is performed using undiscounted net cash flows related
to the long-lived assets. The amount of the impairment losses recognized is
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. During fiscal year 2001 the company recorded goodwill
impairment of $1,545,609 in connection with the closing of its practice
management operations.
F-10
- 38 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
Basic and diluted loss per share:
The loss per share is computed by dividing the 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. No common stock equivalents have been included in the calculation of
diluted loss per share because their effect would be anti-dilutive.
Net liabilities of discontinued operations:
Net liabilities of discontinued operations relates to the Franvale closure in
1998 and consists of the following:
June 30,
2001 2000
__________________________
Debt forgiveness and reserve for
Contingencies $2,641,537 $2,641,537
Less legal and other expenses
incurred to date 1,680,986 757,303
___________ ___________
Net liabilities of discontinued
Operations $ 960,552 $1,884,234
=========== ==========
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.
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".
F-11
- 39 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE A - OPERATIONS AND BUSINESS SEGMENTS (CONTINUED):
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.
New accounting standard
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.
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. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after the adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of June 30, 2001, the net carrying amount of goodwill is
$969,099. Amortization expense during the year ended June 30, 2001 was
approximately $74,000. Currently the Company is assessing but has not yet
determined how the adoption of SFAS 141 and SFAS 142 will impact its financial
position and results of operation.
F-12
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
June 30,
2001 2000
__________ ___________
Land $ 69,259 $ 69,259
Buildings 1,136,963 1,136,963
Furniture and equipment 1,023,636 929,762
Motor vehicles 92,871 62,292
Leasehold improvements 418,992 379,981
__________ ________
2,741,720 2,578,257
Less accumulated depreciation and
amortization 1,403,654 1,250,627
__________ __________
$1,338,066 $1,327,630
========== ==========
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is summarized as follows:
June 30,
2001 2000
__________________
9% mortgage note due in monthly installments of $4,850,
including interest through July 1, 2012, when the
remaining principal balance is payable collaterlized
by a first mortgage on the PHC of Virginia, Inc.
Mount Regis Center facility. $ 426,702 $ 445,567
Term mortgage note payable with the monthly principal
installments of $24,167 through October 2001,
$20,000 November 2001 through February 2003,
balloon payments of $354,167 due in December
2001 and $349,167 due in March 2003 bearing
interest at prime plus 5% (11.75% at June 30,
2001) collateralized by all assets of PHC of
Michigan, Inc. (PHM). These funds were
originally advanced in March and December 1997.
Of the amount advanced in March 1997, $779,166
was refinanced in March 2001 and the
company intends to refinance the balloon payment
of $354,167 on the second advance in December
2001 when it comes due. 1,090,000 1,273,333
Term mortgage note payable with interest only payments
through October 2000 principal due in monthly
installments of $10,000 beginning November 2000
through October 2001. The note bears interest at
prime plus 5% (11.75% at June 30, 2001) collateralized
by all assets of PHM and may be renewed at the end of
two years. 909,891 978,657
Term mortgage note payable with interest only payments
through October 2001 principal due in monthly
installments of $41,667 beginning November 2001
through September 2002. The final payment of
principal of approximately $42,000 is due October 2002.
The note bears interest at prime plus 3% (9.75% at
June 30, 2001) collateralized by all assets
of PHM and may be renewed at the end of two years. 500,000 500,000
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). 454,939 532,000
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). 143,665 168,000
F-13
- 41 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
June 30,
2001 2000
_________________
Note Payable due in monthly installments of $429 including
interest at 8.69% through May 2004. 13,347 17,248
Note Payable due in monthly installments of $5,088 including
interest at 9% through October 2002. 81,408 142,463
Note Payable due in monthly installments of $665 including
interest at 10.8 % through November 2005. 27,774 --
Note payable bearing interest at 9% paid in full May 2001. -- 11,323
Note Payable bearing interest at 9% paid in full March 2001. -- 62,363
__________ __________
Total 3,647,726 4,130,954
__________ __________
Less current maturities 2,038,077 1,622,239
Long-term portion $1,609,649 $2,508,715
========== ==========
Maturities of long-term debt are as follows as of June 30, 2001:
Year Ending
June 30, Amount
2002 $2,038,077
2003 866,245
2004 188,659
2005 204,874
2006 47,598
Thereafter 302,273
__________
$3,647,726
The company has a revolving credit note under which a maximum of $3,000,000 may
be outstanding at any time. At June 30, 2001 and 2000 the outstanding balance
was $2,111,586 and $1,555,149, 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% (9% at June 30, 2001). 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.
F-14
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PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
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.
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 $1,400 and $4,000 for
fiscal 2001 and 2000 respectively and terms expiring from July 2001 through July
2006.
The carrying value of assets under capital leases included in property and
equipment is as follows:
June 30,
2001 2000
_________________________
Equipment and improvements $ 73,888 $167,857
Less accumulated amortization (39,940) (100,714)
__________ __________
$ 33,948 $ 67,143
======== =========
Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 2001:
Year Ending June 30,
2002 $ 16,725
2003 18,315
2004 10,948
2005 8,362
2006 5,697
2007 3,302
Total future minimum lease payments 63,349
Less amount representing interest 14,464
Present value of future minimum
lease payments 48,885
Less current portion 16,725
Long-term obligations under
capital lease $ 32,160
==========
F-15
- 43 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows:
June 30,
2001 2000
______________________
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
========== ==========
NOTE F - INCOME TAXES
The company has the following deferred tax assets included in the accompanying
balance sheets:
Year Ended
June 30,
2001 2000
______________________
Temporary differences attributable to:
Allowance for doubtful accounts $1,053,000 $1,350,000
Depreciation 89,000 125,000
Reserves not currently deductible and other 208,000 39,980
Operating loss carryforward 3,578,000 1,874,000
___________ __________
Total deferred tax asset 4,928,000 3,388,980
Less:
Valuation allowance (4,314,020) (2,775,000)
============= ==========
Subtotal 613,980 613,980
Current portion (613,980) (459,280)
___________ __________
Long-term portion $ -- $ 154,700
============= ==========
The company had no deferred tax liabilities at June 30, 2001 and 2000. The
company anticipates that it will have sufficient taxable income in future fiscal
years to realize its net deferred tax asset. During the past three 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. The company also
anticipates that it will have a gain on the final disposition of all contingent
liabilities of its closed Franvale facility (see Note I).
Income tax expense is as follows:
Year Ended
June 30,
2001 2000
______________________
Current state income taxes $ 44,450 $ 79,390
============= ==========
F-16
- 44 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE F - INCOME TAXES (CONTINUED)
Reconciliations of the statutory U.S. Federal income taxes based on a rate of
34% to actual income taxes is as follows:
Year Ended
June 30,
2001 2000
______________________
Income tax benefit at statutory rate $(1,770,000) $(235,300)
State income taxes, net of federal benefit 29,000 52,400
Change in valuation allowance 1,539,020 220,000
Effect of nondeductible items and other
differences 246,430 42,290
_____________ __________
$ 44,450 $ 79,390
At June 30, 2001 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, 2001 and 2000 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
$613,980 at June 30, 2001 and 2000 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, 2001 and 2000 was approximately $812,000 and
$714,000 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
____________ ________
2002 $ 651,182
2003 625,733
2004 545,618
2005 286,795
__________
$2,109,328
==========
F-17
- 45 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE F - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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 September 14, 1998, the Company and its wholly owned subsidiary,
Franvale, were each served with document subpoenas in connection with an on
going investigation of Franvale being conducted by the Commonwealth of
Massachusetts. In December 2000 the company finalized a settlement agreement
with the Commonwealth in this case, which required payment of $660,000 in three
installments between December 31, 2000 and June 30, 2001. This obligation has
been met.
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 is fully
cooperating with the investigation and currently is engaged in resolution
discussions.
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 1,000,000
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 150,000
shares may be issued under this plan.
The non-employee directors' stock option plan provides for the grant of
nonstatutory stock options automatically at the time of each annual meeting
of the Board. Through June 30, 2001, options for 35,500 shares were granted
under this plan. A maximum of 50,000 shares may be issued under this plan.
Each outside director is granted an option to purchase 2,000 shares of
Class A common stock at fair market value on the date of grant, vesting 25%
immediately and 25% on each of the first three anniversaries of the grant.
Under the above plans, at June 30, 2001, 78,193 shares were available for
future grant or purchase.
F-18
- 46 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE H - STOCK PLANS (CONTINUED)
The company had the following activity in its stock option plans for fiscal 2001
and 2000:
Weighted-Average
Number Exercise
of Price
Shares Per Share
____________ _______________
Option plans:
Balance - June 30, 1999 522,875 $2.02
Granted 271,000 $1.23
Cancelled (2,000) $1.25
Exercised (9,375) $1.25
_________
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
==========
[2] Stock-based compensation:
Options for 582,706 were exercisable as of June 30, 2001 at exercise prices
ranging from $0.19 to $6.63 and a weighted average exercise price of
approximately $.41 per share with a weighted average remaining contractual
life of approximately three years. Options for 448,750 shares were
exercisable as of June 30, 2000 at exercise prices ranging from $.81 to
$6.63 and a weighted average exercise price of approximately $1.58 per
share with a weighted average remaining contractual life of approximately
three years.
Options to purchase 1,141,000 shares of class A common stock were
outstanding at June 30, 2001 at exercise prices ranging from $.19 to $6.63
per share with a weighted-average exercise price of approximately $.33 and
a weighted average remaining contractual life of approximately four years.
Options to purchase 782,500 shares of class A common stock were outstanding
at June 30, 2000 at exercise prices ranging from $.81 to $6.63 per share
with weighted-average exercise prices of approximately $1.46 per share and
a weighted-average remaining contractual life of approximately four years.
The Company re-priced 791,500 options in January 2001. As a result of this
modification, 791,500 options are subject to variable accounting from the
date of the modification. The compensation expense related to 447,125 of
the vested re-priced options amounted to approximately $40,000, which was
recorded during the quarter ended June 30, 2001.
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 loss per share would have been changed to the pro forma
amounts indicated below:
F-19
- 47 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE H - STOCK PLANS (CONTINUED)
Year Ended
June 30,
2001 2000
____________ _____________
Net loss applicable
to common
Shareholders As reported $(5,634,323) $(1,577,145)
Pro forma (5,721,161) (1,727,259)
Net loss per share As reported $ (.66) $ (.23)
Pro forma (.67) (.25)
The fair value of the company's stock options used to compute pro forma loss and
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 2001 and 2000: dividend yield of 0%; expected volatility of 30%;
a risk-free interest rate of 6.5% and 9.5% 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, 2001 and 2000 was $.10 and $.30, respectively.
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.
F-20
- 48 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE I - DISCONTINUED OPERATIONS (CONTINUED)
Although the full extent of the financial impact on PHC, Inc. cannot be
determined at this time, the management of PHC, Inc. does not believe that the
liquidation of the assets and liabilities of Quality Care will have a
substantial negative impact on PHC's financial position or the results of
operations. The company was subject to a guarantee signed by PHC, Inc. for
furniture and equipment purchased by Quality Care during the fiscal year ended
June 30, 1996. The company has come to an agreement with the leasing company and
is currently making monthly payments of $5,088, for a total obligation of
$183,166, which includes interest of 9%, in settlement of this obligation. The
liquidation of the assets and liabilities of Franvale may result in a non-cash
financial statement gain. In the quarter ended December 31, 1998, the company
was relieved of the HUD mortgage of approximately $6,741,000 and surrendered the
underlying assets amounting to approximately $4,329,000. The net liabilities of
discontinued operations amounted to $960,552 at June 30, 2001. As of June 30,
2001 the bankruptcy remains open and management cannot predict a final date of
closure at this time: however, the company did receive a letter from the
bankruptcy trustee stating that discharge of the bankruptcy is awaiting the
final bankruptcy report and no further claims can be made at this time.
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, 2001:
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
________________________________________________________________________________
11/01/1996 Warrant for debt placement service 25,000 $2.00 per October
$125,000 value charged to interest shares share 2001
expense over term of debt
02/18/1997 Warrant for investor relation services 4,762 $2.20 per February
$1,210 value passed as an adjustment shares share 2002
03/03/1997 Consultant warrant for investor 40,000 $ .50 per March
relations shares share 2002
$16,306 value passed as an adjustment
09/17/1998 Consultant warrant for investor 40,000 $ .50 per March
relations shares share 2002
$12,776 value passed as an adjustmet
03/31/1997 Warrants issued as registration 150,000 $2.00 per March
penalty on Convertible debenture shares share 2002
$46,375 value charged to interest
expense over term of debentures
06/01/1997 Warrants issued for investment 206,031 $1.82 per May
banker services shares share 2002
$193,748 value charged to
professional shares fees
09/19/1997 Private Placement warrants with 86,207 $2.90 per September
common stock issuance shares share 2002
Equity transaction
03/10/1998 Warrants issued as a penalty for 3,000 $2.90 per March
late registration of private shares share 2003
placement shares
Equity transaction
03/10/1998 Warrants issued as additional 71,186 $1.76 per March
interest on debt shares share 2003
$48,809 value charged to interest
expense over term of loan
07/10/1998 Warrants issued with extension of 69,347 $1.37 per July
debt shares share 2003
$28,740 value charged to interest
expense over term of loan
07/10/1998 Warrants issued with extension of 25,827 $1.16 per July
debt as price guarantee shares share 2003
$14,779 value charged to interest
expense over term of loan
12/31/1998 Warrants issued with convertible 30,298 $ .83 per December
debenture shares share 2004
$9,240 value charged to professional
fees over term of debentures
12/31/1998 Warrants issued for convertible 72,724 $1.51 per December
debentures finders fee shares share 2003
$25,873 value charged to
professional fees over term of
debentures
12/31/1998 Warrants issued for convertible 13,288 $1.51 per December
debentures finders fee shares share 2003
$3,696 value charged to
professional fees over term of
debentures
12/31/1998 Warrants issued for convertible 19,311 $1.17 per December
debentures finders fee shares share 2003
$3,246 value charged to
professional fees over term of
debentures
F-21
- 49 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
________________________________________________________________________________
12/01/1998 Warrants issued for convertible 12,119 $ .83 per December
debentures finders fee shares share 2003
$1,302 value charged to
professional fees over term of
debentures
01/01/1999 Warrants issued for convertible 12,119 $ .83 per January
debentures finders fee shares share 2004
$3,696 value charged to
professional fees over term of
debentures
02/01/1999 Warrants issued for convertible 12,119 $ .83 per February
debentures finders fee shares share 2004
$3,696 value charged to
professional fees over term of
debentures
03/01/1999 Warrants issued for convertible 12,078 $ .83 per March
debentures finders fee shares share 2004
$3,696 value charged to
professional fees over term of
debentures
04/01/1999 Warrants issued for convertible 12,078 $ .83 per April
debentures finders fee shares share 2004
$3,696 value charged to
professional fees over term of
debentures
05/01/1999 Warrants issued for convertible 12,078 $ .83 per May
debentures finders fee shares share 2004
$3,696 value charged to
professional fees over term of
debentures
06/01/1999 Warrants issued for convertible 12,037 $ .83 per June
debentures finders fee shares share 2004
$3,696 value charged to
professional fees over term of
debentures
01/05/1999 Warrants issued for investment banker 48,071 $1.13 per January
services shares share 2004
$18,100 value charged to
professional fees over service
period
04/05/1999 Warrants issued for investment banker 47,680 $1.14 per April
services shares share 2004
$18,100 value charged to
professional fees over service
period
02/23/1999 Consultant warrant for investor 3,724 $ .97 per February
relations shares share 2004
$1,307 value charged to
professional fees
04/21/1999 Consultant warrant for web site 6,039 $ .83 per April
development services shares share 2004
$1,547 value charged to
professional fees
05/18/1999 Consultant warrant for web site 6,020 $ .83 per April
advisory services shares share 2004
$1,848 value charged to
professional fees
04/21/1999 Warrant issued for management 5,373 $ .93 per April
consultant services shares share 2004
$1,547 value charged to
professional fees
05/18/1999 Warrant issued for management 1,204 $ .83 per May
consultant services shares share 2004
$370 value charged to
professional fees
07/01/1999 Warrants issued for convertible 12,037 $ .83 per July
debentures finders fee shares share 2004
$5,745 value charged to
professional fees over term of
debentures
08/01/1999 Warrants issued for convertible 12,037 $ .83 per August
debentures finders fee shares share 2004
$4,187 value charged to
professional fees over term of
debentures
07/05/1999 Warrants for investment banker 47,369 $1.15 per July
services shares share 2004
$12,944 value charged to
professional fees over service
period
10/05/1999 Warrants for investment banker 47,369 $1.15 per October
services shares share 2004
$6,042 value charged to
professional fees over service
period
03/31/2000 Warrants issued for services 11,334 $1.32 per March
$10,000 value charged to website shares share 2005
development
05/26/2000 Warrants issued as additional 60,000 $1.50 per May
interest on debt shares share 2005
$33,264 value charged to interest
expense
06/28/2000 Warrants issued with preferred stock 125,000 $3.00 per June
placement shares share 2005
Equity transaction
06/28/2000 Warrants issued with preferred stock 115,710 $1.41 per June
placement shares share 2005
Equity transaction
12/20/2000 Warrants issued for investment banker 52,530 $ .20 per December
services shares share 2005
$1,938 value charged to
professional fees
03/20/2001 Warrants issued for investment banker 25,195 $ .21 per March
services shares share 2006
$969 value charged to professional
fees
04/15/2001 Warrants issued for investor relations 10,061 $ .25 per April
consulting services shares share 2006
$1,136 value charged to professional
fees
05/15/2001 Warrants issued for investor relations 10,000 $ .25 per May
consulting services shares share 2006
$2,577 value charged to
professional fees
F-22
- 50 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
________________________________________________________________________________
06/15/2001 Warrants issued for investor 10,000 $ .25 per June
relations consulting services shares share 2006
$2,577 value charged to
professional fees
06/20/2001 Warrants issued for investment 25,000 $ .21 per June
banker services shares share 2006
$5,383 value charged to
professional fees
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 approximately $14,640
and $72,000 in fiscal 2001 and 2000, respectively.
In February 1998, the company received $950,000 in exchange for the issuance of
Series B convertible preferred stock and warrants to purchase 49,990 shares of
Class A common stock. The warrants are exercisable at $2.31 per share and expire
in 2001. For the year ended June 30, 2000 dividends on the series B preferred
stock amounted to $22,809. During the fiscal year ended June 30, 2000 the
company issued 18 shares of series B preferred stock in payment of dividends in
lieu of cash. As of June 30, 2000 all series B convertible preferred has been
converted into shares of class A common stock, which resulted in a dividend
charge of $566,703 for the year ended June 30, 2000, which was paid in class A
common stock.
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.
The series C preferred stock is convertible unto 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, 2000. 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 have been issued upon conversion of 19,300 shares of series C convertible
preferred stock, including accrued dividends outstanding on those preferred
shares. Of these shares of class A common stock, 350,250 were issued after the
February 2001 amendment.
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, 2000.
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
F-23
- 51 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE J - CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
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, 2001 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 Rubenfaer Physician
Services, P.C. formerly Shliselberg Physician Services, P.C., and formerly
Perlow Physicians, P.C., ("Rubenfaer"), 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 August 2000 the company reached an agreement with the former owners on the
terms and amount of the final earn out payment. This payment was made in the
form of Notes totaling $700,000 and 414,815 shares of class A common stock,
valued at $297,500. This agreement was effective May 2000 and is reflected in
the accompanying consolidated financial statements. Accrued expenses included
$297,500 at June 30, 2000, which reflects the obligation for the 414,815 shares
issued in August 2000.
At June 30, 2000, Rubenfaer owed the company $4,364,510 which included
acquisition costs, management fees, working capital advances and interest on
advances through June 30, 1999. At June 30, 2000, a reserve of approximately
$1,125,000 was established in consideration of the period of time expected for
repayment, the level of Rubenfaer's cash flow and other information available at
that time. 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 Rubenfaer, BSC was dependent on the success of
Rubenfaer's operations through its management services agreement with Rubenfaer.
During fiscal 2001, Rubenfaer closed its business operations and the net amount
due from Rubenfaer of $3,401,650 was deemed unrecoverable and was charged to
practice management closing expenses during fiscal 2001 (see note A).
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:
F-24
- 52 -
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
NOTE L - BUSINESS SEGMENT INFORMATION (CONTINUED)
BEHAVIORAL HEALTH
TREATMENT ADMINISTRATIVE ONLINE
SERVICES SERVICES SERVICES ELIMINATIONS TOTAL
___________________________________________________________________
For the Year ended
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 profit
(loss) $ 2,936,935 $(7,384,801) $ (802,839) 0 $(5,250,705)
Total assets $ 8,503,698 $23,551,391 $ 125,582 $(22,457,219) $ 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
_________________________________________________________________________________________
For the Year ended
June 30, 2000
_________________________________________________________________________________________
Revenues - external
customers $18,675,840 $ 1,702,920 0 0 $20,378,760
Revenues -
intersegment 0 $ 1,819,000 $ 9,669 $ (1,828,669) 0
Segment profit
(loss) $ 1,690,314 $(1,818,723) $ (484,262) 0 $ (612,671)
Total assets $ 9,524,005 $27,608,700 $ 63,200 $(21,308,096) $15,887,809
Capital expenditures $ 41,593 $ 38,785 $ 68,979 0 $ 149,357
Depreciation &
amortization $ 233,064 $ 114,082 $ 9,495 0 $ 356,641
Change in
accounting
principle
(amortization) $ 54,700 $ 16,418 $ 1,332 0 $ 72,450
F-25
- 53 -
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, 2001 are as
follows:
Name Age Position
____________________________ ___ _________________________________________
Bruce A. Shear 46 Director, President and Chief Executive
Officer
Robert H. Boswell 52 Senior Vice President
Michael R. Cornelison 51 Executive Vice President
Paula C. Wurts 52 Controller, Treasurer and Assistant Clerk
Gerald M. Perlow, M.D. (1)(2) 63 Director and Clerk
Donald E. Robar (1)(2) 64 Director
Howard W. Phillips 71 Director
William F. Grieco (1) 47 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.
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.
- 54 -
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 August 1999 Mr. Grieco has been the 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. 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.
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.
- 55 -
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 2001
fiscal year, which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the company for services rendered to these
executives in fiscal year 2001, 2000, and 1999:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
________________________________ ___________________
(a) (b) (c) (d) (e) (g) (i)
Name and Other Securities
Principal Annual Underlying All Other
Position Year Salary Bonus Compensation Options/SARs Compensation
($) ($) ($) (#) ($)
_________________________________________________________________________________________
Bruce A. Shear 2001 $310,000(1) -- $19,571(2) 67,000 $ 6,285
President and 2000 $300,195(1) -- $10,159(3) 50,000 $22,517
Chief Executive 1999 $300,195(1) -- $ 7,940(4) 50,000 $21,622
Officer
Robert H. Boswell 2001 $126,000 $16,309 $15,521(5) 41,000 $ 3,864
Senior Vice 2000 $116,000 $32,200 $12,846(6) 26,666 $14,261
President 1999 $111,083 $ 800 $ 7,955(7) 65,000 $29,753
Michael R. Cornelison 2001 $ 96,000 $15,910 $14,160(8) 41,000 $ 3,864
Executive Vice 2000 $ 88,750 $13,000 $11,537(9) 5,000 $ 2,252
President 1999 $ 81,265 $ 9,376 $ 3,400(10) 10,000 $ 4,435
Paula C. Wurts 2001 $100,800 $ 6,414 $13,867(11) 41,000 $ 3,864
Controller, Treasurer 2000 $ 90,800 $13,500 $ 9,642(12) 33,334 $17,263
And Assistant Clerk 1999 $ 85,883 -- $ 8,950(13) 20,000 $ 9,055
(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 $3,799 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.
(3) 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.
- 56 -
(4) This amount represents $2,791 contributed by the company to the company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $2,792 in premiums
paid by the company with respect to life insurance for the benefit of Mr.
Shear and $2,357 personal use of a company car held by Mr. Shear.
(5) 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.
(6) 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.
(7) This amount represents a $6,000 automobile allowance, $357 contributed by
the company to the company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $704 in other benefits paid by the company on behalf of Mr.
Boswell and $894 in benefit derived from the purchase of shares through the
employee stock purchase plan.
(8) 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.
(9) 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.
(10) This amount represents a $3,400 automobile allowance.
(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, $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.
(12) 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.
(13) This amount represents a $4,800 automobile allowance, $3,940 contributed by
the company to the company's Executive Employee Benefit Plan on behalf of
Ms. Wurts and $210 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 $2,500 stipend per year and $1,000 for each Board meeting they attend.
In addition, directors of the company are entitled to receive certain stock
option grants under the company's Non-Employee Director Stock Option Plan (the
"Director Plan").
- 57 -
COMPENSATION COMMITTEE
The Compensation Committee consists of Mr. Donald Robar and Dr. Gerald
Perlow. The compensation Committee met once during fiscal 2001. 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 2001. 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 and December 23, 1998. The Stock Plan
provides for the issuance of a maximum of 1,000,000 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, 2001, the company issued additional
options to purchase 414,500 shares of Class A Common Stock under the 1993 Stock
Plan at a price per share ranging from $.19 to $.30. 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. One hundred thousand of the options issued during the fiscal year ended
June 30, 2000 were issued with immediate vesting of 50% and the balance vested
in year five of the ten-year life of the options.
No options were exercised during the fiscal year ended June 30, 2001. A
total of 9,375 options were exercised at $1.25 each during the fiscal year ended
June 30, 2000.
- 58 -
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 allows for a total of 150,000
shares of class A common stock to be issued under the plan.
As of June 30, 2001 a total of 86,307 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. Fifteen
employees are participating in the current offering period under the plan, which
began on February 1, 2001 and will end on January 31, 2002.
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. Non-qualified options to purchase a total of 50,000 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 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 $.22. As of June
30, 2000, none of the options issued had been exercised.
- 59 -
The following table provides information about options granted to the named
executive officers during fiscal 2001 under the company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
____________________
(a) (b) (c) d) (e)
% of
Total
Number of Options/SARs
Securities Granted to Exercise
Underlying Employees or Base
Options/SARs in Fiscal Price Expiration
Granted (#) Year ($/Share) Date
_____________________________________________________________
Name
_________________
Bruce A. Shear 67,000 16.2% $ .30 04/12/2006
Robert H. Boswell 5,000 1.2% $ .25 10/12/2005
36,000 8.7% $ .30 04/12/2006
Michael R. Cornelison 5,000 1.2% $ .25 10/12/2005
36,000 8.7% $ .30 04/12/2006
Paula C. Wurts 5,000 1.2% $ .25 10/12/2005
36,000 8.7% $ .30 04/12/2006
All Directors and
Officers as a
group (8 Persons) 196,000 46.6% $.22-$.30 10/12/2005-4/12/2006
- 60 -
The following table provides information about options exercised by the
named executive officers during fiscal 2001 and the number and value of options
held at the end of fiscal 2001.
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Name Acquired Options/SARs at Options/SARs at
on Value FY-End (#) FY-End ($)
Exercise Realized Exercisable/ Exercisable/
(#) ($) Unexercisable Unexercisable
_______________________________________________________________________________
Bruce A. Shear -- -- 129,250/ 87,750 $10,795/$ 5,385
Robert H. Boswell -- -- 121,333/ 60,333 $10,470/$ 4,080
Michael R. Cornelison -- -- 115,250/ 35,750 $ 9,923/$ 1,867
Paula C. Wurts -- -- 69,667/ 52,417 $ 5,820/$ 3,368
All Directors and
Officers as a
group (8 persons) -- -- 571,875/346,875 $45,948/$21,000
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 using the existing exercise durations, which was
greater than the current market price. The computed effect of the option
repricing of $55,831 was charged to salaries in the quarter ended June 30, 2001.
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
31, 2001 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 Percent
Title of Class of Beneficial Owner Nature of
of Beneficial Class
Owner (12)
_______________________________________________________________________________
Class A Common Stock Gerald M. Perlow 59,375(1) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 66,375(2) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Bruce A. Shear 379,245(3) 4.3%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
- 61 -
Name and Address Amount and Percent
Title of Class of Beneficial Owner Nature of
of Beneficial Class
Owner (12)
_______________________________________________________________________________
Class A Common Stock Robert H. Boswell 159,128(4) 1.8%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 47,750(5) *
P. O. Box 2047
East Hampton, NY 11937
William F. Grieco 53,375(6) *
115 Marlborough Street
Boston, MA 02116
Paula C. Wurts 92,841(7) 1.1%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Michael R. Cornelison 128,159(8) 1.4%
c/o PHC, Inc.
200 Lake Street
Peabody, Ma 01960
All Directors and
Officers as a Group 1,014,790(9) 10.8%
(8 persons)
Class B Common Stock Bruce A. Shear 671,259(11) 92.3%
(10) c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and 671,259 92.3%
Officers as a Group
(8 persons)
* Less than 1%
1. Includes 37,625 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.
2. Includes 41,125 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.
3. Includes 129,250 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.30 per share.
4. Includes an aggregate of 133,833 shares of Class A Common Stock issuable
pursuant to currently exercisable stock options at an exercise price range
of $.25 to $.30 per share.
5. Includes 36,000 shares issuable pursuant to currently exercisable stock
options having an exercise price range of $.22 to $.30 per share.
6. Includes 31,625 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 72,167 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.30 per share.
8. Includes 115,250 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.30 per share.
- 62 -
9. Includes an aggregate of 596,875 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, 4,500 have an exercise price of
$1.03 per share, 3,000 have an exercise price of $.81 per share, 66,625
have an exercise price of $.30, 503,250 have an exercise price of $.25 and
2,000 have an exercise price of $.22.
10. 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.
11. 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.
12. Represents percentage of equity of class, based on numbers of shares listed
under the column headed "Amount and Nature of Beneficial Ownership". Each
share of Class A Common Stock is entitled to one vote per share and each
share of Class B Common Stock is entitled to five votes per share on all
matters on which stockholders may vote (except that the holders of the
Class A Common Stock are entitled to elect two members of the company's
Board of Directors and holders of the Class B Common Stock are entitled to
elect all the remaining members of the company's Board of Directors).
By virtue of the fact that class B shareholders have the right to elect
three of the five members of the Board of Directors and Mr. Shear owns 92% of
the class B shares, Mr. Shear has the right to elect the nominees and therefore
control the Board of Directors.
Based on the number of shares listed under the column headed "Amount and
Nature of Beneficial Ownership," the following persons or groups held the
following percentages of voting rights for all shares of common stock combined
as of August 31, 2001:
Bruce A. Shear ............................29.99%
All Directors and Officers as a Group
(8 persons).............................33.75%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Related Party Indebtedness
For approximately the last twelve 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 on going 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, 2001, the company
owed an aggregate of $200,000 to related parties.
During the period ended June 30, 2001, the company paid Mr. Shear and
affiliates approximately $22,300 in principal and accrued interest under various
notes. As of June 30, 2001, 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.
- 63 -
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).
3.1.1 Articles of Amendment filed with the Commonwealth of Massachusetts.
(Filed with the 10-QSB dated May 1997).
3.1.2 Restated 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 4.35 to the company's Registration
Statement on Form S-3 dated July 14, 2000. Commission file number
333-41494).
3.4 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 Warrant Agreement issued to Alpine Capital Partners, Inc. to purchase
25,000 Class A Common shares dated October 7, 1996. (Filed as exhibit
4.15 to the company's Current Report on Form 8-K, filed with the
Securities and Exchange Commission November 5, 1996. Commission file
number 0-22916).
4.4 Warrant Agreement issued to Barrow Street Research, Inc. to purchase
3,000 Class A Common shares dated February 18, 1997. (Filed as exhibit
4.17 to the company's Registration Statement on Form SB-2 dated April
15, 1997. Commission file number 333-25231).
4.5 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).
4.6 Warrant Agreement by and between PHC, Inc. and ProFutures Special
Equities Fund, L.P. for 50,000 shares of Class A Common Stock dated
6/4/97. (Filed as exhibit 4.22 to the company's Registration Statement
on Form SB-2 dated April 15, 1997. Commission file number 333-25231).
4.7 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).
4.8 Transfer from Seacrest Capital Securities of PHC, Inc. and securities
to Summit Capital Limited dated 12/19/97. (Filed as exhibit 4.26 to
the company's report on Form 10-KSB, filed with the Securities and
Exchange Commission on October 14, 1997. Commission file number
0-22916).
4.9 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).
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Exhibit No. Description
4.10 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).
4.11 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).
4.12 Warrant Agreement by and between Joan Finsilver and PHC, Inc. dated
07/31/98 for 60,000 shares common stock. (Filed as exhibit 4.15 to the
company's report on 10-KSB filed with the Securities and Exchange
Commission on October 13, 1998. Commission file number 0-22916.
Replaces exhibit 4.15 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).
4.13 Warrant Agreement by and between Brean Murray and Company and PHC,
Inc. dated 07/31/98 for 90,000 shares common stock. (Filed as exhibit
4.17 to the company's report on 10-KSB filed with the Securities and
Exchange Commission on October 13, 1998. Replaces exhibit 4.23 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).
4.14 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 4.18 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).
4.15 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).
4.16 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).
4.17 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).
4.18 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).
4.19 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).
4.20 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).
- 65 -
Exhibit No. Description
4.21 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).
4.22 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).
4.23 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).
4.24 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).
4.25 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).
4.26 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).
4.27 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).
4.28 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).
4.29 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).
4.30 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).
4.31 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).
4.32 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).
4.33 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).
4.34 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).
- 66 -
Exhibit No. Description
4.35 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).
*4.36 Equity Purchase Warrant to purchase 1% equity in Behavioral Health
Online by and between PHC, Inc., and Heller Healthcare Finance dated
December 18, 2000.
10.1 1993 Stock Purchase and Option Plan of PHC, Inc., as amended December
26, 1997. (Filed as exhibit 10.1 to the company's Post-Effective
Amendment No. 2 on Form S-3 to Registration Statement on Form SB-2
under the Securities Act of 1933 dated November 13, 1995. Commission
file number 333-71418).
10.2 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).
10.3 Security Agreement Note of PHC of Virginia, Inc. in favor of Mount
Regis Center, Inc., dated July 28, 1987, in the amount of $90,000,
guaranteed by PHC, Inc., with Security Agreement, dated July 1987.
(Filed as exhibit 10.34 to the company's Registration Statement on
Form SB-2 dated March 2, 1994. Commission file number 333-71418).
10.4 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).
10.5 1995 Employee Stock Purchase Plan. (Filed as exhibit 10.74 to the
company's Post-Effective Amendment No. 2 on Form S-3 to Registration
Statement on Form SB-2 under the Securities Act of 1933 dated November
13, 1995. Commission file number 333-71418. As amended on Form S-8
dated March 12, 1999. Commission File number 333-74373).
10.6 1995 Employee Stock Purchase Plan. (Filed as exhibit 10.7 to the
company's Post-Effective Amendment No. 2 on Form S-3 to Registration
Statement on Form SB-2 under the Securities Act of 1933 dated November
13, 1995. Commission file number 333-71418. As amended on Form S-8
dated March 12, 1999. Commission File number 333-74373).
10.7 1995 Non-Employee Director Stock Option Plan. (Filed as exhibit 10.75
to the company's Post-Effective Amendment No. 2 on Form S-3 to
Registration Statement on Form SB-2 under the Securities Act of 1933
dated November 13, 1995. Commission file number 333-71418. As amended
on Form S-8 dated March 12, 1999. Commission File number 333-74373).
10.8 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).
10.9 Amendment number 1 to Loan and Security Agreement dated May 21, 1996
by and between PHC, of Utah, Inc. and HCFP Funding providing
collateral for the PHC of Michigan, Inc. Loan and Security Agreement.
(Filed as exhibit 10.113 to the company's quarterly report on Form
10-QSB, filed with the Securities and Exchange Commission on February
25, 1997 Commission file number 0-22916).
- 67 -
Exhibit No. Description
10.10 Secured Term Note by and between PHC of Michigan, Inc. and Healthcare
Financial Partners - Funding II, L.P. in the amount of $1,100,000
dated March 1997. (Filed as exhibit 10.116 to the company's
Registration Statement on Form SB-2 dated April 15, 1997. Commission
file number 333-25231).
10.11 Master Equipment Lease Agreement by and between PHC, Inc. and LINC
Capital Partners dated March 18, 1997 in the amount of $200,000.
(Filed as exhibit 10.121 to the company's Registration Statement on
Form SB-2 dated April 15, 1997. Commission file number 333-25231).
10.12 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)
10.13 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).
10.14 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).
10.15 Secured Term Note; Mortgage; Environmental Indemnity; Agreement
Guaranty by PHC, Inc.; and Amendment No. 2 Loan and Security Agreement
by and between Healthcare Financial; and PHC, Inc. of Michigan dated
December 1997. (Filed as exhibit 10.129 to the company's Registration
Statement on Form SB-2 dated January 8, 1997. Commission file number
333-25231).
10.16 Secured Bridge Loan to be made to PHC, Inc. by HCFP Funding II, Inc.
in the amount of $350,000 dated March 10, 1998. (Filed as exhibit
10.136 to the company's Current Report on Form 8-K, filed with the
Securities and Exchange Commission. Commission file number 0-22916 on
April 29, 1998).
10.17 First Amendment to Mortgage between PHC of Michigan, Inc. and HCFP
Funding, Inc. (Filed as Exhibit 10.137 to the company's 10-QSB filed
on May 15, 1998. Commission file number 0-22916).
10.18 Secured Unconditional Guaranty of Payment and performance by and
between BSC-NY, Inc. and HCFP Funding II, Inc. in the amount of
$350,000. (Filed as exhibit 10.138 to the company's Registration
Statement on Form SB-2 dated July 24, 1998. Commission file number
333-59927).
10.19 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).
10.20 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).
10.21 Amendment No. 1 to Secured Bridge Note dated July 10, 1998 by and
between PHC, Inc. and HCFP Funding II, Inc. (Filed as exhibit 10.141
to the company's Registration Statement on Form SB-2 dated July 24,
1998. Commission file number 333-59927).
10.22 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).
- 68 -
Exhibit No. Description
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 This amendment no. 2 to secured bridge note (the "Amendment") is
hereby entered into as of the 10th day of May 1999 by and among PHC,
INC., a Massachusetts corporation ("Borrower"), and HCFP FUNDING II,
INC., a Delaware corporation ("Lender"). (Filed as exhibit 10.63 to
the company's report on Form 10-KSB dated October 13, 1999. Commission
file number 0-22916).
10.28 Loan and Security Agreement by and between Heller Healthcare Finance,
Inc. f/k/a 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 August 11, 1999. (Filed as 10.64
exhibit to the company's report on Form 10-KSB dated October 13, 1999.
Commission file number 0-22916).
10.29 Amendment number 3 to Secured Bridge Note dated May 10, 1999 by and
between PHC, Inc. and HCFP (Filed as exhibit 10.65 to the company's
report on Form 10-KSB, filed with the Securities and Exchange
Commission on October 13, 1999. Commission file number 0-22916).
10.30 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.
10.31 Secured Term Loan for $1,000,000 by and between PHC of Michigan, Inc
and Heller Finance, Inc., which includes Secured Term Note from
Borrower; Restated Mortgage by and between Borrower and Lender;
Guaranty of Term Loan by PHC, Inc.; Secured Guaranty of Term Loan by
BSC-NY, Inc.; Guaranty of Term Loan by Bruce A. Shear and Letter
Agreement. (Filed as exhibit 10.69 to the company's report on Form
10-QSB, filed with the Securities and Exchange Commission on February
14, 2000. Commission file 0-22916).
10.32 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).
10.33 Secured Term Note by and between PHC of Michigan, Inc. and Heller
Healthcare Finance, Inc. in the amount of $500,000 dated May 26, 2000.
(Filed as exhibit 10.71 to the company's Registration Statement on
Form S-3 dated July 14, 2000. Commission file number 333-41494).
- 69 -
Exhibit No. Description
10.34 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).
10.35 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).
10.36 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).
10.37 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).
10.38 Promissory Note for $532,000 dated May 30, 2000 by and between PHC,
Inc. and Irwin J. Mansdorf, Ph.D. (Filed as an 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).
10.39 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).
10.40 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).
10.41 Restated mortgage for $3,100,000 by and between PHC of Michigan, Inc.
and Heller Finance, Inc., which includes Secured Unconditional
Guaranty of Payment and Performance by PHC, Inc.; Secured
Unconditional Guaranty of Payment and Performance by BSC-NY, Inc.;
Secured Unconditional Guaranty of Payment and Performance by Bruce A.
Shear and Amended and Restated Cross-Collateralization and
Cross-Default Agreement By and Among PHC of Michigan, Inc., PHC of
Utah, Inc., PHC of Virginia, Inc., PHC of Rhode Island, Inc. and
Pioneer Counseling of Virginia, Inc. (Collectively, "Borrower") And
Heller Healthcare Finance, Inc. ("Lender"). (Filed as exhibit 10.79 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).
10.42 Loan and Security Agreement by and among Heller Healthcare Finance,
Inc., f/k/a HCFP Funding, Inc. and PHC Of Michigan, Inc., Et Al dated
December 18, 2000. (Filed as exhibit 10.52 to the company's report on
Form 10-QSB, filed with the Securities and Exchange Commission on
February 14, 2001. Commission file number 0-22916).
10.43 Consolidated Restated Mortgage by and between PHC of Michigan, Inc.
and Heller Healthcare Finance, Inc., Second Amended and Restated
Cross-Collateralization and Cross-Default Agreement dated March 9 ,
2001. (Filed as exhibit 10.53 to the company's report on Form 10-QSB
dated May 14, 2001. Commission file 0-22916).
10.44 Amendment number one, dated March 2001, to the Secured Term Note by
and between PHC of Michigan, Inc. and Heller Healthcare Financial,
Inc. in the amount of $1,100,000 dated March 1997. (Filed as exhibit
10.54 to the company's report on Form 10-QSB dated May 14, 2001.
Commission file number 0-22916).
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Exhibit No. Description
*10.45 Loan and Security Agreement originally dated as of February 18, 1998
by and among Heller Healthcare Finance, Inc. and PHC of Michigan,
Inc., PHC of Utah, Inc. and Pioneer Counseling Centers of Virginia,
Inc. dated as of June 27, 2001.
*10.46 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.
21.1 List of Subsidiaries. (Filed as an exhibit to the company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission
file number 333-59927).
* Filed herewith
(b) REPORTS ON FORM 8-K.
The company filed no reports on Form 8-K during the quarter ended June 30,
2001.
- 71 -
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 25 , 2001 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 25, 2001
Bruce A. Shear Executive Officer and
Director (principal
executive officer)
/s/ PAULA C. WURTS Controller and Treasurer September 25, 2001
Paula C. Wurts (principal financial and
accounting officer)
/s/ GERALD M. PERLOW Director September 25, 2001
Gerald M. Perlow
/s/ DONALD E. ROBAR Director September 25, 2001
Donald E. Robar
/s/ Howard Phillips Director September 25, 2001
Howard Phillips
/s/ WILLIAM F. GRIECO Director September 25, 2001
William F. Grieco
- 72 -
EX-4
3
e10k436.txt
EQUITY PURCHASE WARRANT
Exhibit 4.36
THIS EQUITY PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR
THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT.
EQUITY PURCHASE WARRANT
To Purchase 1% Equity interest in
Behavioral Health Online, Inc.
THIS IS TO CERTIFY THAT Heller Healthcare Finance, Inc., or registered
assigns, is entitled, at any time from the Closing Date (as hereinafter defined)
to the Expiration Date (as hereinafter defined) , , , to purchase from
Behavioral Health Online, Inc., a Massachusetts corporation (the "Company"), the
number of shares representing 1% of the issued and outstanding Common Stock (as
hereinafter defined) of the Company immediately following such exercise but in
any event prior to a Qualified IPO (as hereinafter defined) (provided that no
adjustments shall be made due to such Qualified IPO), exercisable in whole but
not in part, at an aggregate purchase price (i.e. for all shares of Warrant
Stock) of $100 (the "Warrant Price"), all on the terms and conditions and
pursuant to the provisions hereinafter set forth.
This Warrant is issued in connection with and as partial consideration for
the $330,000 over-line loan made by the Holder to the Company's affiliate PHC of
Michigan, Inc. (the "Loan") as evidenced by that certain Letter Agreement dated
as of December 18, 2000 for Three Hundred Thirty Thousand and no/100 dollars
($330,000) from PHC of Michigan, Inc. and the documents related thereto.
1. Definitions
As used in this Equity Purchase Warrant (this "Warrant"), the following
terms shall have the respective meanings set forth below:
"Business Day" shall mean any day that is not a Saturday or Sunday or a day
on which banks are required or permitted to be closed in the Commonwealth of
Massachusetts.
"Closing Date" is December 18, 2000.
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency then administering the Securities Act and other federal
securities laws.
"Common Stock" shall mean (except where the context otherwise indicates)
the Common Stock, par value $.01 per share, of the Company as constituted on the
Closing Date, and any capital stock into which such Common Stock may thereafter
be changed, and shall also include (i) capital stock of the Company of any other
class (regardless of how denominated) issued to the holders of shares of Common
Stock upon any reclassification thereof which is also not preferred as to
dividends or assets over any other class of stock of the Company and which is
not subject to redemption and (ii) shares of common stock of any successor or
acquiring corporation received by or distributed to the holders of Common Stock
of the Company in the circumstances contemplated by Section 4.
- 73 -
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
"Exercise Period" shall mean the period during which this Warrant is
exercisable pursuant to Section 2.1.
"Expiration Date" shall mean the earlier of (i) December 17, 2010, or (ii)
the date of the closing of, and receipt of funds from, a firm-commitment
underwritten initial public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of Common Stock
for the account of the Corporation to the public with (x) an aggregate offering
price (before deduction of underwriters commissions and expenses) of not less
than Two Million Five Hundred Thousand Dollars ($2,500,000) ("Qualified IPO").
"Fundamental Corporate Change" shall have the meaning set forth in Section
4.1.
"Holder" shall mean the Person in whose name the Warrant or Warrant Stock
set forth herein is registered on the books of the Company maintained for such
purpose.
"Other Property" shall have the meaning set forth in Section 4.
"Person" shall mean any individual, sole proprietorship, partnership, joint
venture, trust, incorporated organization, association, corporation, limited
liability company, institution, public benefit corporation, entity or government
(whether federal, state, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or department
thereof).
"Restricted Common Stock" shall mean shares of Common Stock which are, or
which upon their issuance on their exercise of this Warrant would be, evidenced
by a certificate bearing the restrictive legend set forth in Section 9.1.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Transfer" shall mean any disposition of any Warrant or Warrant Stock or of
any interest in either thereon, which would constitute a sale thereof within the
meaning of the Securities Act.
"Transfer Notice" shall have the meaning set forth in Section 9.2.
"Warrant Stock" shall mean the shares of Common Stock purchased by the
holders of the Warrants upon the exercise thereof.
"Warrants" shall mean this Warrant and all warrants issued upon
transfer, division or combination of, or in substitution for, any thereof.
All
Warrants shall at all times be identical as to terms and conditions and date,
except as to the number of shares of Common Stock for which they may be
exercised.
2. Exercise of Warrant
2.1 Manner of Exercise
From and after the Closing Date and until 5:00 p.m., New York time, on the
Expiration Date (regardless of any prepayment of the Loan), Holder may exercise
this Warrant, on any Business Day, for all, but not part, of the number of
shares of Common Stock purchasable hereunder.
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In order to exercise this Warrant in whole Holder shall deliver to the
Company at its principal office at 200 Lake Street, Suite 102, Peabody, MA
01960, or at the office or agency designated by the Company pursuant to Section
13, (i) a written notice of Holder's election to exercise this Warrant, (ii)
payment of the Warrant Price in cash or wire transfer or cashier's check drawn
on a United States bank and (iii) this Warrant. Such notice shall be
substantially in the form of the subscription form appearing at the end of this
Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon
receipt of the items referred to in clauses (i), (ii) and (iii) above, the
Company shall, as promptly as practicable, and in any event within five Business
Days thereafter, execute or cause to be executed and deliver or cause to be
delivered to Holder a certificate or certificates representing the aggregate
number of full shares of Common Stock issuable upon such exercise. The stock
certificate or certificates so delivered shall be, to the extent possible, in
such denomination or denominations as Holder shall request in the notice and
shall be registered in the name of Holder or, subject to Section 9, such other
name as shall be designated in the notice. This Warrant shall be deemed to have
been exercised and such certificate or certificates shall be deemed to have been
issued, and Holder or any other Person so designated to be named therein shall
be deemed to have become a holder of record of such shares for all purposes, as
of the date the notice, together with the cash or check or checks and this
Warrant, is received by the Company as described above and all taxes required to
be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such
shares have been paid. Notwithstanding any provision herein to the contrary, the
Company shall not be required to register shares in the name of any Person who
acquired this Warrant (or part hereof) or any Warrant Stock otherwise than in
accordance with this Warrant.
2.2 Payment of Taxes and Charges
All shares of Common Stock issuable upon the exercise of this Warrant
pursuant to the terms hereof shall be validly issued, fully paid and
nonassessable, freely tradable and without any preemptive rights. The Company
shall pay all expenses in connection with, and all taxes and other governmental
charges that may be imposed with respect to, the issuance or delivery thereof,
unless such tax or charge is imposed by law upon Holder, in which case such
taxes or charges shall be paid by Holder. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issuance of any certificate for shares of Common Stock issuable
upon exercise of this Warrant in any name other than that of Holder, and in such
case the Company shall not be required to issue or deliver any stock certificate
until such tax or other charge has been paid or it has been established to the
satisfaction of the Company that no such tax or other charge is due.
2.3 Fractional Shares
The Company shall not be required to issue a fractional share of Common
Stock upon exercise of any Warrant. As to any fraction of a share which Holder
would otherwise be entitled to purchase upon such exercise, such fraction shall
be adjusted to a full share of Common Stock.
2.4 Continued Validity
A holder of shares of Common Stock issued upon the exercise of this Warrant
(other than a holder who acquires such shares after the same have been publicly
sold pursuant to a Registration Statement under the Securities Act or sold
pursuant to Rule 144 thereunder) shall continue to be entitled with respect to
such shares to all rights to which it would have been entitled as Holder under
Sections 9 and 10 of this Warrant. The Company will, at the time of exercise of
this Warrant, upon the request of Holder, acknowledge in writing, in form
reasonably satisfactory to Holder, its continuing obligation to afford Holder
all such rights; provided, however, that if Holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to Holder all such rights.
- 75 -
2.5 Cooperation
The Company shall assist and cooperate with any Holder required to make any
governmental filings or obtain any governmental approvals prior to or in
connection with any exercise of this Warrant, including, without limitation,
making any filings required to be made by the Company. The Holder shall
reimburse the Company for any reasonable costs and expenses incurred by the
Company (including without limitation, reasonable attorneys' fees) in connection
with the cooperation and assistance. Notwithstanding the foregoing, the costs
and expenses shall not include any fees or costs related to any federal or state
registration of this Warrant or the Warrant Shares or registered public offering
of the Company's securities.
2.6 Regulation
This Warrant may not be exercised by a Holder that qualifies as a
"subsidiary" of a "bank holding company" (as such terms are defined in Section
225.2 of Regulation Y issued by the Board of Governors of the Federal Reserve
System ("Regulation Y")) (a "BHC Subsidiary") unless such Holder advises the
Company in writing that the exercise of the Warrant by such Holder complies with
Regulation Y and the Bank Holding Company Act of 1956, as amended ("BHCA").
3. Transfer, Division and Combination
3.1 Transfer
Subject to compliance with Section 9, transfer of this Warrant and all
rights hereunder, in whole but not in part, shall be registered on the books of
the Company to be maintained for such purpose, upon surrender of this Warrant at
the principal office of the Company referred to in Section 2.1 or the office or
agency designated by the Company pursuant to Section 13, together with a written
assignment of this Warrant substantially in the form of Exhibit B hereto duly
executed by Holder or its agent or attorney and funds sufficient to pay any
transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall, subject to Section 9, execute
and deliver a new Warrant in the name of the assignee and this Warrant shall
promptly be canceled. A Warrant, if properly assigned in compliance with Section
9, may be exercised by a new Holder for the purchase of shares of Common Stock
without having a new warrant issued.
3.2 Division and Combination
Subject to Section 9, this Warrant may be divided or combined with other
Warrants upon presentation thereof at the aforesaid office or agency of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued, signed by Holder or its agent or
attorney. Subject to compliance with Sections 3.1 and 9, as to any transfer
which may be involved in such division or combination, the Company shall execute
and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to
be divided or combined in accordance with such notice.
3.3 Expenses
The Company shall prepare, issue and deliver at its own expense
(other than transfer taxes) the new Warrants or Warrants under this Section 3.
3.4 Maintenance of Books
The Company agrees to maintain, at its aforesaid office or agency, books
for the registration and the registration of transfer of the Warrants.
- 76 -
4. ADJUSTMENTS
4.1 Transfer
In case the Company shall reorganize its capital, reclassify its capital
stock, consolidate or merge with or into another Person (where the Company is
not the survivor or where there is a change in or distribution with respect to
the Common Stock of the Company), or sell, convey, transfer or otherwise dispose
of all or substantially all its property, assets or business to another Person,
or effectuate a transaction or series of related transactions in which more than
50% of the voting power of the Company is disposed of (each, a "Fundamental
Corporate Change") and, pursuant to the terms of such Fundamental Corporate
Change, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of the Warrant, such number of shares of common stock of the successor
or acquiring corporation, and Other Property as is receivable upon or as a
result of such Fundamental Corporate Change by a holder of the number of shares
of Common Stock for which this Warrant is exercisable immediately prior to such
Fundamental Corporate Change. In case of any such Fundamental Corporate Change,
the successor or acquiring corporation (if other than the Company) shall
expressly assume in writing the due and punctual observance and performance of
each and every covenant and condition of this Warrant to be performed and
observed by the Company and all the obligations and liabilities hereunder,
subject to such modifications as may be deemed appropriate (as determined by
resolution of the Board of Directors of the Company) in order to provide for
adjustments of shares of Common Stock for which this Warrant is exercisable
which shall be as nearly equivalent as practicable to the adjustments provided
for in this Section 4. For purposes of this, "common stock of the successor or
acquiring corporation" shall include stock of such corporation of any class
which is not preferred as to dividends or assets over any other class of stock
of such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares of stock or other securities which
are convertible into or exchangeable for any such stock, either immediately or
upon the arrival of a specified date or the happening of a specified event and
any warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 4 shall similarly apply to successive
Fundamental Corporate Change.
4.2 Recapitalization
If at any time or from time to time there shall be a recapitalization of
the Common Stock (other than a subdivision, combination or merger or sale of
assets transaction provided for elsewhere in this Section 4) provision shall be
made so that the Holder of this Warrant shall thereafter be entitled to receive
upon exercise of this Warrant the number of shares of stock or other securities
or property of the Company or otherwise, to which a holder of the Common Stock
deliverable upon conversion would have been entitled on such recapitalization.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the Holder of this
Warrant after the recapitalization to the end that the provisions of this
Section 4 (including adjustment of the Exercise Price then in effect and the
number of shares purchasable upon exercise of this Warrant) shall be applicable
after that event and be as nearly equivalent as practicable.
5. Notices to Holder
5.1 Notice of Adjustments
Whenever the shares for which this Warrant is exercisable shall be subject
to a Fundamental Corporate Change the Company shall forthwith prepare a
certificate to be executed by the chief financial officer of the Company setting
forth, in reasonable detail, the event requiring the adjustment and the method
by which such adjustment was calculated describing the number and kind of any
other shares of stock or Other Property for which this Warrant is exercisable.
The Company shall promptly cause a signed copy of such certificate to be
delivered to the Holder in accordance with Section 16.2. The Company shall keep
at its office or agency designated pursuant to Section 13 copies of all such
certificates and cause the same to be available for inspection at said office
during normal business hours by the Holder or any prospective purchaser of a
Warrant designated by Holder.
- 77 -
5.2 Notice of Corporate Action
If at any time:
(a) the Company shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend or other distribution, or
any right to subscribe for or purchase any evidences of its indebtedness, any
shares of stock of any class or any other securities or property, or to receive
any other right; or
(b) there shall be any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation; or (c) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder
(i) at least 30 days' prior written notice of the date on which a record date
shall be selected for such dividend, distribution or right or for determining
rights to vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, and (ii) in the case of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, at least 30 days' prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the date on which the holders of Common Stock
shall be entitled to any such dividend, distribution or right, and the amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 16.2.
6. No Impairment
The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issuance or sale of
securities or other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and (b)
use its best efforts to obtain all such authorizations, exemptions or consents
from any public regulatory body having jurisdiction thereof as may be necessary
to enable the Company to perform its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the period
this Warrant is outstanding acknowledge in writing, in form satisfactory to
Holder, the continuing validity of this Warrant and the obligations of the
Company hereunder.
7. Reservation and Authorization of Common Stock
From and after the Closing Date, the Company shall at all times reserve and
keep available for issuance upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as will be sufficient to permit
the exercise in full of all outstanding Warrants. All shares of Common Stock
which shall be so issuable, when issued upon exercise of any Warrant and payment
therefor in accordance with the terms of such Warrant, shall be duly and validly
issued and fully paid and nonassessable and not subject to preemptive rights.
- 78 -
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable, the
Company shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.
8. Taking of Record; Stock and Warrant Transfer Books
The Company will not at any time, except upon dissolution, liquidation or
winding up of the Company, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise or transfer of any
Warrant.
9. Restrictions on Transferability
The Warrants and the Warrant Stock shall not be transferred, hypothecated
or assigned before satisfaction of the conditions specified in this Section 9,
which conditions are intended to ensure compliance with the provisions of the
Securities Act with respect to the Transfer of any Warrant or any Warrant Stock.
Holder, by acceptance of this Warrant, agrees to be bound by the provisions of
this Section 9.
9.1 Restrictive Legend
(a) Holder, by accepting this Warrant and any Warrant Stock agrees that
this Warrant and the Warrant Stock issuable upon exercise hereof may not be
assigned or otherwise transferred unless and until (i) the Company has received
an opinion of counsel for Holder that such securities may be sold pursuant to an
exemption from registration under the Securities Act or (ii) a registration
statement relating to such securities has been filed by the Company and declared
effective by the Commission.
Each certificate for Warrant Stock issuable hereunder shall bear a legend
as follows until such securities have been sold pursuant to an effective
registration statement under the Securities Act:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE, AND ARE BEING OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR SUCH
OTHER LAWS."
(b) Except as otherwise provided in this Section 9, the Warrant shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
"THIS COMMON STOCK PURCHASE WARRANT AND THE SECURITIES REPRESENTED HEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS
THEREUNDER OR THE PROVISIONS OF THIS COMMON STOCK PURCHASE WARRANT."
- 79 -
9.2 Notice of Proposed Transfers
Prior to any Transfer or attempted Transfer of any Warrants or any shares
of Restricted Common Stock, the Holder shall give ten days' prior written notice
(a "Transfer Notice") to the Company of Holder's intention to effect such
Transfer, describing the manner and circumstances of the proposed Transfer, and
obtain from counsel to Holder who shall be reasonably satisfactory to the
Company, an opinion that the proposed Transfer of such Warrants or such
Restricted Common Stock may be effected without registration under the
Securities Act. After receipt of the Transfer Notice and opinion, the Company
shall, within five days thereof, notify the Holder as to whether such opinion is
reasonably satisfactory and, if so, such holder shall thereupon be entitled to
Transfer such Warrants or such Restricted Common Stock, in accordance with the
terms of the Transfer Notice. Each certificate, if any, evidencing such shares
of Restricted Common Stock issued upon such Transfer shall bear the restrictive
legend set forth in Section 9.1(a), and the Warrant issued upon such Transfer
shall bear the restrictive legend set forth in Section 9.1(b), unless in the
opinion of such counsel such legend is not required in order to ensure
compliance with the Securities Act. Holder shall not be entitled to Transfer
such Warrants or such Restricted Common Stock until receipt of notice from the
Company under this Section 9.2 that such opinion is reasonably satisfactory.
9.3 Registration of Common Stock Shares.
From and after the first public sale of shares of the Company's Common
Stock pursuant to an effective registration statement under the Securities Act,
after the expiration of any applicable underwriter lock-up period, the Holder
shall have the right to have the Warrant Stock registered for resale on a Form
S-3 Registration Statement in the event the Company is eligible to file a Form
S-3 (or any successor form).
9.4 Termination of Restrictions
Notwithstanding the foregoing provisions of Section 9, the restrictions
imposed by this Section upon the transferability of the Warrant Stock and the
Restricted Common Stock and the legend requirements of Section 9.1 shall
terminate as to any particular share of Warrant Stock or Restricted Common Stock
(i) when and so long as such security shall have been effectively registered
under the Securities Act and disposed of pursuant thereto or (ii) when the
Company shall have received an opinion of counsel reasonably satisfactory to it
that such shares may be transferred without registration thereof under the
Securities Act.
Whenever the restrictions imposed by this Section shall terminate as to any
share of Restricted Common Stock, as hereinabove provided, the holder thereof
shall be entitled to receive from the Company, at the Company's expense, a new
certificate representing such Common Stock not bearing the restrictive legend
set forth in Section 9.1(a).
10. PREEMPTIVE PURCHASE RIGHTS
If at any time the Company grants, issues or sells any shares of Common
Stock or other securities or any options, warrants, or rights to purchase shares
of Common Stock, warrants, securities or other property pro rata to the record
holders of the Common Stock (the "Subscription Rights"), then the Holder of this
Warrant shall be entitled to acquire, upon the terms applicable to the
Subscription Rights, the total number of Subscription Rights that the Holder
would have acquired if the Holder had exercised this Warrant immediately before
the record date for the grant, issuance or sale of the Subscription Rights, or
if no record date is determined, the date as of which the record holders of
Shares entitled to receive the Subscription Rights were determined.
11. Supplying Information
The Company shall cooperate with Holder in supplying such information as
may be reasonably necessary for Holder to complete and file any information
reporting forms presently or hereafter required by the Commission as a condition
to the availability of an exemption from the Securities Act for the sale of any
Warrant or Restricted Common Stock.
12. Loss or Mutilation
Upon receipt by the Company from Holder of evidence reasonably satisfactory
to it of the ownership of and the loss, theft, destruction or mutilation of this
Warrant and indemnity reasonably satisfactory to it (it being understood that
the written agreement of the Holder shall be sufficient indemnity), and in case
of mutilation upon surrender and cancellation hereof, the Company will execute
and deliver in lieu hereof a new Warrant of like tenor to Holder; provided, in
the case of mutilation no indemnity shall be required if this Warrant in
identifiable form is surrendered to the Company for cancellation.
- 80 -
13. Office of the Company
As long as any of the Warrants remain outstanding, the Company shall
maintain an office or agency (which may be the principal executive offices of
the Company) where the Warrants may be presented for exercise, registration of
transfer, division or combination as provided in this Warrant.
14. Limitation of Liability
No provision hereof, in the absence of affirmative action by Holder to
purchase shares of Common Stock, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of Holder for the
purchase price of any Common Stock or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the Company.
15. RIGHTS OF CO-SALE
(a) If at any time any stockholder of the Company who owns shares of Common
Stock constituting 10% or more of the Company's ownership interests (computed on
a fully diluted basis) (a "Significant Shareholder") proposes to sell or
otherwise transfer any shares of Common Stock to any person (a "Transfer"), and
the shares of Common Stock that are to be sold or otherwise transferred
constitute 10% or more of the Company's total ownership (computed on a fully
diluted basis), the Significant Shareholder proposing the Transfer shall, before
the Transfer, deliver written notice of the Transfer (a "Transfer Notice") to
the Holder. The Transfer Notice shall state that the Significant Shareholder
proposes to Transfer Shares, specify the number of shares of Common Stock
subject to the proposed Transfer, and state the terms (including purchase price)
of the proposed Transfer.
(b) The Significant Shareholder shall give the Holder the right to sell
Warrant Stock, on a proportional basis, in the transaction described in the
Transfer Notice on the same terms and conditions as the Significant Shareholder,
and the Significant Shareholder shall take all steps necessary to include the
shares of Warrant Stock in the Transfer. Within fifteen (15) days of delivery of
the Transfer Notice, the Holder may give written notice (the "Co-Sale Notice")
to the Significant Shareholder of its desire to sell, on a proportional basis,
the Holder's Warrant Stock in the transaction described in the Transfer Notice.
(c) If the Holder does not deliver a Co-Sale Notice in response to a
properly delivered Transfer Notice within the 15-day period, the Significant
Shareholder may proceed with the sale or other transfer, without any further
notice to the Company or the Holder pursuant to this Section 15; provided,
however, that (i) the sale or other transfer is completed within ninety (90)
days on the terms set forth in the Transfer Notice, and (ii) Holder shall
continue to have the rights set forth in this Section 15 for all subsequent
sales of shares of Common Stock.
(d) The Holder shall not be required to have exercised this Warrant with
respect to Warrant Stock as a condition of giving a Co-Sale Notice with respect
to the Warrant Stock.
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(e) Notwithstanding anything to the contrary in this Section 15, the right
of a co-sale (i) shall expire immediately upon a Qualified IPO, and (ii) shall
not be applicable to a Transfer to an affiliate of the Company.
16. Miscellaneous
16.1 Nonwaiver and Expenses
No course of dealing or any delay or failure to exercise any right
hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder's rights, powers or remedies. If the Company fails to
make, when due, any payments provided for hereunder, or fails to comply with any
other provision of this Warrant, the Company shall pay to Holder such amounts as
shall be sufficient to cover any costs and expenses including, without
limitation, reasonable attorneys' fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due pursuant hereto or
in otherwise enforcing any of its rights, powers or remedies hereunder.
16.2 Notice Generally
Except as may be otherwise provided herein, any notice or other
communication or delivery required or permitted hereunder shall be in writing
and shall be delivered personally or sent by certified mail, postage prepaid, or
by a nationally recognized overnight courier service, and shall be deemed given
when so delivered personally or by overnight courier service, or, if mailed,
three days after the date of deposit in the United States mails, as follows:
(a) if to the Company, to:
Behavioral Health Online, Inc.
200 Lake Street, Suite 102
Peabody, MA 01960
Attention: Bruce A. Shear
(978) 536-2777
(978) 536-2677(fax)
with a copy to:
Arnold R. Westerman, Esquire
Arent Fox Kintner Plotkin & Kahn, PLLC
1050 Connecticut Avenue, NW
Washington, DC 20036
(202) 857-6243
(202) 857-6395 (fax)
(b) if to the Holder, to:
Heller Healthcare Finance, Inc.
2 Wisconsin Circle, 4th floor
Chevy Chase, MD 20815
Attention: Steven M Curwin, Esq.
(301) 664-9827 (Phone)
(301) 664-9860 (Fax)
with a copy to:
Heller Healthcare Finance, Inc.
2 Wisconsin Circle, 4th Floor
Chevy Chase, MD 20815
Attention: Brett Robinson
(301) 347-3137 (Phone)
(301) 664-9860 (fax)
- 82 -
The Company or the Holder may change the foregoing address by
notice given pursuant to this Section.
16.3 Remedies
Holder in addition to being entitled to exercise all rights granted by law,
including recovery of damages, will be entitled to specific performance of its
rights under Section 9 of this Warrant. The Company agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of the provisions of Section 9 of this Warrant and hereby agrees to waive
the defense in any action for specific performance that a remedy at law would be
adequate.
16.4 Successors and Assigns
Subject to the provisions of Sections 3.1 and 9, this Warrant and the
rights evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the successors and assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant and, with respect to Section 9 hereof, holders
of Warrant Stock, and shall be enforceable by any such Holder or holder of
Warrant Stock.
16.5 Amendment
This Warrant and all other Warrants may be modified or amended or the
provisions hereof waived with the written consent of the Company and Holder.
16.6 Severability
Wherever possible, each provision of this Warrant shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Warrant shall be prohibited by or invalid under applicable
law, such provision shall only be ineffective to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Warrant.
16.7 Headings
The headings used in this Warrant are for the convenience of reference only
and shall not, for any purpose, be deemed a part of this Warrant.
16.8 Governing Law
This Warrant shall be governed by the laws of the Commonwealth of
Massachusetts, without regard to the provisions thereof relating to conflicts of
law.
- 83 -
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and its corporate seal to be impressed hereon and attested by its Secretary or
an Assistant Secretary.
Dated: December 18, 2000
BEHAVIORAL HEALTH ONLINE.COM, INC.
By: /s/ Bruce A. Shear
Name: Bruce A. Shear
Title: Chief Executive Officer
Attest:
By: /s/ Paula C. Wurts
Name: Paula C. Wurts
Title: Assistant Clerk
- 84 -
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably exercises this
Warrant for the purchase of __________ shares of Common Stock of Behavioral
Health Online.com, Inc. and herewith makes payment therefor, all at the price
and on the terms and conditions specified in this Warrant and requests that
certificates for the shares of Common Stock hereby purchased (and any securities
or other property issuable upon such exercise) be issued in the name of and
delivered to
whose address is
and, if such shares of Common Stock shall not include all of the shares of
Common Stock issuable as provided in this Warrant, that a new Warrant of like
tenor and date for the balance of the shares of Common Stock issuable hereunder
be delivered to the undersigned.
----------------------------------- ---------------------------------------
(Name of Registered Owner)
----------------------------------- ---------------------------------------
(Signature of Registered Owner)
----------------------------------- ---------------------------------------
(Street Address)
----------------------------------- ---------------------------------------
(City) (State) (Zip Code)
Notice: The signature on this subscription must correspond with the
name as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatsoever.
- 85 -
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under this Warrant, with respect to the number of shares of
Common Stock set forth below:
No. of Shares of
Name and Address of Assignee Common Stock
____________________________________________________________________________
and does hereby irrevocably constitute and appoint
attorney-in-fact to register such transfer on the books of Behavioral Health
Online.com, Inc. maintained for the purpose, with full power of substitution in
the premises.
Dated:
---------------------------
----------------------------------- ---------------------------------------
(Print Name)
----------------------------------- ---------------------------------------
(Signature)
----------------------------------- ---------------------------------------
(Print Name of Witness)
----------------------------------- ---------------------------------------
(Witness's Signature)
Notice: The signature on this assignment must correspond
with the name as written upon the face of the within Warrant
in every particular, without alteration or enlargement or
any change whatsoever.
- 86 -
EX-10
4
e10k1045.txt
LOAN AND SECURITY AGREEMENT
Exhibit 10.45
[Pioneer Behavioral Health Letterhead]
June 26, 2001
Heller Healthcare Finance, Inc.
f/k/a HCFP Funding, Inc.
2 Wisconsin Circle, 4th Floor
Chevy Chase, Maryland 20815
Attention: David Moore, Senior Vice President
Dear Mr. Moore:
Reference is made to that certain Loan and Security Agreement originally
dated as of February 18, 1998 by and among the Borrowers identified therein and
Heller Healthcare Finance, Inc. f/k/a HCFP Funding, Inc., as Lender (as
previously amended, as amended hereby and as otherwise amended, modified or
supplemented from time to time, the "Loan Agreement"). All capitalized terms
used but not defined in this letter shall have the meaning given them in the
Loan Agreement.
We are writing to request that Lender agree to lend, and Lender hereby
agrees to make, to Borrower a Revolving Credit Loan in the form of an "overline
advance" (i.e., an advance that exceeds the Borrowing Base). We acknowledge that
the Lender has agreed to provide such overline advance, provided the Borrower
agree to the terms and conditions set forth herein. Accordingly, the Borrower
and Lender hereby agree as follows:
1. The aggregate amount of the overline advance shall not exceed Four
Hundred Thousand and No/100 Dollars ($400,000.00) (the "Overline Loan"). The
Overline Loan shall bear interest at the Base Rate as specified in the Loan
Agreement.
2. Except as expressly modified by the terms of this letter agreement, the
Overline Loan will be treated for all purposes as a Revolving Credit Loan under
the Loan Agreement, and all principal, interest, fees and other costs and
expenses relating to the Overline Loan (the "Overline Obligations") shall be
treated as additional Obligations under the Loan Agreement and the other Loan
Documents. The Maximum Loan Amount shall be inclusive of, and shall not be
deemed to be increased by, the Overline Obligations.
3. The Overline Loan shall be repaid in full by Borrower making weekly
installment payments of principal to Lender, each of which payments shall be
equal to $25,000 and which payments shall commence on July 13, 2001 and continue
to be made on a weekly basis thereafter until the earlier of (a) the date on
which the aggregate principal amount of the Overline Loan and all other Overline
Obligations have been repaid in full by Borrower and (b) November 2, 2001, on
which date, unless earlier repaid, the aggregate principal amount of the
Overline Loan and all other Overline Obligations shall be due and payable (the
"Maturity Date").
4. In consideration for Lender's agreement to make the Overline Loan to
Borrower, Borrower hereby agrees to pay to Lender an overline fee (the "Overline
Fee") equal to one percent (10%) of the amount of the Overline Loan actually
advanced by Lender hereunder, provided that the Overline Fee shall in any event
be not less than $30,000. The Overline Fee shall constitute a portion of the
Obligations evidenced and secured by the Loan Documents and shall be due and
payable promptly following demand therefor by Lender. To the extent that
Borrower shall not have paid the Overline Fee promptly following demand therefor
by Lender, the Overline Borrower shall be deemed to have authorized and hereby
does authorize Lender to deduct the amount of such Overline Fee from the
proceeds of the any subsequent Revolving Credit Loan(s) made by Lender to
Borrower under the Loan Agreement.
- 87 -
5. Any breach by Borrower of any of the provisions of this letter
agreement, including but not limited to any failure of Borrower to repay the
Overline Obligations on or before the Maturity Date as required hereunder, shall
constitute an immediate and automatic Event of Default under the Loan Agreement
without further action or notice by Lender. Upon the occurrence of such an Event
of Default, and in addition to the other rights to which Lender may be entitled
under the Loan Agreement, or at law or in equity, upon such failure, Lender
shall be entitled to apply amounts transferred to the Concentration Account
pursuant to Section 2.3 of the Loan Agreement in satisfaction of Borrower's
obligations with respect to the Overline Loan and the Overline Obligations.
6. Except as specifically modified hereby, the Loan Agreement, and all
other Loan Documents, shall remain in full force and effect, and are hereby
ratified and confirmed.
7. The execution, delivery and effectiveness of this letter agreement shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of Lender, nor constitute a waiver of any provision of the Loan
Agreement, or any other documents, instruments and agreements executed or
delivered in connection therewith, nor shall it be construed as a waiver of any
other Event of Default, whether now existing of hereafter arising. Lender hereby
reserves all of its rights and remedies under the Loan Documents and applicable
law.
8. This letter agreement shall be governed by and construed in accordance
with the laws of the State of Maryland without regard to any otherwise
applicable conflicts of law provisions thereof.
9. This letter agreement may be executed in counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same instrument.
10. By execution and delivery of this letter agreement, the Borrower agrees
to be legally bound by the provisions hereof.
Very truly yours,
PHC of Michigan, Inc., PHC of Utah, Inc. and
Pioneer Counseling of Virginia, Inc.,, each a
Massachusetts corporation
By: /s/ Paula C. Wurts
Name: Paula C. Wurts
Title: Chief Financial Officer
ACKNOWLEDGED AND AGREED TO
AS OF THE 27 DAY OF JUNE, 2001:
HELLER HEALTHCARE FINANCE, INC.
f/k/a HCFP FUNDING, INC.
a Delaware corporation
By: /s/ Brett Robinson
Name: Brett Robinson
Title: Vice President
- 88 -
EX-10
5
e10k1046.txt
LOAN AND SECURITY AGREEMENT AMENDMENT 2
Exhibit 10.46
$3,000,000.00
AMENDMENT NO. 2
TO
LOAN AND SECURITY AGREEMENT
originally dated as of February 18, 1998
by and among
PHC OF MICHIGAN, INC.
PHC OF VIRGINIA, INC.
PHC OF UTAH, INC.
(collectively, "Borrower")
and
HELLER HEALTHCARE FINANCE, INC.
(f/k/a HCFP FUNDING, INC.)
("Lender")
Amended as of May ___, 2001
- 89 -
AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT (this "Amendment") is
made as of this ___ day of May, 2001, by and among PHC OF MICHIGAN, INC., a
Massachusetts corporation, PHC OF UTAH, INC., a Massachusetts corporation, and
PHC OF VIRGINIA, INC., a Massachusetts corporation (collectively, "Borrower"),
and HELLER HEALTHCARE FINANCE, INC. f/k/a HCFP FUNDING, INC., a Delaware
corporation ("Lender").
RECITALS
WHEREAS, pursuant to that certain Loan and Security Agreement dated as of
February 18, 1998 (as previously amended by that certain Amendment No. 1 to Loan
and Security Agreement dated as of February 17, 2000, as amended hereby and as
it may be further amended, modified and restated from time to time,
collectively, the "Loan Agreement") by and among Lender and Borrower, Lender
agreed to make available to Original Borrower a revolving credit loan (the
"Loan")
WHEREAS, Borrower and Lender wish to make certain additional changes to the
financing arrangements as set forth in this Amendment.
NOW, THEREFORE, in consideration of the foregoing, the terms and conditions
set forth in this Amendment, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Lender and Borrower
hereby agree as follows:
Section 1. Definitions. Unless otherwise defined in this Amendment, all
capitalized terms shall have the meanings assigned to such terms in the Loan
Agreement.
Section 2. Increase in Maximum Loan Amount. Effective as of the date of
this Amendment, Lender agrees to increase the Maximum Loan Amount from Two
Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00) to Three
Million and No/100 Dollars ($3,000,000.00).
Section 3. Amendment to Loan Agreement.
(a) Section 2.1(a) of the Loan Agreement is hereby amended and restated to
read as follows:
(a) The maximum aggregate principal amount of credit extended by Lender to
Borrower hereunder (the "Loan") that will be outstanding at any time
is Three Million and No/100 Dollars ($3,000,000.00) (the "Maximum Loan
Amount").
(b) Section 2.8(a) of the Loan Agreement is hereby amended and restated to
read as follows:
(c) Subject to Lender's right to cease making Revolving Credit Loans to
Borrower upon or after any Event of Default, this Agreement shall be
in effect until February 18, 2003, and this Agreement shall
automatically renew itself for one-year periods thereafter. unless
terminated as provided in this Section 2.8."
- 90 -
Section 4. Fee. In consideration of Lender's agreement to increase the
Maximum Loan Amount, Borrower agrees to unconditionally pay to Lender a fee (the
"Fee") equal to Seven Thousand Five Hundred and No/100 Dollars ($7,500.00).
Borrower hereby authorizes Lender to deduct the amount of the Fee from the next
Revolving Credit Loan made by Lender under the Loan Agreement after the
effective date hereof.
Section 5. Costs. Borrower shall be responsible for the payment of all
costs of Lender incurred in connection with the preparation of this Amendment,
including but not limited to the reasonable fees of Lender's in-house counsel.
Section 6. Effective Date. This Amendment shall be effective upon the
execution and delivery to Lender of this Amendment by each Borrower.
Section 7. Reference to the Effect on the Loan Agreement.
(a) Upon the effectiveness of the Amendment, each reference in the Loan
Agreement to "this agreement," "hereunder," "hereof," "herein" or words of
similar import shall be a reference to the Loan Agreement as amended by the
Amendment.
(b) Except as specifically amended above, the Loan Agreement and all other
Loan Documents shall remain in full force and effect, and are hereby ratified
and confirmed.
(c) The execution, delivery and effectiveness of the Amendment shall not,
except as expressly provided in this Amendment, operate as a waiver of any
right, power or remedy of Lender, nor constitute a waiver of any provision of
the Loan Agreement, or any other documents, instruments and agreements executed
or delivered in connection with the Loan Agreement.
Section 8. Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of the State of Maryland.
Section 9. Headings. Section headings in this Amendment are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
Section 10. Counterparts. This Amendment may be executed in counterparts,
and both counterparts taken together shall be deemed to constitute one and the
same instrument.
[SIGNATURES FOLLOW]
- 91 -
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
as of the date first written above.
LENDER:
HELLER HEALTHCARE FINANCE, INC.
(f/k/a HCFP FUNDING, INC.), a Delaware
corporation
By: /s/ Brett Robinson
Name: Brett Robinson
Title: Vice President
BORROWER:
PHC OF MICHIGAN, INC., a Massachusetts
corporation
By: /s/ Paula C. Wurts
Name: Paula C. Wurts
Title: Chief Financial officer
PHC OF UTAH, INC., a Massachusetts
corporation
By: /s/ Paula C. Wurts
Name: Paula C. Wurts
Title: Chief Financial officer
PHC OF VIRGINIA, INC., a Massachusetts
corporation
By: /s/ Paula C. Wurts
Name: Paula C. Wurts
Title: Chief Financial officer