-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V97ZMF55vKCThOzVaj55wTCYEM2V26YYppRgIU/mng90E5o5Nc9DLhXNeE7rfJjo DIYYo13qtzAHXOycudwdKg== 0000915127-98-000030.txt : 19981104 0000915127-98-000030.hdr.sgml : 19981104 ACCESSION NUMBER: 0000915127-98-000030 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981103 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-22916 FILM NUMBER: 98737052 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 10QSB 1 1ST QUARTER 1999 REPORT U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998. | | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ___________ Commission file number 0-23524 PHC, INC. (Exact name of small business issuer as specified in its charter) Massachusetts 04-2601571 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Lake Street, Suite 102, Peabody MA 01960 (Address of principal executive offices) (Zip Code) 978-536-2777 (Issuer's telephone number) _______________________________________________________________________________ (Former Name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Applicable only to corporate issuers Number of shares outstanding of each class of common equity, as of October 16, 1998: Class A Common Stock 4,935,267 Class B Common Stock 727,328 Transitional Small Business Disclosure Format (Check one): Yes No X PHC, Inc. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 1998 and June 30, 1998. Condensed Consolidated Statements of Operations - Three months ended September 30, 1998 and September 30, 1997. Condensed Consolidated Statements of Cash Flows - Three months ended September 30, 1998 ` and September 30, 1997. Notes to Condensed Consolidated Financial Statements - September 30, 1998. Item 2. Management's Discussion and Analysis or Plan of Operation PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. Signatures PART I. FINANCIAL INFORMATION Item 1 Financial Statements PHC INC. AND SUBSIDIARIES (UNAUDITED) CONSOLIDATED BALANCE SHEETS Sept. 30 June 30 1998 1998 ASSETS Current assets: Cash & Cash Equivalents...................... $ 81,275 $ 227,077 Accounts receivable, net of allowance for bad debts of $3,539,637 at Sept. 30, 1998, $ 3,488,029 at June 30, 1998......... 7,220,700 7,441,972 Prepaid expenses............................ 181,984 156,695 Other receivables and advances.............. 430,279 127,064 Deferred Income Tax Asset................... 515,300 515,300 Other Receivables, related party............ 305,766 64,065 ___________ __________ Total current assets.................... 8,735,304 8,532,173 Accounts Receivable, noncurrent................ 610,000 685,000 Other receivables, noncurrent, related party net of allowance for doubtful accounts of $382,000 Sept.30, 1998 and June 30, 1998.... 3,048,742 2,941,402 Other Receivable............................... 117,680 426,195 Property and equipment, net.................... 2,124,485 2,128,273 Deferred income taxes.......................... 154,700 154,700 Deferred financing costs, net of amortization of $4,514 at Sept. 30, 1998 and $18,065 at June 30, 1998............................ 59,593 53,608 Goodwill, net of accumulated amortization of $26,869 at Sept. 30, 1998 and $307,707 at June 30, 1998............................ 1,983,363 2,011,613 Other assets................................... 136,568 167,004 __________ __________ Total assets.............................. $ 16,970,435 $17,099,968 __________ __________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................ $2,691,024 $ 2,346,213 Notes payable--related parties ............. 243,696 159,496 Current maturities of long term debt........ 1,137,138 1,107,167 Revolving credit note....................... 1,559,490 1,683,458 Current portion of obligations under capital leases.................................... 64,652 67,492 Accrued Payroll, Payroll Taxes and Benefits.................................. 260,547 729,194 Accrued expenses and other liabilities...... 1,093,807 1,004,763 Net current liabilities of discontinued operations................................ 1,232,394 1,232,394 __________ __________ Total Current liabilities................ 8,282,748 8,330,177 __________ __________ Long-term debt................................ 2,742,730 2,850,089 Obligations under capital lease............... 77,160 93,747 Net long term liabilities of discontinued operations................................. 1,409,143 1,409,143 __________ _________ Total noncurrent liabilities............. 4,229,033 4,352,979 __________ __________ Total liabilities........................ 12,511,781 12,683,156 __________ __________ Stockholders' Equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, 976 and 950 shares issued and outstanding Sept. 30, 1998 and June 30, 1998 liquidation preference ($976,000 and 950,000 respectively)....................... 10 10 Class A common stock, $.01 value; 20,000,000 shares authorized, 4,935,267 shares issued Sept. 98 and June 98........................ 49,353 49,353 Class B common stock, $.01 par value; 2,000,000 shares authorized, 727,328 issued Sept. 98 and June 98, convertible into one share of Class A common stock.............................. 7,273 7,273 Additional paid-in capital.................... 15,313,395 15,295,895 Treasury stock, 2,776 shares at cost.......... (12,122) (12,122) Accumulated Deficit........................... (10,899,255) (10,923,597) ___________ ___________ Total Stockholders' Equity.................... 4,458,654 4,416,812 ___________ ___________ Total Liabilities & Stockholders' Equity.... $16,970,435 $17,099,968 See Notes to Consolidated Financial Statements PHC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended September 30 1998 1997 Revenues: Patient Care, net........................... $ 4,476,738 $4,770,735 Management Fees. ........................... 235,104 233,283 Other....................................... 199,453 173,477 ___________ __________ Total revenue................................. 4,911,295 5,177,495 Operating expenses: Patient care expenses....................... 2,308,051 2,641,817 Cost of Management Contracts................ 128,165 102,400 Provision for doubtful accounts............. 356,190 427,093 Administrative expenses..................... 1,905,917 2,286,764 ___________ __________ Total operating expenses...................... 4,698,323 5,458,074 ___________ __________ Income (loss) from operations................. 212,972 (280,579) ___________ __________ Other income (expense): Interest income............................. 109,382 97,647 Interest expense............................ (286,688) (326,588) Other income (expense), net................. 4,342 34,750 ___________ __________ Total other expense, net...................... (172,964) (194,191) ___________ __________ Income (loss) before Provision for Taxes...... 40,008 (474,770) Provision for Income Taxes.................... 911 7,200 ___________ __________ Income (loss) from continuing operations...... $ 39,097 (481,970) Loss from discontinued operations............. -- (436,668) ___________ __________ Net income (loss)................. $ 39,097 (918,638) ___________ __________ Basic and Diluted earnings (loss) per common share: Continuing Operations................... $ .01 $ (.11) Discontinued Operations................. -- (.10) Total................................ $ .01 $ (.21) Basic and Diluted weighted average number of shares outstanding...................... 5,659,819 4,444,706 See Notes to Consolidated Financial Statements PHC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended September 30 1998 1997 Cash flows from operating activities: Net income (loss).............................. $ 39,097 $ (918,638) Adjustments to reconcile net income or loss to net cash provided by (used in) operating activities: Depreciation and amortization.................. 78,775 146,337 Compensatory stock options and stock and warrants issued for obligations.............. -- 46,131 Changes in: Accounts receivable......................... (43,681) (228,345) Prepaid expenses and other current assets..................................... (25,289) 137,686 Other assets................................. 30,436 11,461 Accounts payable............................. 344,811 40,577 Accrued expenses and other liabilities....... (379,603) (64,853) Net liabilities of discontinued operations................................. -- 193,087 __________ __________ Net cash provided by (used in) operating activities.................................... 44,546 (636,557) __________ __________ Cash flows from investing activities: Acquisition of property and equipment.......... (46,737) (39,084) Costs related to business acquisitions......... -- (8,390) __________ __________ Net cash used in investing activities............ (46,737) (47,474) __________ __________ Cash flows from financing activities: Revolving debt, net........................... (123,968) (462,847) Proceeds from borrowings...................... 100,000 446,062 Payments on debt.............................. (111,895) -- Deferred financing costs...................... (5,985) -- Preferred Stock Dividends..................... (1,763) -- __________ __________ Net cash provided by (used in) financing activities.................................... (143,611) (16,785) __________ __________ NET INCREASE (DECREASE) IN CASH.................. (145,802) (700,816) Beginning cash balance........................... 227,077 844,471 __________ __________ ENDING CASH BALANCE.............................. $ 81,275 $ 143,655 __________ __________ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest................................ $ 282,821 $ 33,101 Income taxes............................ 51,195 37,956 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of Debt to Common Stock.......... -- $2,734,375 Conversion of Preferred Stock to Common Stock..................................... -- 584,587 Stock issued for North Point Acquisition... 31,383 Issuance of Preferred Stock in lieu of cash for Dividends due.......................... $ 26,000 -- See Notes to Consolidated Financial Statements PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 1998 Note A - The Company PHC, Inc. (the "Company") is a national health care company specializing in the treatment of substance abuse, which includes alcohol and drug dependency and related disorders, and in the provision of psychiatric services. The Company currently operates two substance abuse treatment facilities: Highland Ridge Hospital, located in Salt Lake City, Utah, ("Highland Ridge"); and Mount Regis Center, located in Salem, Virginia, near Roanoke ("Mount Regis") and ten psychiatric facilities: Harbor Oaks Hospital ("Harbor Oaks"), a 64-bed psychiatric hospital located in New Baltimore, Michigan; Harmony Healthcare ("Harmony Healthcare"), a provider of outpatient behavioral health services in Las Vegas, Nevada; Total Concept EAP ("Total Concept"), a provider of outpatient behavioral health services in Shawnee Mission, Kansas;" North Point-Pioneer, Inc. ("NPP") which operates five outpatient behavioral health centers under the name Pioneer Counseling Center in the greater Detroit metropolitan area, and Pioneer Counseling of Virginia, Inc. ("PCV"), an 80% owned subsidiary providing outpatient services through a physicians' practice in Roanoke, Virginia. The Company also operates BSC-NY, Inc. ("BSC") which provides management and administrative services to psychotherapy and psychological practices in the greater New York City metropolitan area. Additionally, BSC provides billing and administrative services to the Company's Joint Venture with Lexington Healthcare Group, Inc., Behavioral Rehab Services of Connecticut, Inc. In May, 1998 the Company closed Good Hope Center, a substance abuse treatment facility located in West Greenwich, Rhode Island ("Good Hope") and entered into an agreement terminating the lease for the facility. In June, 1998 the Company's sub acute long-term care facility, Franvale Nursing and Rehabilitation Center ("Franvale"), in Braintree, Massachusetts was closed in a State Receivership action which was precipitated when the Company caused the owner of the Franvale facility, Quality Care Centers of Massachusetts, Inc., to institute a proceeding under Chapter 11 of the Federal Bankruptcy Code. The net assets and liabilities of this facility are shown as discontinued operations on the accompanying financial statements. Note B - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending June 30, 1999. The accompanying financial statements should be read in conjunction with the June 30, 1998 consolidated financial statements and footnotes thereto included in the Company's 10-KSB filed on October 13, 1998. Item 2. Management's Discussion and Analysis or Plan of Operation PHC, INC. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net patient care revenue decreased 6.2% to $4,476,738 for the three months ended September 30, 1998 from $4,770,735 for the three months ended September 30, 1997. This decrease in revenue is due primarily to the close of Good Hope Center in May, 1998 which accounted for $377,645 of the net revenue for the three months ended September 30, 1997. Management fees increased by 1% to $235,104 for the three months ended September 30, 1998 from $233,283 for the three months ended September 30, 1997. This increase in revenue is due to increases in BSC-NY, Inc. related fees for the management of Psychological and Psychotherapy practices in New York. Administrative expenses decreased 16.6% to $1,905,917 for the three months ended September 30, 1998 from $2,286,764 for the three months ended September 30, 1997. Patient care expenses also decreased by 12.6% to $2,308,051 for the three months ended September 30, 1998 from $2,641,817 for the three months ended September 30, 1997. These expense decreases are also a result of the close of Good Hope Center in May, 1998 which accounted for $333,378 and $231,985 of the administrative and patient care expenses, respectively, for the three months ended September 30, 1997. Year 2000 Compliance The Company has contracted with its Information Systems Vendor to upgrade its current accounts receivable software to accommodate a four digit year and bill, track and age receivables accordingly. This software is expected to be installed in test form by December 31, 1998. The Company has also contracted with another company to provide case management software which is year 2000 compliant. This software has already been installed at Pioneer Development and Support Services in Utah and is currently being modified to meet the needs of Harmony Healthcare in Nevada. The Company has already upgraded Network software at some locations and is currently upgrading hardware to accommodate the software upgrade at all other locations. The Company is currently in the process of contacting each third party payor of accounts receivable, financial institution, major supplier of essential products and utility to request the status of their year 2000 compliance. To date the Company has expended approximately $46,000 on items relating to the year 2000 issues and anticipates approximately $130,000 in additional expenses relating to the upgrade of Company's computer and telephone systems. Liquidity and Capital Resources A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. Net accounts receivable from patient care decreased during the quarter ended September 30, 1998 by 3.6%, approximately $290,000. This is primarily the result of a more aggressive collection policy. The Company continues to closely monitor its accounts receivable balances and is working to reduce amounts due consistent with growth in revenues. During the quarter ended September 30, 1998 the Company met its cash flow needs through ongoing accounts receivable financing and through debt and equity transactions as follows: Transaction # of Maturity Date Type Shares Proceeds Date Terms Status ____ ___________ ______ ________ __________ ______________ ___________ 7/98 Warrants 52,500 07/10/2003 exercise price outstanding issued $1.81 as additional interest on extension of 3/98 debt 7/98 Warrants 20,000 07/10/2003 exercise price outstanding issued $1.50 as additional interest on extension of 3/98 debt 8/98 Warrants 50,000 08/15/2001 exercise price outstanding issued for $1.75 services 8/98 Note Payable $100,000 on demand 12% annual outstanding - Related interest Party rate The Company believes that it has the necessary liquidity and capital resources and contingent funding commitments to sustain existing operations for the foreseeable future. The Company also intends to renew the expansion of its operations through the acquisition or establishment of additional treatment facilities. The Company's expansion plans will be dependent upon obtaining adequate financing as opportunities arise. FORWARD LOOKING STATEMENTS This quarterly report contains certain forward-looking statements regarding the Company, its business prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitations; the Company's ability to successfully and timely develop and finance new projects, the impact of competition on the Company's revenues, and changes in reimbursement rates, patient mix, and demand for the Company's services. When used, words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report, news releases, and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8K (a) Exhibit List Exhibit No. Description 10.66 Promissory Note by and between PHC, Inc. and Bruce A. Shear dated August 13, 1998, in the amount of $100,000. Filed as an exhibit to the Company's report on Form 10QSB dated November 3, 1998. 27 Financial Data Schedule 99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. (b) Reports on Form 8-K No reports were filed on form 8-K during the quarter ended September 30, 1998. Signatures In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHC, Inc. Registrant Date: November 3, 1998 /s/ Bruce A. Shear Bruce A. Shear President Chief Executive Officer Date: November 3, 1998 /s/ Paula C. Wurts Paula C. Wurts Controller Assistant Treasurer Exhibit 10.66 PROMISSORY NOTE Peabody, Massachusetts $100,000.00 August 13, 1998 FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, the undersigned PHC, Inc., a Massachusetts corporation having its principal offices at 200 Lake Street, Suite 102, Peabody, Massachusetts, ("Borrower"), promises to pay to the order of Bruce A. Shear, an individual residing at 14 Ida Road, Marblehead, Massachusetts, ("Lender"), the principal sum of ONE HUNDRED THOUSAND ($100,000.00) DOLLARS. This Note shall bear interest on the unpaid principal at 12% annually, to be paid in arrears monthly; provided that in no event shall the amount payable by the Borrower as interest on this Note exceed the highest lawful rate permissible under any law applicable hereto. Payment of principal shall be made upon demand of the Lender at any time after August 13, 1998. Demand shall be made in writing with thirty (30) days notice to Borrower. This Note may be prepaid, in whole or in part, at any time or from time to time without penalty to Borrower. This note shall be binding upon borrower and its successors and assigns, and shall inure to the benefit or Lender and its successors and assigns. Borrower shall not assign this Note without the express written consent of the Lender, except Borrower may assign this Note to an affiliate of Borrower without such consent. This Note shall be governed by and construed according to the laws of the Commonwealth of Massachusetts. Executed as a sealed instrument as of the date first written above. BORROWER: LENDER: PHC, Inc. /s/ Paula C. Wurts /s/ Bruce A. Shear Ass't Treas /s/ T. A. Bates /s/ T. A. Bates Witness Witness Exhibit 99.1 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE LITIGATION REFORM ACT OF 1995 PHC, Inc. (the "Company") desires to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this Exhibit 99.1 in its Form 10-KSB in order to do so. The Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for the Company's current quarter and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. During its last fiscal year and in certain other fiscal years of its operation, the Company has generated losses and there can be no assurance that future losses will not occur. The Company has experienced a significant increase in accounts receivable in recent years and there can be no assurance that this trend will not continue, and that if it does, that it will not have a material adverse effect on the Company's cash flow and financial performance. The Company historically experiences and expects to continue to experience a decline in revenue in its fiscal quarters ending December 31 due to a seasonality decline in revenue from the Company's substance abuse facilities during such period. Payment for the company's substance abuse treatment is provided by private insurance carriers and managed care organizations; payment for long-term and subacute care is provided by private insurance carriers, managed care organizations and the Medicare and Medicaid programs; payment for psychiatric services is provided by private insurance carriers, managed care organizations and the Medicare and Medicaid programs. In general, revenues derived from the Medicare and Medicaid programs in connection with the long-term and subacute care services provided by the Company have been less profitable to the Company than revenues derived from private insurers and managed care organizations in connection with the substance abuse treatment provided by the Company and changes in the sources of the Company's revenues could significantly alter the Company's profitability. Additionally, the Company experiences greater delays in the collection of amounts reimbursable by the Medicare and Medicaid programs than in the collection of amounts reimbursable by private insurers and managed care organizations. Accordingly, a change in the Company's service mix from substance abuse to long-term care could have a materially adverse effect on the Company as would an increase in the percentage of the Company's patients who are insured by Medicare or Medicaid. Cost containment pressures from private insurers in the Medicare and Medicaid programs may begin to restrict the amount that the Company can charge for its services. There can be no assurance that the Company's existing facilities will continue to meet, or that proposed facilities will meet, the requirements for reimbursement by third party or government payors. The Company has substantial receivables from Medicare and Medicaid which constitute a concentration of credit risk should these agencies defer or be unable to make reimbursement payments as due. The Company often experiences significant delays in the collection of amounts reimbursable by third-party payors. Although the Company believes it maintains an adequate allowance for doubtful accounts, if the amount of receivables which eventually becomes uncollectible exceeds such allowance, the Company could be materially adversely affected. If a growing number of managed care organizations and insurance companies adopt policies which limit the length of stay for substance abuse treatment, the Company's business would be materially adversely affected. There can be no assurance that occupancy rates at the Company's facilities will continue at present levels. Similarly, there can be no assurance that the patient census will not decrease in the future. There can be no assurance that the Company will be successful in identifying appropriate acquisition opportunities, or if it does, that the Company will be successful in acquiring such facilities or that such acquired facilities will be profitable. The failure of the company to implement its acquisition strategy could have a materially adverse effect an the Company's financial performance. Moreover, the inherent risks of expansion could also have a material adverse effect on the Company's business. Additionally, the company's acquisition program will be directed by the President and Chief Executive officer of the Company and the Company does not intend to seek stockholder approval for any such acquisitions unless required by applicable law or regulations. Accordingly, investors will be substantially dependent upon the business judgment of management in making such acquisitions. Furthermore, the company's acquisition strategy is highly dependent on access to capital, of which there can be no assurance. The Company and the healthcare industry in general are subject to extensive federal, state and local regulation with respect to licensure and conduct of operations. There can be no assurance that the Company will be able to obtain new licenses to affect its acquisition strategy or maintain its existing licenses and reimbursement program participation approvals. It is not possible to accurately predict the content or impact of future legislation and regulations affecting the healthcare industry. In addition, both the Medicare and Medicaid programs are subject to statutory and regulatory changes and there can be no assurances that payments under those programs to the Company will, in the future, remain at a level comparable to the present level or be sufficient to cover the cost allocable to such patients. Bruce A. Shear the President and Chief Executive officer of the Company together with his affiliates is able to control all matters requiring approval of the stockholders, including the election of a majority of the directors, as a result of his ownership of the Company's stock. There can be no assurance that the Company will be successful in hiring or retaining the personnel it requires for continued growth, or that the Company will be able to continue to attract and retain highly qualified personnel, particularly skilled healthcare personnel. The healthcare business is highly competitive and subject to excess capacity. The Company has entered into relationships with large employers, healthcare institutions, labor unions and other key clients to provide treatment for chemical dependency and substance abuse as well as other services and the loss of any of these key clients would require the Company to expend considerable effort to replace patient referrals and would result in revenue losses to the Company and attendant loss in income. Existing environmental contamination at certain of the Company's facilities and potential future environmental contamination at facilities acquired by the company could have a materially adverse effect on the Company's operations. On October 31, 1994, the Company was served with a summons for a Civil Action in the Superior Court Department of the Trial Court of the Commonwealth of Massachusetts by NovaCare, Inc. ("NovaCare"), an entity which contracted with the Company in 1992 to provide rehabilitation therapy and related administrative services to the Company's long-term care facility (the "Action"). The complaint alleged that the Company owed NovaCare contractual damages in the amount of approximately $587,000 plus interest, attorney fees, costs of collection, and double or triple damages pursuant to a Massachusetts statute prohibiting unfair and deceptive trade practices. The Company filed a counterclaim alleging that NovaCare breached the contract in question and that the Company may be owed damages in excess of the amount sought by NovaCare. On February 13, 1996, the company settled the Action by agreeing to pay NovaCare an amount less than its claim. The Company is not paying NovaCare accrued interest, attorney's fees, costs of collection, or multiple damages. A portion of the settlement amount has already been paid. The balance of the settlement amount is payable over twelve (12) months with interest on the unpaid balance at 9.5%. In the event that the Company defaults on its obligation to pay the settlement amount, it has agreed to entry of judgment against it in the amount of $457,637.46 (the "Judgment"). The Judgment represents the full unpaid balance of NovaCare's claim against the Company, including interest, attorney's fees, and costs of collection. Any amounts paid by the Company to NovaCare after February 9, 1996 shall be deducted from the Judgment. Until the settlement amount is paid, NovaCare will continue to hold a mortgage on a day care property owned by the Company in Saugus, Massachusetts. As of Fiscal Year Ended June 30, 1997, this obligation has been paid in full. Interruption by fire, earthquakes or other catastrophic events, power failures, work stoppages, regulatory actions or other causes to any of the Company's operations could have a materially adverse impact on the Company. The company has and in the future may enter into transactions in which it acquires businesses or obtains financing for a consideration that includes the issuance of stock, warrants, options or convertible debt at a price less than the value at which the Company's stock may then be trading in the public markets or which are convertible into or exercisable for Common Stock at a conversion rate or exercise price less than such value. Such transactions may result in significant dilution to the existing holders of the Company's stock. The Company has authorized 1,000,000 shares of Preferred Stock, the terms of which may be fixed and which may be issued by the Company's Board of Directors, without stockholder approval. The issuance of the Preferred Stock could have the effect of making it more difficult for a third party to acquire the Company and may result in the issuance of stock that dilutes the existing stockholders and has liquidation, redemption, dividend and other preferences superior to the Company's outstanding Class A Common Stock. NOTE: THIS DOES NOT DISCUSS PREFERRED STOCK, REDEMPTION OF WARRANTS, THE EFFECTS OF DE-LISTING FROM NASDAQ, PENNY STOCK RULES OR THIN FLOAT. THOSE SUBJECTS ARE, HOWEVER, INCLUDED IN THE RISK-FACTOR SECTION OF THE 06/97 S-3. EX-27 2 FDS - FINANCIAL DATA SCHEDULE
5 This schedule contains financial information extracted from the consolidated balance sheet and the consolidated statement of income filed as part of the report on Form 10-QSB and is qualified in its entirety by reference to such report on Form 10-QSB. 0000915127 PHC, Inc. 1 US 3-MOS JUN-30-1999 JUL-1-1998 SEP-30-1998 1.000 81,275 0 11,370,337 3,539,637 0 8,735,304 3,071,281 946,796 16,970,435 8,282,748 0 0 10 56,626 4,402,018 16,970,435 0 4,911,295 0 4,698,323 172,964 356,190 286,688 40,008 911 39,097 0 0 0 39,097 .01 .01
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