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, 2003
[ ] 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, 2003 were $23,833,323.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of August 1, 2003, was $8,751,891.16. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At August 1, 2003, 13,342,213 shares of the issuer's Class A Common Stock and
726,991 shares of the issuer's Class B Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Our Company is a national health care Company, which, through wholly owned
subsidiaries, provides psychiatric services primarily to individuals who have
alcohol and drug dependency, related disorders and to individuals in the gaming
and transportation industries. Our subsidiaries operate substance abuse
treatment facilities in Utah and Virginia, three outpatient psychiatric
facilities in Michigan, two outpatient psychiatric facilities in Nevada, one
outpatient psychiatric facility in Kansas and an inpatient psychiatric facility
in Michigan. One of our subsidiaries also operates a website, Wellplace.com,
which provides education, training and materials to behavioral health
professionals in addition to providing internet support to all of our other
subsidiaries. Through another subsidiary, we also provide help line services
through contracts with major railroads and the State of Nebraska and operate a
call center for Wayne County, Michigan. Through our newest subsidiary in
Michigan the Company conducts studies of the effects of psychiatric
pharmaceuticals on a controlled population through contracts with major
manufacturers of these pharmaceuticals.
Our Company provides behavioral health services and products through
inpatient and outpatient facilities and online to behavioral health
professionals. Our substance abuse facilities provide specialized treatment
services to patients who typically have poor recovery prognoses and who are
prone to relapse. These services are offered in small specialty care facilities,
which permit us to provide our clients with efficient and customized treatment
without the significant costs associated with the management and operation of
general acute care hospitals. We tailor these programs and services to
"safety-sensitive" industries and concentrate our marketing efforts on the
transportation, heavy equipment, manufacturing, law enforcement, gaming and
health services industries. Our psychiatric facility provides inpatient
psychiatric care and intensive outpatient treatment, referred to as partial
hospitalization, to children, adolescents and adults. Our outpatient mental
health clinics provide services to employees of major employers, as well as to
managed care, Medicare and Medicaid clients. The psychiatric services are
offered in a larger, more traditional setting than PHC's substance abuse
facilities, enabling PHC to take advantage of economies of scale to provide
cost-effective treatment alternatives.
The Company treats employees who have been referred for treatment as a
result of compliance with Subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as the Drug Free Workplace Act), which requires employers who
are Federal contractors or Federal grant recipients to establish drug-free
awareness programs which, among other things, inform employees about available
drug counseling, rehabilitation and employee assistance programs. We also
provide treatment under the Department of Transportation implemented
regulations, which broaden the coverage and scope of alcohol and drug testing
for employees in "safety sensitive" positions in the transportation industry.
The Company was incorporated in 1976 and is a Massachusetts corporation.
Our corporate offices are located at 200 Lake Street, Suite 102, Peabody, MA
01960 and our telephone number is (978) 536-2777. As used herein, our Company
refers to and includes the Company and each of it's subsidiaries through which,
substantially all of our business and operations are conducted.
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PSYCHIATRIC SERVICES INDUSTRY
Substance Abuse Facilities
Industry Background
The demand for substance abuse treatment services increased rapidly in the
last decade. The Company believes that the increased demand is related to
clinical advances in the treatment of substance abuse, greater societal
willingness to acknowledge the underlying problems as treatable illnesses,
improved health insurance coverage for addictive disorders and chemical
dependencies and governmental regulation which requires certain employers to
provide information to employees about drug counseling and employee assistance
programs.
To contain costs associated with behavioral health issues in the 1980s,
many private payors instituted managed care programs for reimbursement, which
included pre-admission certification, case management or utilization review and
limits on financial coverage or length of stay. These cost containment measures
have encouraged outpatient care for behavioral problems, resulting in a
shortening of the length of stay and revenue per day in inpatient chemical abuse
facilities. The Company believes that it has addressed these cost containment
measures by specializing in treating relapse-prone patients with poor prognoses
who have failed in other treatment settings. These patients require longer
lengths of stay and come from a wide geographic area. The Company continues to
develop alternatives to inpatient care including partial day and evening
programs in addition to on site and off site outpatient programs.
The Company believes that because of the apparent unmet need for certain
clinical and medical services, its strategy has been successful despite national
trends towards outpatient treatment, shorter inpatient stays and rigorous
scrutiny by managed care organizations.
Company Operations
The Company has been able to secure insurance reimbursement for longer-term
inpatient treatment as a result of its success with poor prognosis patients. The
Company's two substance abuse facilities work together to refer patients to the
center that best meets the patient's clinical and medical needs. Each facility
caters to a slightly different patient population including high-risk,
relapse-prone chronic alcoholics, drug addicts, Native Americans and dual
diagnosis patients (those suffering from both substance abuse and psychiatric
disorders). The Company concentrates on providing services to insurers, managed
care networks and health maintenance organizations for both adults and
adolescents. The Company's clinicians often work directly with managers of
employee assistance programs to select the best treatment facility possible for
their clients.
Each of the Company's facilities operates a case management program for
each patient including a clinical and financial evaluation of a patient's
circumstances to determine the most cost-effective modality of care from among
outpatient treatment, detoxification, inpatient, day care, specialized relapse
treatment and others. In addition to any care provided at one of the Company's
facilities, the case management program for each patient includes aftercare.
Aftercare may be provided through the outpatient services provided by a
facility. Alternatively, the Company may arrange for outpatient aftercare, as
well as family and mental health services, through its numerous affiliations
with clinicians located across the country once the patient is discharged.
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
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of charge to a small number of patients each year who are unable to pay for
treatment, but who meet certain clinical criteria and who are believed by the
Company to have the requisite degree of motivation for treatment to be
successful. In addition, the Company provides follow-up treatment free of charge
to relapse patients who satisfy certain criteria. The number of patient days
attributable to all patients who receive treatment free of charge in any given
fiscal year is less than 5%.
The Company believes that it has benefited from an increased awareness of
the need to make substance abuse treatment services accessible to the nation's
workforce. For example, Subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as The Drug Free Workplace Act), requires employers who are
Federal contractors or Federal grant recipients to establish drug free awareness
programs to inform employees about available drug counseling, rehabilitation and
employee assistance programs and the consequences of drug abuse violations. In
response to the Drug Free Workplace Act, many companies, including many major
national corporations and transportation companies, have adopted policies that
provide for treatment options as an alternative to termination of employment.
Although the Company does not directly provide federally approved mandated
drug testing, the Company treats employees who have been referred to the Company
as a result of compliance with the Drug Free Workplace Act, particularly from
companies that are part of the gaming industry as well as safety sensitive
industries such as railroads, airlines, trucking firms, oil and gas exploration
companies, heavy equipment companies, manufacturing companies and health
services.
HIGHLAND RIDGE - Highland Ridge is a 32-bed, freestanding alcohol and drug
treatment hospital, which the Company has been operating since 1984. The
hospital is in the process of increasing bed capacity by 14. It is anticipated
that the new beds will come on line in the second quarter of fiscal 2004. It is
the oldest facility dedicated to substance abuse in Utah. Highland Ridge is
accredited by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO") and is licensed by the Utah Department of Health. Highland Ridge is
recognized nationally for its excellence in treating substance abuse disorders.
Most patients are from Utah and surrounding states. Individuals typically
access Highland Ridge's services through professional referrals, family members,
employers, employee assistance programs or contracts between the Company and
health maintenance organizations located in Utah.
Highland Ridge was the first private for-profit hospital to address
specifically the special needs of chemically dependent women in Salt Lake
County. In addition, Highland Ridge has contracted with Salt Lake County to
provide medical detoxification services targeted to women. The hospital also
operates a specialized continuing care support group to address the unique needs
of women and minorities.
A pre-admission evaluation, which involves an evaluation of psychological,
cognitive and situational factors, is completed for each prospective patient. In
addition, each prospective patient is given a physical examination upon
admission. Diagnostic tools, including those developed by the American
Psychological Association, the American Society of Addiction Medicine and the
Substance Abuse Subtle Screening Inventory are used to develop an individualized
treatment plan for each client. The treatment regimen involves an
interdisciplinary team which integrates the twelve-step principles of self-help
organizations, medical detoxification, individual and group counseling, family
therapy, psychological assessment, psychiatric support, stress management,
dietary planning, vocational counseling and pastoral support. Highland Ridge
also offers extensive aftercare assistance at programs strategically located in
areas of client concentration throughout the United States. Highland Ridge
maintains a comprehensive array of professional affiliations to meet the needs
of discharged patients and other individuals not admitted to the hospital for
treatment.
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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 fro m 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. Highland Ridge recently contracted with a major pharmaceutical
manufacturer to participate in a research study in cooperation with a local
nursing home.
In the spring of 1994, the Company began to ope rate a crisis hotline
service under contract with a major transportation client. The hotline,
Wellplace, formerly known as Pioneer Development Support Services, or 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, 2003.
Wellplace also operates the smoking cessation helpline for the State of
Nebraska. This operation is physically located in Highland Ridge Hospital, but a
staff dedicated to Wellplace provides the services from a separate designated
area of the Hospital. Wellplace recently contracted with Wayne County Michigan
to operate its call center. The Wellplace primary focus is now placed on growing
its operations to take advantage of current opportunities and capitalize on the
economies of scale in providing similar services to other companies and
government units.
MOUNT REGIS - Mount Regis is a 26-bed, freestanding alcohol and drug
treatment center located in Salem, Virginia, near Roanoke. The Company acquired
the center in 1987. It is the oldest of its kind in the Roanoke Valley. Mount
Regis is accredited by the JCAHO and licensed by the Department of Mental
Health, Mental Retardation and Substance Abuse Services of the Commonwealth of
Virginia. In addition, Mount Regis operates Changes, an outpatient clinic, at
its Salem, Virginia location. The Changes clinic provides structured intensive
outpatient treatment for patients who have been discharged from Mount Regis and
for patients who do not need the formal structure of a residential treatment
program. The program is licensed by the Commonwealth of Virginia and approved
for reimbursement by major insurance carriers.
Mount Regis Center's programs are sensitive to the needs of women and
minorities. The majority of Mount Regis clients are from Virginia and
surrounding states. In addition, because of its relatively close proximity and
accessibility to New York, Mount Regis has been able to attract an increasing
number of referrals from New York-based labor unions. Mount Regis has
established programs that allow the Company to better treat dual diagnosis
patients (those suffering from both substance abuse and psychiatric disorders),
cocaine addiction and relapse-prone patients. The multi-disciplinary case
management, aftercare and family programs are key to the prevention of relapse.
General Psychiatric Facilities
Introduction
The Company believes that its proven ability to provide high quality,
cost-effective care in the treatment of substance abuse has enabled it to grow
in the related behavioral health field of psychiatric treatment. The Company's
main advantage is its ability to provide an integrated delivery system of
inpatient and outpatient care. As a result of integration, the Company is better
able to manage and track patients.
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The Company offers inpatient and partial hospitalization psychiatry
services through Harbor Oaks Hospital. The Company also currently operates six
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, Medicare certified and 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
expanded its coverage area to include Wayne, Sanilac and Livingston Counties.
Harbor Oaks has become a primary provider for Medicaid patients from Wayne,
Macomb and St. Clair counties. Utilization of a short-term crisis management
model in conjunction with strong case management has allowed Harbor Oaks to
successfully enter this segment of the market. Reimbursement for these services
is comparable to traditional managed care payors. Given the current climate of
public sector treatment availability, Harbor Oaks anticipates continued growth
in this sector of the business.
On February 10, 1997, Harbor Oaks Hospital opened an 8-bed residential unit
serving adolescents with a substance abuse problem and a co-existing mental
disorder who have been adjudicated to have committed criminal acts and who have
been referred or required to undergo psychiatric treatment by a court or family
service agency. The patients in the program range from 13 to 18 years of age.
The program provides patients with educational and recreational activities and
adult life functioning skills as well as treatment. Typically, a patient is
admitted to the unit for an initial period of 30 days to six months. A case
review is done for any patient still in the program at six months, and each
subsequent six-month period thereafter, to determine if additional treatment is
required. State authorization allowed the Company to increase the number of beds
in the adjudicated residential unit to twelve on May 1, 1998 and twenty on June
26, 1998.
HARMONY HEALTHCARE - Harmony Healthcare, which consists of two psychiatric
clinics in Nevada, provides outpatient psychiatric care to children, adolescents
and adults in the local area. Harmony also operates employee assistance programs
for railroads, health care companies and several large casino companies
including Boyd Gaming Corporation, the MGM Grand and the Venetian with a rapid
response program to provide immediate assistance 24 hours a day. Harmony also
provides outpatient psychiatric care and inpatient psychiatric case management
through a capitated rate behavioral health carve-out with Pacific Care
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Insurance. In addition, Harmony began clinical trials in the last quarter of the
current fiscal year.
TOTAL CONCEPT EAP - Total Concept, an outpatient clinic located in Shawnee
Mission, Kansas, provides psychiatric and substance abuse treatment to children,
adolescents and adults and manages employee assistance programs for local
businesses, gaming, railroads and managed health care companies.
NORTH POINT-PIONEER, INC. - NPP consists of three 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 three clinics are located in close proximity to the
Harbor Oaks facility, which provides more efficient integration of inpatient and
outpatient services, a larger coverage area and the ability to share personnel
which results in cost savings.
PIONEER PHARMACEUTICAL RESEARCH, INC. - PPR works with major manufacturers
of psychiatric pharmaceuticals to assist in the study of the effects of certain
pharmaceuticals in the treatment of specific mental illness. These studies are
conducted primarily through our facilities in Michigan, Harbor Oaks Hospital and
North Point-Pioneer with the permission and assistance of patients who are in
treatment.
Internet Operations
WELLPLACE - Behavioral Health Online designs, develops and maintains the
Company's web site, Wellplace.com in addition to providing Internet support
services and maintaining the web sites of all of the other subsidiaries of the
Company. The Company's web sites provide behavioral health professionals with
the educational tools required to keep them abreast of behavioral health
breakthroughs and keeps individuals informed of current issues in behavioral
health of interest to them.
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Operating Statistics
The following table reflects selected financial and statistical information
for all psychiatric services.
Year Ended June 30,
2003 2002
_____________________________
Inpatient
Net patient service revenues $14,430,069 $14,130,471
Net revenues per patient day (1) $ 417 $ 413
Average occupancy rate (2) 77.7% 76.9%
Total number of licensed beds
at
end of period 122 122
Source of Revenues:
Private (3) 62.20% 76.82%
Government (4) 37.80% 23.18%
Partial Hospitalization
and
Outpatient
Net Revenues:
Individual $ 4,865,392 $ 4,678,493
Contract $ 1,947,716 $ 2,300,140
Sources of revenues:
Private 98.0% 98.1%
Government 2.0% 1.9%
Other Psychiatric Services:
Wellplace (5) $ 1,649,374 $ 842,345
(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) Wellplace, formerly PDS2, Pioneer Development and Support Services,
provides clinical support, referrals management and professional services
for a number of the Company's national contracts, a smoking cessation help
line for the state of Nebraska and operates the Wayne County Michigan call
center.
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Business Strategy
The Company's objective is to become the leading national provider of
treatment services, specializing in substance abuse and psychiatric care.
The Company focuses its marketing efforts on "safety-sensitive" industries.
This focus results in customized outcome oriented programs that the Company
believes produce overall cost savings to the patients and/or client
organizations. The Company intends to leverage experience gained from providing
services to customers in certain industries that it believes will enhance its
selling efforts within these certain industries.
Marketing and Customers
The Company markets its substance abuse, inpatient and outpatient
psychiatric health services both locally and nationally, primarily to safety
sensitive industries, including transportation, oil and gas exploration, heavy
machinery and equipment, manufacturing and healthcare services. Additionally,
the Company markets its services in the gaming industry both in Nevada and
nationally and its help line services nationally.
The Company employs four individuals dedicated to marketing among the
Company's facilities. Each facility performs marketing activities in its local
region. The Senior Vice President of the Company coordinates the Company's
national marketing efforts. In addition, employees at certain facilities perform
local marketing activities independent of the Senior Vice President. The
Company, with the support of its owned integrated outpatient systems and
management services, continues to pursue more at-risk contracts and outpatient,
managed health care fee-for-service contracts. "At risk" contracts require that
the Company provide all the clinically necessary behavioral health services for
a group of people for a set fee per person per month. The Company currently has
one at risk contract with a large insurance carrier, which requires the Company
to provide behavioral health services to all of its insured in the state of
Nevada for a fixed fee. This at risk contract represents less than 5% of the
Company's total gross revenues. In addition to providing excellent services and
treatment outcomes, the Company will continue to negotiate pricing policies to
attract patients for long-term intensive treatment which meet length of stay and
clinical requirements established by insurers, managed health care organizations
and the Company's internal professional standards.
The Company's integrated systems of comprehensive outpatient mental health
clinics complement the Company's inpatient facilities. These clinics are
strategically located in Nevada, Virginia, Kansas City, Michigan, and Utah. They
make it possible for the Company to offer wholly integrated, comprehensive,
mental health services for corporations and managed care organizations on an
at-risk or exclusive fee-for-service basis. Additionally, the Company operates
Wellplace located in the Highland Ridge facility in Salt Lake City, Utah.
Wellplace provides clinical support, referrals, management and professional
services for a number of the Company's national contracts. It gives the Company
the capacity to provide a complete range of fully integrated mental health
services.
The Company has been successful in securing a number of national accounts
with a variety of corporations including: Boyd Gaming, Conrail, CSX, the IUE,
MCC, MGM, Station Casinos, Union Pacific Railroad, Union Pacific Railroad
Hospital Association, VBH, and others.
In addition to its direct patient care services; the Company maintains its
web site, Wellplace.com, which provides articles and information of interest to
the general public as well as the behavioral health professional. The Company's
internet company also provides the added benefit of web availability of
information for various EAP contracts held and serviced by those subsidiaries
providing direct treatment services.
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Competition
The Company's substance abuse programs compete nationally with other health
care providers, including general and chronic care hospitals, both non-profit
and for-profit, other substance abuse facilities and short-term detoxification
centers. Some competitors have substantially greater financial resources than
the Company. The Company believes, however, that it can compete successfully
with such institutions because of its success in treating poor-prognosis
patients. The Company will compete through its focus on such patients, its
willingness to negotiate appropriate rates and its capacity to build and service
corporate relationships.
The Company's psychiatric facilities and programs compete primarily within
the respective geographic area serviced by them. The Company competes with
private doctors, hospital-based clinics, hospital-based outpatient services and
other comparable facilities. The main reasons that the Company competes well are
its integrated delivery and dual diagnosis programming. Integrated delivery
provides for more efficient follow-up procedures and reductions in length of
stay. Dual diagnosis programming provides a niche service for clients with a
primary mental health and a secondary substance abuse diagnosis. The Company
developed its dual diagnosis service in response to demand from insurers,
employers and treatment facilities. The Company's internet company provides the
competitive edge for service information and delivery for our direct patient
care programs.
Revenue Sources and Contracts
The Company has entered into relationships with numerous employers, labor
unions and third-party payors to provide services to their employees and members
for the treatment of substance abuse and psychiatric disorders. In addition, the
Company admits patients who seek treatment directly without the intervention of
third parties and whose insurance does not cover these conditions in
circumstances where the patient either has adequate financial resources to pay
for treatment directly or is eligible to receive free care at one of the
Company's facilities. The Company's psychiatric patients either have insurance
or pay at least a portion of treatment costs based on their ability to pay. Free
treatment provided each year amounts to less than 5% of the Company's total
patient days.
Each contract is negotiated separately, taking into account the insurance
coverage provided to employees and members, and, depending on such coverage, may
provide for differing amounts of compensation to the Company for different
subsets of employees and members. The charges may be capitated, or fixed with a
maximum charge per patient day, and, in the case of larger clients, frequently
result in a negotiated discount from the Company's published charges. The
Company believes that such discounts are appropriate as they are effective in
producing a larger volume of patient admissions. The Company treats non-contract
patients and bills them on the basis of the Company's standard per diem rates
and for any additional ancillary services provided to them by the Company.
Quality Assurance and Utilization Review
The Company has established comprehensive quality assurance programs at all
of its facilities. These programs are designed to ensure that each facility
maintains standards that meet or exceed requirements imposed upon the Company
with the objective of providing high-quality specialized treatment services to
its patients. To this end, the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") surveys and accredits the Company's inpatient facilities
and the Company's outpatient facilities comply with the standards of National
Commission on Quality Assurance ("NCQA") although the facilities are not NCQA
-- 10 --
certified. The Company's outpatient facilities in Michigan are certified by
the American Osteopathic Association ("AOA"), which is nationally recognized by
all payers as the measure of quality in outpatient treatment. The Company's
professional staff, including physicians, social workers, psychologists, nurses,
dietitians, therapists and counselors, must meet the minimum requirements of
licensure related to their specific discipline, in addition to each facility's
own internal quality assurance criteria. The Company participates in the
federally mandated National Practitioners Data Bank, which monitors professional
accreditation nationally.
In response to the increasing reliance of insurers and managed care
organizations upon utilization review methodologies, the Company has adopted a
comprehensive documentation policy to satisfy relevant reimbursement criteria.
Additionally, the Company has developed an internal case management system,
which provides assurance that services rendered to individual patients are
medically appropriate and reimbursable. Implementation of these internal
policies has been integral to the success of the Company's strategy of providing
services to relapse-prone, higher acuity patients.
Government Regulation
The Company's business and the development and operation of the Company's
facilities are subject to extensive federal, state and local government
regulation. In recent years, an increasing number of legislative proposals have
been introduced at both the national and state levels that would affect major
reforms of the health care system if adopted. Among the proposals under
consideration are reforms to increase the availability of group health
insurance, to increase reliance upon managed care, to bolster competition and to
require that all businesses offer health insurance coverage to their employees.
The Company cannot predict whether any such legislative proposals will be
adopted and, if adopted, what effect, if any, such proposals would have on the
Company's business.
In addition, both the Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions, all
of which may materially increase or decrease the rate of program payments to
health care facilities. Since 1983, Congress has consistently attempted to limit
the growth of federal spending under the Medicare and Medicaid programs and will
likely continue to do so. Additionally, congressional spending reductions for
the Medicaid program involving the issuance of block grants to states is likely
to hasten the reliance upon managed care as a potential savings mechanism of the
Medicaid program. As a result of this reform activity the Company can give no
assurance that payments under such programs will in the future remain at a level
comparable to the present level or be sufficient to cover the costs allocable to
such patients.
Health Planning Requirements
Some of the states in which the Company operates, and many of the states
where the Company may consider expansion opportunities, have health planning
statutes which require that prior to the addition or construction of new beds,
the addition of new services, the acquisition of certain medical equipment or
certain capital expenditures in excess of defined levels, a state health
planning agency must determine that a need exists for such new or additional
beds, new services, equipment or capital expenditures. These state
determinations 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
-- 11 --
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
All of the Company's facilities must be licensed by State regulatory
authorities. The Company's Harbor Oaks facility is certified for participation
as a provider in the Medicare and Medicaid programs.
The Company's initial and continued licensure of its facilities, and
certification to participate in the Medicare and Medicaid programs, depends upon
many factors, including accommodations, equipment, services, patient care,
safety, personnel, physical environment, the existence of adequate policies,
procedures and controls and the regulatory process regarding the facility's
initial licensure. Federal, state and local agencies survey facilities on a
regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participating in
government programs. Such surveys include review of patient utilization and
inspection of standards of patient care. The Company has procedures in place to
ensure that its facilities are operated in compliance with all such standards
and conditions. To the extent these standards are not met, however, the license
of a facility could be restricted, suspended or revoked, or a facility could be
decertified from the Medicare or Medicaid programs.
Medicare Reimbursement
Currently, the only facility of the Company that receives Medicare
reimbursement is Harbor Oaks. For the fiscal year ended June 30, 2003, 12.99% 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
-- 12 --
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
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, 2003, the Company had 374 employees of whom four were
dedicated to marketing, 113 (10 part time and 1 contingent) to finance and
administration and 257 (21 part time and 45 contingent) to patient care. Until
January of 2003, all of the Company's employees were leased through Team
America, a national employee-leasing firm. The Company elected to discontinue
the use of the leasing Company and begin using a more traditional payroll
service while providing more employee services when the benefit of using a
leasing Company began to diminish.
-- 13 --
The Company believes that it has been successful in attracting skilled and
experienced personnel. Competition for such employees is intense, however, and
there can be no assurance that the Company will be able to attract and retain
necessary qualified employees in the future. On July 31, 2003, the Company's
largest facility, with 125 Union eligible employees, voted for union (UAW)
representation. Contract negotiations with the Union will begin as soon as
practicable.
Insurance
Each of the Company's facilities maintains separate professional liability
insurance policies. Harbor Oaks, Mount Regis Center, Harmony Healthcare, Total
Concept and NPP each have coverage of $1,000,000 per claim and $3,000,000 in the
aggregate. In addition to this coverage, Harbor Oaks and Mount Regis Center each
maintain an umbrella policy of $1,000,000. Highland Ridge has limits of
$1,000,000 per claim and $6,000,000 in the aggregate. In addition, these
entities maintain general liability insurance coverage in similar amounts.
The parent Company maintains $1,000,000 of directors' and officers'
liability insurance coverage, general liability coverage of $1,000,000 per claim
and $2,000,000 in aggregate and an umbrella policy of $1,000,000. The Company
believes, based on its experience, that its insurance coverage is adequate for
its business and that it will continue to be able to obtain adequate coverage.
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 July 31, 2004. The current annual payment under
the lease is $88,896. 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 the first floor of a two-story hospital owned by
Valley Mental Health. The lease is for a six-year term expiring December 31,
2004, which provides for monthly rental payments of approximately $16,230.
Changes in rental payments each year are based on increases or decreases in the
CPI. In March 2003, the Company entered into an agreement to expand the space
being leased at the Highland Ridge location and complete an early exercise of
the option to renew the lease pending completion of the remodeling of the space
and the approval of the additional beds by the State of Utah. The Company
expects the renovations to be complete and the beds approved by the end of
September of 2003. The lease will be effective through December 31, 2009. All
terms and conditions of the previous lease remain in effect. 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 $383,500. The facility is used for both
inpatient and outpatient services. The Company believes that these premises are
adequate for its current and anticipated needs.
-- 14 --
Psychiatric Facilities
The Company owns or leases premises for each of its psychiatric facilities.
Harmony, Total Concept, North Point Pioneer and Pioneer Pharmaceutical Research
lease their premises. The Company believes that each of these premises is leased
at fair market value and could be replaced without significant time or expense
if necessary. The Company believes that all of these premises are adequate for
its current and anticipated needs.
The Company owns the building in which Harbor Oaks operates, which is a
single story brick and wood frame structure comprising approximately 32,000
square feet situated on an approximately three acre site. The Company has a
$2,100,000 mortgage on this property. The Company believes that these premises
are adequate for its current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
A medical malpractice claim was filed by a former patient against North
Point Mental Health Associates, the Company's subsidiary, North Point-Pioneer,
Inc., and Pioneer Counseling Centers in the Circuit Court for the County of
Wayne, State of Michigan (Case No. 00-017768-NH, November 21, 2000), alleging
sexual abuse by a former clinical psychologist. At trial in December 2002, a
jury returned a verdict in favor of the plaintiff in the amount of approximately
$9 million plus interest and taxable costs and attorney's fee for conduct that
first manifested itself prior to the Company's acquisition of the subsidiary in
1996. The clinical psychologist declared bankruptcy and was not a party to the
proceeding. Although the Court subsequently reduced the award to $3.2 million,
plus applicable interest and taxable costs and attorney's fee, the Court has not
yet entered a judgment and is considering motions made by the defendants to
further reduce the award, to set aside the verdict or to declare a mistrial.
Plaintiff could also appeal the Court's reduction of the jury verdict. The
Company believes that substantial error was committed at trial and intends to
appeal any adverse judgment if and when entered. However, a bond or other
marketable collateral would be required to be posted in an amount equal to one
and one-half times the current value of any judgment when entered.
The Company's subsidiary, North Point-Pioneer, Inc., is covered by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company, which is insolvent and is being administered by the State of New York,
with the result that Frontier's ability to pay any judgment is unknown. If
Frontier formally goes into liquidation, the Company may have a claim against
the Michigan Property and Casualty Guaranty Fund, which could avail itself of
defenses available to Frontier and to Michigan statutory defenses. The entity
whose assets were acquired by the Company's subsidiary also carried malpractice
insurance in the amount of $1 million. Such carrier has, however, refused
coverage and filed an action in Michigan seeking a declaratory judgment to the
effect that it is not liable under such policy. The Company will take all steps
available to require this carrier to meet its obligations under such policy.
To date, there have been no meaningful settlement discussions. In December
2002, Plaintiff's counsel demanded the payment of $1,000,000 within 10 days,
which demand was not met. At a meeting on September 3, 2003, representatives of
Frontier's receiver acknowledged to the Company, Frontier's obligations under
the policy but acknowledged that payment of such obligations is subject to the
unresolved insolvency proceedings referred to above. The Company may recover a
portion of the legal fees expended to date on this matter. ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
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, 2003.
-- 15 --
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. 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 Bulletin Board.
HIGH LOW
______________________________
2002
First Quarter $ .48 $ .30
Second Quarter $ .63 $ .34
Third Quarter $ .45 $ .35
Fourth Quarter $ .99 $ .37
2003
First Quarter $ .89 $ .56
Second Quarter $ .85 $ .65
Third Quarter $ .95 $ .69
Fourth Quarter $ .94 $ .72
2004
First Quarter (through August 1, 2003) $ .91 $ .72
On August 1, 2003, the last reported sale price of the Class A Common Stock
was $.82. On August 1, 2003, there were 696 holders of record of the Company's
Class A Common Stock and 311 holders of record of the Company's Class B Common
Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. During
the fiscal year ended June 30, 2002, the Company accrued dividends on preferred
stock according to the preferred stock agreement and paid all dividends in
common stock, as required, upon conversion of the preferred stock. The Company
anticipates that, in the future, earnings will be retained for use in the
business or for other corporate purposes, and it is not anticipated that cash
dividends in respect to Common Stock will be paid in the foreseeable future. Any
decision as to the future payment of dividends will depend on the results of
operations, the financial position of the Company and such other factors, as the
Company's Board of directors, in its discretion, deems relevant.
-- 16 --
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, 2003 and 2002.
It should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein.
Overview
The Company presently provides behavioral health care services through two
substance abuse treatment centers, a psychiatric hospital and six 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 outpatient 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.,
continues to provide technology and internet support for the Company's other
operations, it also continues to provide behavioral health information and
education through its web site at Wellplace.com. The expenses of the internet
operation decreased approximately 25% for the year as the total effect of cost
cuts were realized. The Company's most recent addition, Pioneer Pharmaceutical
Research, contracts with major manufacturers of psychiatric pharmaceuticals to
assist in the study of the effects of certain pharmaceuticals in the treatment
of specific mental illness.
The healthcare industry is subject to extensive federal, state and local
regulation governing, among other things, licensure and certification, conduct
of operations, audit and retroactive adjustment of prior government billings and
reimbursement. In addition, there are on-going debates and initiatives regarding
the restructuring of the health care system in its entirety. The extent of any
regulatory changes and their impact on the Company's business is unknown. The
current administration has put forth proposals to mandate equality in the
benefits available to those individuals suffering from mental illness. If
passed, this legislation will improve access to the Company's programs. Managed
care has had a profound impact on the Company's operations, in the form of
shorter lengths of stay, extensive certification of benefits requirements and,
in some cases, reduced payment for services.
Critical Accounting Policies
The preparation of our financial statements in accordance with accounting
principles generally accepted in the United States of America, requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. On an on-going
basis, we evaluate our estimates and assumptions, including but not limited to
those related to revenue recognition, accounts receivable reserves and the
impairment of long-lived assets and goodwill. We base our estimates on
historical experience and various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
-- 17 --
Revenue recognition and accounts receivable:
Patient care revenues and accounts receivable are recorded at established
billing rates or at the amount realizable under agreements with third-party
payors, including Medicaid and Medicare. Revenues under third-party payor
agreements are subject to examination and contractual adjustment, and amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
provided and subsequent settlements are recorded in operations in the year of
settlement. Amounts due as a result of cost report settlements is recorded and
listed separately on the consolidated balance sheets as "Other receivables,
third party". 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.
The Company currently has one "at-risk" contract. The contract calls for
the Company to provide for all of the in patient and outpatient behavioral
health needs of the insurance carrier's enrollees in Nevada for a fixed monthly
fee per member per month. Revenues are recorded monthly based on this formula
and the expenses related to providing the services under this contract are
recorded as incurred. The Company provides most of the outpatient care directly
and, through utilization review, monitors closely, and pre-approves all in
patient and outpatient services not provided directly. The contract is
considered "at-risk" because the payments to third-party providers for services
rendered could equal or exceed the total amount of the revenue recorded.
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and accepted
based on study criteria and billable units of service are provided. Where a
contract requires completion of the study by the patient, no revenue is
recognized until the patient completes the study program.
Contract support service revenue is a result of fixed contracts to provide
telephone support. Revenue for these services is recognized ratably over the
service period, as there is no contingency for a change in the contracted amount
based on services provided.
Allowance for doubtful accounts:
The provision for bad debt is calculated based on a percentage of each aged
accounts receivable category beginning at 0-5% on current accounts and
increasing incrementally for each additional 30 days the account remains
outstanding until the account is over 360 days outstanding, at which time the
provision is 60-100% of the outstanding balance. These percentages vary by
facility based on each facility's experience in collecting older receivables.
The Company compares this required reserve amount to the current "Allowance for
doubtful accounts" to determine the required bad debt expense for the period.
This method of determining the required "Allowance for doubtful accounts" has
historically resulted in an allowance for doubtful accounts of 30% or greater of
the total outstanding receivables balance.
-- 18 --
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.
Goodwill:
The excess of the purchase price over the fair market value of net assets
of an acquisition is recorded as goodwill. The Company's net goodwill relates to
the treatment services segment of the Company and is evaluated at least annually
for impairment.
Results of Operations
Years Ended June 30, 2003 and 2002
The Company's profitability from its ongoing operations remained relatively
stable during the fiscal year ended June 30, 2003 despite less favorable overall
economic conditions and some decreases in coverage choices made by employers.
Total revenues increased 5.0% to $23,833,323 for the year ended June 30, 2003
from $22,698,268 for the year ended June 30, 2002. General economic conditions
and increases in some operating expenses, resulted in a decrease in income from
operations of 18.1% to $1,445,689 for the year ended June 30, 2003 from
$1,764,274 for the year ended June 30, 2002 and a decrease in income before
taxes and dividends of 6.1% to $1,031,976 for the fiscal year ended June 30,
2003 from $1,099,341 for the fiscal year ended June 30, 2002. The Company has
recorded its tenth consecutive profitable quarter from ongoing operations with
the quarter ended June 30, 2003.
Total net patient care revenue from all facilities, remained relatively
stable at $21,243,177 for the year ended June 30, 2003 as compared to
$21,109,104 for the year ended June 30, 2002. Although patient census and net
revenue per patient day increased as shown in "Operating Statistics" on page 7
of this report, increased expenses resulted in lower net income from our core
business. Net inpatient care revenue from inpatient psychiatric services
increased 2.1% to $14,430,069 for the year ended June 30, 2003 from $14,130,471
for the fiscal year ended June 30, 2002. Net partial hospitalization and
outpatient care revenue decreased 2.4% to $6,813,108 for the year ended June 30,
2003 from $6,978,633 for the year ended June 30, 2002. This decrease is due in
part to the decrease in the number of employees covered under our Employee
Assistance Program ("EAP") contracts and our behavioral healthcare carve out,
which provide for a fixed fee per employee per month to provide behavioral
healthcare services. The highlight of the year was the growth in revenues from
Wellplace, formerly known as Pioneer Development and Support Services ("PDS2").
Wellplace revenues increased 95.8% to $1,649,374 for the year ended June 30,
2003 from $842,345 for the year ended June 30, 2002. This increase in revenue is
due to the inclusion of the Nebraska smoking cessation contract signed in May
2002 and the Wayne County call center contract, which began in March 2003. All
revenues reported in the accompanying consolidated statements of income 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.
-- 19 --
Patient care expenses increased by approximately $433,613 due to the
increase in patient census at our inpatient facilities for the year ended June
30, 2003. Inpatient census increased by approximately 390 patient days, 1%, for
the year ended June 30, 2003 compared to the year ended June 30, 2002. Direct
patient care payroll and payroll related expenses increased approximately 2% to
$9,927,554 for the year ended June 30, 2003 from $9,755,460 for the year ended
June 30, 2002; pharmacy costs increased approximately 21% to $426,510 for the
year ended June 30, 2003 from $351,531 for the year ended June 30, 2002;
laboratory fees decreased approximately 14% to $184,810 for the year ended June
30, 2003 from $213,973 for the year ended June 30, 2002; and hospital supplies
expense increased approximately 21% to $39,116 for the year ended June 30, 2003
from $32,474 for the year ended June 30, 2002. All of these increases were a
result of increased patient census and increased needs of the patients based on
the severity of their illness. Other patient related expenses increased
approximately 45% to $345,907 for the year ended June 30, 2003 from $238,034 for
the year ended June 30, 2002. This is due to the increase in patients
participating in pharmaceutical research studies through Pioneer Pharmaceutical
Research. The corresponding revenue increase was approximately $198,000 or 27%
over last year's revenues. We continue to closely monitor the ordering of
hospital supplies, food and pharmaceutical supplies but these expenses all
relate directly to the number of days of inpatient services we provide and are
expected to increase with higher patient census (see "Operating Statistics" Part
I, Item 1).
Website expenses decreased 24.6% to $216,827 for the year ended June 30,
2003 from $287,556 for the year ended June 30, 2002. This decrease is due to the
change in focus of the internet Company to internal support of the other
operating locations. We expect Website expenses will remain at this level while
the internet Company's focus remains internal.
Contract expenses related to Wellplace increased 98.6% to $1,398,602 for
the year ended June 30, 2003 from $704,363 for the year ended June 30, 2002.
This increase is due to the inclusion of the Nebraska smoking cessation contract
signed in May 2002 and the Wayne County call center contract, which began in
March 2003. Expenses are expected to increase as a full year of the Wayne County
call center expenses will be included in the fiscal year ended June 30, 2004.
Total administrative expenses for all facilities increased less than 1% to
$7,833,908 for the year ended June 30, 2003 from $7,829,208 for the year ended
June 30, 2002. This minimal increase in administrative expense is attributable
to many offsetting changes in expenses. There was a non-cash equity based
compensation charge of approximately $264,000 recorded in fiscal 2002 which was
offset by various increases. As part of the change in administrative expenses,
legal fees increased 308.2% to $143,276 for the year ended June 30, 2003 from
$35,096 for the year ended June 30, 2002. This is a result of the litigation
described in "Legal Proceedings" on page 13 of this report. Increased marketing
efforts resulted in a 25.8% increase in travel and entertainment expenses to
$179,840 for the year ended June 30, 2003 from $143,009 for the year ended June
30, 2002. Marketing expense increased 61.4% to $295,043 for the year ended June
30, 2003 from $182,753 for the year ended June 30, 2002; and meals expense
increased 16.8% to $67,690 for the year ended June 30, 2003 from $57,969 for the
year ended June 30, 2002. Insurance expense increased 25.2% to $284,465 for the
year ended June 30, 2003 from $227,247 for the year ended June 30, 2002 due to
general increases in property and liability insurance. Accounting fees, which
includes non-audit accounting services, including but not limited to cost
reports and individual contract audits, provided by firms other than our audit
firm, increased 68.8% to $198,815 for the year ended June 30, 2003 from $117,783
for the year ended June 30, 2002.
Interest expense decreased 31.4% to $542,269 for the year ended June 30,
2003 from $790,955 for the year ended June 30, 2002. This decrease is due to the
decrease in prime rate, which dictates the interest rate on the majority of the
Company's long-term debt and the decrease in outstanding debt.
-- 20 --
The Company's income taxes of $54,234 and $15,446 for the years ended June
30, 2003 and June 30, 2002, respectively, are significantly below the Federal
statutory rate of 34% primarily due to the availability of net operating loss
carry-forwards. Total income tax expense for fiscal 2003 and 2002 represents
state income taxes for certain subsidiaries with no available net operating loss
carry-forwards. The Company has provided a significant valuation allowance
against its deferred tax asset due to the uncertainty of its full recoverability
given the Company's history of operating losses and potential changes in IRS
rules that may limit the accessibility of the loss carry-forwards.
Provision for doubtful accounts increased 54.7% to $1,108,498 for the
fiscal year ended June 30, 2003 from $716,681 for the fiscal year ended June 30,
2002. This increase is the result of an increase in the age of outstanding
accounts receivable with many insurance carriers delaying payment as much as 180
days.
The environment the Company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the Company has increased staff, standardized some
procedures for collecting receivables and instituted a more aggressive
collection policy, which has resulted in an overall decrease in its accounts
receivable. Although the Company's receivables have decreased, the Company
continues to reserve for bad debts based on managed care denials and past
difficulty in collections. The growth of managed care has negatively impacted
reimbursement for behavioral health services with a higher rate of denials
requiring higher reserves.
Liquidity and Capital Resources
The Company`s net cash provided by operating activities was $1,406,694 for
the year ended June 30, 2003 compared to $1,576,109 for the year ended June 30,
2002. Cash flow from operations in fiscal 2003 consists primarily of net income
of $977,742 plus depreciation and amortization of $198,695, decrease in accounts
receivable of $513,193 and non-cash equity based charges of $25,871 less cash
used for net changes in other operating assets and liabilities of $308,807.
Cash used in investing activities in fiscal 2003 consisted of $226,100 in
capital expenditures compared to $124,362 in capital expenditures in fiscal
2002.
Cash used in financing activities in fiscal 2003 primarily consisted of
$914,985 in net debt repayments, $8,000 in deferred financing cost, $65,421
received from the issuance of common stock, $41,391 paid in the purchase of
treasury stock and $7,212 in costs related to the issuance of common stock.
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 11%
to $4,945,301 on June 30, 2003 from $5,553,601 on June 30, 2002. 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
-- 21 --
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 2003, in order to provide start up cash for the Wayne County call
center, the Company increased its borrowing capacity by $500,000 with GE
Healthcare Finance, formerly Heller Healthcare Finance, Inc. As of August 15,
2003, the Company has not been required to utilize the additional funds
available. The outstanding balance on the accounts receivables financing on June
30, 2003 was $1,103,561, reflecting a $365,083 decrease from June 30, 2002. In
November 2001, the Company refinanced all of the outstanding mortgage debt with
Heller Healthcare Finance. This resulted in the consolidation of several
outstanding notes, the reduction of interest on the debt from prime plus 5% to
prime plus 3.5% and the reduction in the principal payments due each month.
Principal payments on long-term debt totaled $1,359,983 in fiscal 2003 compared
to $1,219,314 in fiscal 2002.
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes as of June 30, 2003 are as
follows:
Year Ending Term Capital Operating
June 30, Notes Leases Leases Total
_______________________ _____________ ___________ ____________ ___________
2004 $ 883,659 $55,954 $ 845,972 $1,785,585
2005 1,680,415 18,832 745,767 2,445,014
2006 47,598 12,825 499,244 559,667
2007 32,306 7,788 437,680 477,774
2008 35,337 649 326,396 362,382
Thereafter 234,629 -- 142,913 377,542
_____________ ___________ ____________ ___________
Total minimum payments $2,913,944 $96,048 $2,997,972 $6,007,964
=========== ========== =========== ===========
In addition to the above term notes, the Company also has $275,000 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. In July 2002, the holders of the debentures
exercised the put provision in the agreement as to 50% of the outstanding
debentures of which $225,000 was paid during the fiscal year ended June 30, 2003
and the remainder was paid as of July 31, 2003.
The Company also has $100,000 in an outstanding related party debt, which
bears interest at 12% per annum and is payable upon demand. This debt is
currently being extinguished as cash flow permits.
The Company believes that, with its revolving credit facility through its
primary lender and cash flow from operations, it will have sufficient cash and
financing available to fund its growing operations for the foreseeable future.
The Company plans to expand its core business through increased capacity at its
current facilities and potential acquisitions and its pharmaceutical research
operations through additional contracts and acquisitions. Any acquisitions will
be funded through acquisition specific financing instruments.
The Company has operated ongoing operations profitably for ten consecutive
quarters. The current positive business environment towards behavioral health
treatment and the new business opportunities give us confidence to foresee
continued improved results.
-- 22 --
New accounting standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 145, Rescission of FASB
SFAS Nos. 4,44 and 64, and Amendment of FASB SFAS No. 13 and Technical
Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishments of Debt and SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44 Accounting for
intangible Assets of Motor Carriers. In addition, SFAS 145 amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transaction and the required accounting for
certain lease modifications that have economic effects that existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The provision
of SFAS No. 145 related to the rescission of SFAS No. 4 is effective in fiscal
years beginning after May 15, 2002. The provisions of SFAS No. 145 related to
SFAS No. 13 are to be applied to transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have an impact on the Company's results of
operations, financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)".
Under this statement, a liability or a cost associated with a disposal or exit
activity is recognized at fair value when the liability is incurred rather than
at the date of the entity's commitment to an exit plan as required under EITF
94-3. The provisions of SFAS 146 are effective for exit or disposal activities
initiated after December 31, 2002, with earlier application permitted. The
adoption of SFAS 146 did not have a significant effect on the Company's
operations, financial position or cash flows.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." Among other things, FIN 45 requires guarantors to
recognize, at fair value, their obligations to stand ready to perform under
certain guarantees. FIN 45 is effective for guarantees issued or modified on or
after January 1, 2003. The adoption of FIN 45 did not have a material effect on
its financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation in the event companies adopt SFAS No. 123 and account for
stock options under the fair value method. SFAS No. 148 also amends the
disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial
Reporting (APB 28), to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While the Statement does not
amend SFAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of SFAS No. 148 are
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of APB Opinion No. 25 Accounting for
Stock Issued to Employees (APB 25). The Company has adopted the disclosure
requirements of SFAS No. 148.
-- 23 --
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46's consolidation criteria are based on analysis of
risks and rewards, not control, and represent a significant and complex
modification of previous accounting principles. FIN 46 represents an accounting
change, not a change in the underlying economics of asset sales. FIN 46 is
effective for consolidated financial statements issued after June 30, 2003. The
Company does not believe that the adoption of FIN 46 will have any effect on its
financial position or future results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 is the first phase of the FASB's project on liabilities and equity. SFAS
No. 150 provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. For
publicly held companies, SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. SFAS No. 150 requires companies to
record the cumulative effect of financial instruments existing at the adoption
date. The adoption of SFAS 150 did not have a significant effect on the
Company's operations, financial position or cash flows.
In November 2002, the EITF reached consensus on EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Revenue arrangements with multiple
deliverables include arrangements that provide for the delivery or performance
of multiple products, services and/or rights to use assets where performance may
occur at different points in time or over different periods of time. The
adoption of EITF No. 00-21 did not have a significant effect on the Company's
operations, financial position or cash flows.
-- 24 --
ITEM 7. FINANCIAL STATEMENTS. PAGE
Index F-1
Report of Independent Certified Public Accountants F-2
Consolidated balance sheets F-3
Consolidated statements of income 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
-- 25 --
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, 2003 and 2002, and the related consolidated
statements of income, 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, 2003 and 2002, 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.
/s/ BDO Seidman, LLP
Boston, Massachusetts
August 8, 2003
F-2
-- 26 --
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30,
2003 2002
____________________________
ASSETS
Current assets: (Note C)
Cash and cash equivalents (Note A) $ 494,991 $ 204,564
Accounts receivable, net of allowance for
doubtful accounts of $2,348,445
and $2,715,760 at June 30, 2003
and 2002, respectively (Note A) 4,345,301 4,863,601
Prepaid expenses 69,541 66,652
Other receivables and advances 255,006 137,032
Deferred income tax asset (Note F) 808,607 766,793
Other receivables, third party (Note A) 172,043 214,818
____________ ____________
Total current assets 6,145,489 6,253,460
Accounts receivable, non-current (Note A) 600,000 690,000
Other receivables (Note A) 111,976 92,068
Property and equipment, net (Notes A, B and D) 1,295,113 1,259,648
Deferred financing costs, net of amortization of
$130,109 and $122,109 at June 30, 2003
and 2002, respectively 4,000 12,000
Goodwill (Note A) 969,099 969,099
Other assets (Note A) 286,046 197,340
____________ ____________
Total assets $9,411,723 $9,473,615
============ ===========
LIABILITIES
Current liabilities:
Accounts payable $ 860,952 $1,283,389
Notes payable - related parties (Note E) 100,000 200,000
Current maturities of long-term debt (Note C) 883,659 765,415
Revolving credit note (Note C) 1,103,561 1,468,644
Deferred revenue 160,720 129,258
Current portion of obligations under capital
leases (Note D) 50,805 11,020
Accrued payroll, payroll taxes and benefits 1,016,088 1,143,569
Accrued expenses and other liabilities (Note K) 958,527 906,250
Convertible debentures (Notes C) 275,000 500,000
____________ ____________
Total current liabilities 5,409,312 6,407,545
Long-term debt, less current maturities (Note C) 2,030,285 2,428,945
Obligations under capital leases (Note D) 36,869 21,140
____________ ____________
Total liabilities 7,476,466 8,857,630
____________ ____________
Commitments and contingent liabilities (Notes D,
G, H and I)
STOCKHOLDERS' EQUITY (Notes A, G, H and I) Class A
common stock, $.01 par value; 20,000,000
shares authorized, 13,437,067 and 12,919,042 shares
issued at June 30, 2003 and 2002, respectively. 134,371 129,190
Class B common stock, $.01 par value; 2,000,000
shares authorized, 726,991 issued and outstanding
at June 30, 2003 and 2002, each convertible into
one share of Class A common stock. 7,270 7,270
Additional paid-in capital 19,147,604 18,769,863
-- 27 --
PHC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (con't)
June 30,
2003 2002
___________________________
Treasury stock, 97,804 and 38,126 common shares at
cost at June 30, 2003 and 2002, respectively. (72,380) (30,988)
Notes receivable - common stock (80,000) (80,000)
Accumulated deficit (17,201,608) (18,179,350)
____________ _____________
Total stockholders' equity 1,935,257 615,985
____________ _____________
Total liabilities and stockholders'
equity $ 9,411,723 $ 9,473,615
============ ============
See accompanying notes to consolidated financial statements F-3
-- 28 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Year Ended June 30,
2003 2002
____________________________________
Revenues:
Patient care, net (Note A) $21,243,177 $21,109,104
Pharmaceutical study 940,772 742,380
Website services -- 4,439
Contract support services 1,649,374 842,345
______________ _____________
Total revenues 23,833,323 22,698,268
______________ _____________
Operating expenses:
Patient care expenses 11,829,799 11,396,186
Cost of contract support services 1,398,602 704,363
Provision for doubtful accounts 1,108,498 716,681
Website expenses 216,827 287,556
Administrative expenses 7,833,908 7,829,208
______________ _____________
Total operating expenses 22,387,634 20,933,994
______________ _____________
Income from operations 1,445,689 1,764,274
______________ _____________
Other income (expense):
Interest income 13,133 10,852
Interest expense (542,269) (790,955)
Other income, net 115,423 115,170
______________ _____________
Total other expense, net (413,713) (664,933)
______________ _____________
Income before income taxes 1,031,976 1,099,341
Provision for income taxes (Notes A and F) 54,234 15,446
______________ _____________
Net income 977,742 1,083,895
Dividends (Note I) -- (98,411)
______________ _____________
Income applicable to common shareholders $ 977,742 $ 985,484
============== =============
Basic income per common share (Note A) $ .07 $ .10
============== =============
Basic weighted average number of shares
outstanding (Note A) 13,944,047 10,232,286
============== =============
Fully diluted income per common share
(Note A) $ .07 $ .09
============== =============
Fully diluted weighted average number of
shares outstanding (Note A) 14,564,078 11,012,861
============== =============
See accompanying notes to consolidated financial statements F-4
-- 29 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity (Deficit) (See Notes
A, C, H, J and K)
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
_________________________________________________________________
Balance - June 30, 2001 8,709,834 $ 87,098 726,991 $ 7,270 150,700 $ 1,507
Costs related to private
placements
Dividends on preferred stock
Issuance of shares for options
exercised 1,250 13
Repurchase of shares on open
market
Issuance of warrants for services
Shares issued for employee
bonuses 71,750 717
Conversion of preferred stock 3,483,583 34,836 (150,700) (1,507)
Common stock issued for accrued
dividends 511,800 5,118
Issuance of shares for warrants
exercised 31,624 316
Issuance of employee stock
purchase plan shares 25,871 259
Issuance of shares for services
provided 83,330 833
Reclassification of net
liabilities of
discontinued operations
Net income-year ended June 30,
2002
_________________________________________________________________
Balance - June 30, 2002 12,919,042 $129,190 726,991 $ 7,270 0 $ 0
-- 30 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Changes In Stockholders' Equity (Deficit) (See Notes
A, C, H, J and K)(con't)
Class A Class B
Common Stock Common Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
_________________________________________________________________
Costs related to private
placements
Issuance of shares for options
exercised 408,025 4,081
Issuance of warrants for services
Shares issued for employee
bonuses 28,623 286
Issuance of shares for warrants
exercised 62,363 624
Issuance of employee stock
purchase plan shares 19,014 190
Purchase of shares from former
employee
Net income-year ended June 30,
2003
_________________________________________________________________
Balance - June 30, 2003 13,437,067 $134,371 726,991 $ 7,270 0 $ 0
==================================================================
See accompanying notes to consolidated financial statements.
-- 31 --
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity (Deficit) (See Notes
A, C, H, J and K)
Notes
Additional Receivable
Paid-in Treasury Stock Stock Accumulated
Capital Shares Amount Purchase Deficit Total
______________________________________________________________________________
Balance - June 30, 2001 $18,696,779 22,926 $(24,894) $(80,000) $(19,968,880) $(1,281,120)
Costs related to private
placements (198,149) (198,149)
Dividends on preferred stock (98,411) (98,411)
Issuance of shares for
options exercised 612 625
Repurchase of shares on open
market 15,200 (6,094) (6,094)
Issuance of warrants for
services 5,461 5,461
Shares issued for employee
bonuses 29,780 30,497
Conversion of preferred stock (31,690) 1,639
Common stock issued for
accrued dividends 213,644 218,762
Issuance of shares for
warrants Exercised 9,684 10,000
Issuance of employee stock
purchase plan shares 9,575 9,834
Issuance of shares for
services provided 34,167 35,000
Reclassification of net
liabilities of
discontinued operations 804,046 804,046
Net income-year ended June
30,2002 1,083,895 1,083,895
______________________________________________________________________________
Balance - June 30, 2002 18,769,863 38,126 (30,988) (80,000) (18,179,350) 615,985
-- 32 --
PHC, INC. AND SUBSIDIARIES (con't)
Consolidated Statements of Changes In Stockholders' Equity (Deficit) (See Notes
A, C, H, J and K)
Costs related to private
placements (7,212) (7,212)
Issuance of shares for
options exercised 346,060 350,140
Issuance of warrants for
services 3,185 3,185
Shares issued for employee
bonuses 18,726 19,012
Issuance of shares for
warrants excerised 9,376 10,000
Issuance of employee stock
purchase plan shares 7,606 7,796
Purchase of shares from
former employee 59,678 (41,391) (41,391)
Net income-year ended June
30,2003 977,742 977,742
______________________________________________________________________________
Balance - June 30, 2003 $ 19,147,604 97,804 $(72,380) $(80,000) $ (17,201,608) $ 1,935,257
===============================================================================
See accompanying notes to consolidated financial statements F-5
-- 33 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended June 30,
2003 2002
___________________________
Cash flows from operating activities:
Net income $ 977,742 $1,083,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 198,695 210,836
Deferred income taxes (41,814) (152,813)
Compensatory stock options and stock issued 20,181 72,745
Warrants issued for services 3,185 --
Equity based compensation charge 2,505 264,000
Changes in operating assets and liabilities:
Accounts receivable 513,193 440,638
Prepaid expenses and other current assets (2,889) (2,712)
Other assets (96,766) 31,078
Accounts payable (422,437) (462,580)
Accrued expenses and other liabilities 255,099 247,528
Net liabilities of discontinued operations -- (156,506)
___________ ___________
Net cash provided by operating activities 1,406,694 1,576,109
___________ ___________
Cash flows from investing activities:
Acquisition of property and equipment (226,100) (124,362)
___________ ___________
Net cash used in investing activities (226,100) (124,362)
___________ ___________
Cash flows from financing activities:
Repayment revolving debt, net (365,083) (642,942)
Proceeds from borrowings 810,081 748,912
Principal payments on long-term debt (1,359,983) (1,219,314)
Deferred financing costs 8,000 8,000
Cost related to common stock issuance (7,212) --
Cost related to preferred stock issuance -- (198,149)
Purchase of treasury stock (41,391) (6,094)
Proceeds from issuance of common stock 65,421 18,672
___________ ___________
Net cash used in financing activities (890,167) (1,290,915)
___________ ___________
Net increase in cash and cash equivalents 290,427 160,832
Cash and cash equivalents, beginning of year 204,564 43,732
___________ ___________
Cash and cash equivalents, end of year $ 494,991 $ 204,564
=========== ==========
Supplemental cash flow information: Cash paid
during the period for:
Interest $ 506,909 $ 782,416
Income taxes $ 121,323 $ 25,164
See accompanying notes to consolidated financial statements
F-6
-- 34 --
PHC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Year Ended June 30,
2003 2002
___________________________
Supplemental disclosures of non-cash investing
and financing activities:
Issuance of common stock in cashless
exercise of options $134,866 $ --
Issuance of common stock in cashless
exercise of warrants 424 --
Conversion of preferred stock at stated value -- 1,507,000
Issuance of stock in lieu of cash for dividends
due -- 218,762
Accrued dividends on series C preferred stock -- 98,411
Increase in equity as a result of the
reclassification of net liabilities of
discontinued operations -- 804,046
Issuance of warrants in connection with
preferred stock conversion -- 53,848
See accompanying notes to consolidated financial statements F-7
-- 35 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and business segments:
PHC, Inc. (the "Company") is a national health care company which operates
subsidiaries specializing in behavioral health services including the treatment
of substance abuse, which includes alcohol and drug dependency and related
disorders and the provision of psychiatric services. The Company also provides
management, administrative and online behavioral health services. The Company
primarily operates under three business segments:
(1) Behavioral health treatment services, including two substance abuse
treatment facilities: Highland Ridge Hospital, located in Salt Lake
City, Utah, which also treats psychiatric patients, and Mount Regis
Center, located in Salem, Virginia, and eight psychiatric treatment
locations which include Harbor Oaks Hospital, a 64-bed psychiatric
hospital located in New Baltimore, Michigan and seven outpatient
behavioral health locations (two in Las Vegas, Nevada operating as
Harmony Healthcare, one in Shawnee Mission, Kansas operating as Total
Concept and three 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. Pioneer Development and Support Services,
which does business as Wellplace, provides help line services
primarily through contracts with major railroads, a smoking cessation
contract with the State of Nebraska and a call center contract with
the State of Michigan. Pioneer Pharmaceutical Research conducts
studies of the effects of psychiatric pharmaceuticals on a controlled
population through contracts with major manufacturers of these
pharmaceuticals; and
(3) Behavioral health online services, are provided through Behavioral
Health Online, Inc., the Company's internet subsidiary, which provides
internet support services for all other subsidiaries of the Company
and provides behavioral health education, training and products for
the behavioral health professional, through its website Wellplace.com.
On October 5, 1998, Quality Care Centers of Massachusetts, Inc., which
operated the Company's long-term care facility, Franvale Nursing and
Rehabilitation Center, filed for protection under the Chapter 7 Bankruptcy Code.
In April 2002, the bankruptcy court accepted the report of the trustee and the
bankruptcy was closed. This event resulted in the reclassification of the net
liabilities of discontinued operations of $804,046 to stockholders' equity in
the fourth quarter of fiscal 2002.
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.
F-8
-- 36 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues and accounts receivable:
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.
Activity and cost report expense differences are reviewed on an interim basis
and adjustments are made to the net expected collectable revenue accordingly.
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 16% and 15% of the Company's total revenue is derived from
Medicare and Medicaid payors for the years ended June 30, 2003 and 2002,
respectively. Differences between the amounts provided and subsequent
settlements are recorded in operations in the year of the settlement. To date,
settlement adjustments have not been material.
Patient care revenue is recognized as services are provided, provided there
exists persuasive evidence of an arrangement, the fee is fixed or determinable
and collectability of the related receivable is reasonably assured. Pre
- -admission screening of financial responsibility of the patient, insurance
carrier or other contractually obligated payor, provides the Company the net
expected collectable patient revenue to be recorded based on contractual
arrangements with the payor or pre-admission agreements with the patient.
Revenue is not recognized for emergency provision of services for indigent
patients. As of June 30, 2003, the Company has $172,043 in other receivables,
third party, due as a result of cost report settlements.
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and accepted
based on study criteria and billable units of service are provided. Where
contracts require completion of the study by the patient, no revenue is
recognized until the patient completes the study program.
Contract support service revenue is a result of fixed contracts to provide
telephone support. Revenue for these services is recognized ratably over the
service period, as there is no contingency for a change in the contracted amount
based on services provided.
Long-term assets include accounts receivable non-current, other receivables
and other assets. Accounts receivable, non-current consists of amounts due from
former patients for service. This amount represents estimated amounts
collectable under supplemental payment agreements, arranged by the Company or
its collection agencies, entered into because of the patients' inability to pay
under normal payment terms. All of these receivables have been extended beyond
their original due date. Accounts of former patients that do not comply with
these supplemental payment agreements are written off when deemed unrecoverable.
Other receivables included as long-term assets include the non-current portion
of loans provided to employees and amounts due on a contractual agreement.
Charity care amounted to approximately $54,263 and $415,700 for the years
ended June 30, 2003 and June 30, 2002, respectively. Patient care revenue is
stated net of charity care in the accompanying consolidated statements of
income.
F-9
-- 37 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Estimates and assumptions:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash equivalents:
Cash equivalents include short-term highly liquid investments with
maturities of less than three months when purchased.
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, advances and web development costs.
Long-lived assets:
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the impairment or Disposal of Long-Lived Assets", the
Company reviews the carrying values of its long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable. Any long-lived assets
held for disposal are reported at the lower of their carrying amounts or fair
value less costs to sell. The Company believes that the carrying value of its
long-lived assets is fully realizable at June 30, 2003.
Goodwill:
The excess of the purchase price over the fair market value of net assets
acquired was amortized on a straight-line basis over twenty years through June
30, 2001.
The Company adopted SFAS 142 in the first quarter of fiscal 2002. SFAS No.
142 requires, among other things, that companies no longer amortize goodwill,
but instead test goodwill for impairment at least annually. In addition, SFAS
F-10
-- 38 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill (continued):
142 requires that the Company identify reporting units for the purpose of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life.
The Company's goodwill of $969,099 relating to the treatment services
reporting unit of the Company was evaluated under SFAS No. 142 as of June 30,
2003. As a result of the evaluation, the Company determined that no impairment
exists. The Company will continue to test goodwill for impairment at least
annually in accordance with the guidelines of SFAS 142.
Fair value of financial instruments:
The carrying amounts of cash, trade receivables, other current assets,
accounts payable, notes payable and accrued expenses approximate fair value
based on their short-term maturity and prevailing interest rates.
Basic and diluted income per share:
Income per share is computed by dividing the income applicable to common
shareholders, net of dividends charged directly to retained earnings, by the
weighted average number of shares of common stock outstanding for each fiscal
year. All dilutive common stock equivalents have been included in the
calculation of diluted earnings per share for the fiscal year ended June 30,
2003 and 2002. As of June 30, 2003 and June 30, 2002, the number of shares
outstanding increased by 620,031 and 780,575 dilutive common stock equivalents,
respectively.
The weighted average number of common shares outstanding used in the
computation of earnings per share is summarized as follows:
Years Ended June 30,
2003 2002
_____________________________
Denominator for basic earnings per share-
weighted average shares 13,944,047 10,232,286
Effect of dilutive securities:
Employee stock options 377,741 439,431
Warrants 242,290 91,144
Convertible debentures -- 250,000
___________ ____________
Denominator for diluted earnings per share-
adjusted weighted average shares and
assumed conversions 14,564,078 11,012,861
=========== ===========
F-11
-- 39 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes securities which were outstanding as of June
30, 2003 and 2002 but not included in the calculation of diluted net earnings
per share because such shares are antidilutive:
Years Ended June 30,
2003 2002
____________________________
Employee stock options 29,500 191,500
Warrants 327,500 1,013,800
Convertible debentures 125,000 --
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 bases 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.
Comprehensive Income:
SFAS No. 130, "Reporting Comprehensive Income", requires companies to
classify items of other comprehensive income in a financial statement.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The Company's comprehensive net income is equal to its net
income for all periods presented.
Stock-based compensation:
Until January 1, 2003, all of the Company's employees were employed under
leasing arrangements. The Company believes that, although its employees were
leased, they met the common law definition of employee and therefore, qualified
as employees for purposes of applying SFAS No.123 prior to January 1, 2003. The
Company's employee leasing arrangement met the employee definition requirements
under FASB Interpretation ("FIN") No.44 "Accounting for Certain Transactions
Involving Stock Compensation". The Company elected to discontinue the use of the
employee leasing Company and begin using a more traditional payroll service and
providing more employee services internally when it believed the benefit of
using a leasing Company began to diminish.
For all periods presented in the accompanying financial statements, the
Company accounted for its employee stock-based compensation arrangements using
the intrinsic value method under the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and FIN No. 44. The Company has
elected to use the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure." Had compensation expense for stock
option grants to employees been determined based on the fair value method at the
-- 40 --
grant dates for awards under the stock option plans consistent with the
method prescribed by SFAS No. 123, the Company's net income would have decreased
to the pro forma amounts indicated as follows:
F-12
-- 41 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-based compensation (continued):
Year Ended
June 30,
2003 2002
_________________________
Net income, as reported $ 977,742 $ 985,484
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 22,686 336,745
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related taxes ( 78,575) (391,599)
_____________ ___________
Pro forma net income $ 921,853 $ 930,630
============= ==========
Earnings per share:
Basic - as reported $ 0.07 $ 0.10
_____________ ___________
Basic - pro forma $ 0.07 $ 0.09
_____________ ___________
Diluted - as reported $ 0.07 $ 0.09
_____________ __________
Diluted - pro forma $ 0.06 $ 0.09
_____________ ___________
The Company has computed the pro forma disclosures for stock options
granted to employees using the Black-Scholes option pricing model prescribed by
SFAS No. 123. The assumptions used during each of the two years ended June 30,
2003 were as follows:
June 30,
2003 2002
__________ _________
Risk free interest rate 6.00% 6.00%
Expected dividend yield -- --
Expected lives 5 years 5 years
Expected volatility 30% 30%
Weighted average value of grants per share $.29 $.16
Weighted average remaining contractual life of
options outstanding (years) 3.76 3.4
Reclassifications:
Certain June 30, 2002 amounts have been reclassified to be consistent with
the June 30, 2003 presentation.
F-13
-- 42 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New accounting standards:
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accouting Standards ("SFAS") No. 145, Rescission of FASB
SFAS Nos. 4,44 and 64, and Amendment of FASB SFAS No. 13 and Technical
Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishments of Debt and SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44 Accounting for
intangible Assets of Motor Carriers. In addition, SFAS 145 amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transaction and the required accounting for
certain lease modifications that have economic effects that existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The provision
of SFAS No. 145 related to the rescission of SFAS No. 4 is effective in fiscal
years beginning after May 15, 2002. The provisions of SFAS No. 145 related to
SFAS No. 13 are to be applied to transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have an impact on the Company's results of
operations, financial position or cash flows.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"), which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". Under this
statement, a liability or a cost associated with a disposal or exit activity is
recognized at fair value when the liability is incurred rather than at the date
of the entity's commitment to an exit plan as required under EITF 94-3. The
provisions of SFAS 146 are effective for exit or disposal activities initiated
after December 31, 2002, with earlier application permitted. The adoption of
SFAS 146 did not have a significant effect on the Company's operations,
financial position or cash flows.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." Among other things, FIN 45 requires guarantors to
recognize, at fair value, their obligations to stand ready to perform under
certain guarantees. FIN 45 is effective for guarantees issued or modified on or
after January 1, 2003. The adoption of FIN 45 did not have a material effect on
the Company's financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation in the event companies adopt SFAS No. 123 and account for
stock options under the fair value method. SFAS No. 148 also amends the
disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial
Reporting (APB 28), to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While the Statement does not
amend SFAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of SFAS No. 148 are
-- 43 --
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of APB Opinion No. 25 Accounting for
Stock Issued to Employees (APB 25). The Company has adopted the disclosure
requirements of SFAS No. 148.
F-14
-- 44 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New accounting standards (continued):
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46's consolidation criteria are based on analysis of
risks and rewards, not control, and represent a significant and complex
modification of previous accounting principles. FIN 46 represents an accounting
change, not a change in the underlying economics of asset sales. FIN 46 is
effective for consolidated financial statements issued after June 30, 2003. The
Company does not believe that the adoption of FIN 46 will have any effect on its
financial position or future results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 is the first phase of the FASB's project on liabilities and equity. SFAS
No. 150 provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. For
publicly-held companies, SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. SFAS No. 150 requires companies to
record the cumulative effect of financial instruments existing at the adoption
date. The adoption of SFAS 150 did not have a significant effect on the
Company's operations, financial position or cash flows.
In November 2002, the EITF reached consensus on EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Revenue arrangements with multiple
deliverables include arrangements that provide for the delivery or performance
of multiple products, services and/or rights to use assets where performance may
occur at different points in time or over different periods of time. The
adoption of EITF No. 00-21 did not have a significant effect on the Company's
operations, financial position or cash flows.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
June 30,
2003 2002
__________________________
Land $ 69,259 $ 69,259
Buildings 1,136,963 1,136,963
Furniture and equipment 1,284,646 1,123,258
Motor vehicles 92,871 92,871
Leasehold improvements 508,441 443,733
____________ ____________
3,092,180 2,866,084
Less accumulated depreciation and
amortization 1,797,067 1,606,436
____________ ____________
Property and equipment, net $1,295,113 $1,259,648
=========== ===========
F-15
-- 45 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is summarized as follows: June 30,
2003 2002
________________________
9% mortgage note due in monthly installments of
$4,850 including interest through July 1, 2012,
when the remaining principal balance is payable,
collateralized by a first mortgage on the PHC of
Virginia, Inc, Mount Regis Center facility. $383,498 $406,068
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. 257,384 361,564
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. 81,279 114,178
Note payable due in monthly installments of $429
including interest at 8.69% through May 2004. 4,536 9,119
Note payable due in monthly installments of $5,088
including interest at 9% through October 2002. -- 20,352
Note payable due in monthly installments of $665
including interest at 10.8% through November 2005. 16,705 22,538
Term mortgage note payable with principal installments
of $45,000 beginning December 2001 through November
2002 and increasing annually by $5,000 through
November 2004 at which time the remaining balance
becomes due. The note bears interest at prime
(4.0% at June 30, 2003)plus 3.5% is collateralized
by all assets of PHC of Michigan, Inc., guaranteed
by PHC, Inc. and may be renewed at maturity. In May
2003, $500,000 was paid on the revolving credit note
through an increase in this note. At that time the
payments were increased by $5,000 each month but all
other terms and conditions of the original note
remain in effect. 2,170,542 2,260,541
___________ _________
Total 2,913,944 3,194,360
Less current maturities 883,659 765,415
___________ _________
Long-term portion $2,030,285 $2,428,945
=========== ==========
Maturities of long-term debt are as follows as of June 30, 2003:
Year Ending
June 30, Amount
____________________________________________________
2004 $ 883,659
2005 1,680,415
2006 47,598
2007 32,306
2008 35,337
Thereafter 234,629
__________
$2,913,944
===========
F-16
-- 46 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The Company has a revolving credit note under which a maximum of $3,000,000
may be outstanding at any time. At June 30, 2003 and 2002, the outstanding
balance was $1,103,561 and $1,468,644, respectively. Advances are available
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 (4.0% at June 30, 2003) plus 2.25%. The agreement is automatically
renewable for one-year periods unless terminated by either party. Upon
expiration, all remaining principal and interest are due. The revolving credit
note is collateralized by substantially all of the assets of the Company's
subsidiaries and guaranteed by PHC.
On December 7, 1998 the Company issued the principal sum of $500,000 of
convertible debentures with interest at 12% per annum that are due on December
2, 2004. Interest is payable quarterly. The debentures and any unpaid interest
are convertible into shares of common stock at the rate of $1,000 for 500 shares
of common stock, which equates to $2.00 per share of class A 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 debt is classified as a current liability on the
accompanying consolidated balance sheets. The Company has the right to call the
debentures upon the same terms as above. If called, the holders of the
debentures then have 20 days from the date of written notice to exercise their
conversion privilege as to any debentures not then already converted. In July
2002, the holders of the debentures exercised the put provision in the agreement
as to 50% of the outstanding debentures, of which $225,000 was paid during the
year ended June 30, 2003 and the remainder was paid as of July 31, 2003.
NOTE D - CAPITAL LEASE OBLIGATION
At June 30, 2003, the Company was obligated under various capital leases
for equipment providing for monthly payments of approximately $4,500 and $1,100
for fiscal 2003 and 2002, respectively, and terms expiring from July 2003
through July 2007.
The carrying value of assets under capital leases included in property and
equipment is as follows:
June 30,
2003 2002
______________________
Equipment and improvements $141,998 $ 50,271
Less accumulated amortization (69,322) (33,108)
__________ _________
$ 72,676 $ 17,163
========== ==========
F-17
-- 47 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE D - CAPITAL LEASE OBLIGATION (CONTINUED)
Future minimum lease payments under the terms of the capital lease agreements
are as follows at June 30, 2003:
Year Ending
June 30,
____________
2004 $ 55,954
2005 18,832
2006 12,825
2007 7,788
2008 649
__________
Total future minimum lease payments 96,048
Less amount representing interest 8,374
__________
Present value of future minimum
lease payments 87,674
Less current portion 50,805
__________
Long-term obligations under capital leases $ 36,869
==========
NOTE E - NOTES PAYABLE - RELATED PARTIES
Related party debt is summarized as follows:
June 30,
2003 2002
_________________________
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
__________ __________
Total $100,000 $200,000
========== ==========
-- 48 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE F - INCOME TAXES
The Company has the following deferred tax assets included in the
accompanying balance sheets:
Year Ended
June 30,
2003 2002
__________________________
Temporary differences attributable to:
Allowance for doubtful accounts $ 939,000 $1,086,000
Depreciation 68,000 72,000
Reserves not currently deductible and other 201,000 173,000
Operating loss carryforward 3,628,000 3,734,000
___________ ___________
Total deferred tax asset 4,836,000 5,065,000
Less:
Valuation allowance (4,027,393) (4,298,207)
___________ ___________
Subtotal 808,607 766,793
Current portion (808,607) (766,793)
___________ ___________
Long-term portion $ -- $ --
========== ===========
F-18
-- 49 --
The Company had no deferred tax liabilities at June 30, 2003 and 2002. The
Company anticipates that it will have sufficient taxable income in future fiscal
years to realize its net deferred tax asset. The Company 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 components of the Income tax provisions for the years ended June 30,
2003 and 2002 are as follows:
2003 2002
_______________________________
Current
Federal $ -- $ --
State 96,048 25,164
__________ _________
96,048 25,164
Deferred
Federal (35,542) (8,260)
State ( 6,272) (1,458)
__________ __________
(41,814) (9,718)
__________ __________
Income tax provision $ 54,234 $ 15,446
=========== ==========
A reconciliation of the federal statutory rate to the Company's effective
tax rate for the years ended June 30, 2003 and 2002 is as follows:
2003 2002
________________________
Income tax provision at federal statutory rate 34.0% 34.0%
Increase (decrease) in tax resulting from
State tax provision, net of federal benefit 4.5% 4.5%
Non-deductible expenses 1.3% 0.9%
Other, net (0.5%) (4.0%)
Valuation allowance (34.0%) (34.0%)
Effective income tax rate 5.3% 1.4%
======== =========
-- 50 --
At June 30, 2003 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 2023.
The Company has provided a significant valuation allowance against its
deferred tax asset at June 30, 2003 and 2002 due to the uncertainty of its full
recoverability given the Company's history of operating losses.
F-19
-- 51 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
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, 2003 and 2002 was approximately $899,000 and
$799,000, 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, 2003 are as follows: Year
Ending June 30, Amount
2004 $ 845,972
2005 745,767
2006 499,244
2007 437,680
2008 326,396
2009 142,913
-----------
$2,997,972
===========
Notes Receivable:
In August 2000, the Company entered into agreements with nine officers and
directors to provide each officer and director with $10,000 with which to
purchase stock. The agreement called for the parties to sign notes, which would
provide the purchased shares as security, with the Company releasing the shares,
and canceling the officers' and directors' obligations under the Notes based on
specific PHC stock price targets. In the event that the stock price targets are
not met, the agreement calls for the cancellation of the obligation and release
of the shares on the third anniversary of the agreement. The notes were
cancelled pursuant to these provisions in August 2003, which will result in a
compensation charge of $80,000 during the quarter ended September 30, 2003. As
of June 30,2003 eight agreements are still in effect and accordingly will be
terminated as outlined above. Under FIN 44, the shares underlying the notes were
subject to variable accounting but did not result in any material change in any
period presented.
-- 52 --
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.
A medical malpractice claim was filed by a former patient against North
Point Mental Health Associates, the Company's subsidiary, North Point-Pioneer,
Inc., and Pioneer Counseling Centers in the Circuit Court for the County of
Wayne, State of Michigan (Case No. 00-017768-NH, November 21, 2000), alleging
sexual abuse by a former clinical psychologist. At trial in December 2002, a
jury returned a verdict in favor of the plaintiff in the amount of approximately
$9 million plus interest and taxable costs and attorney's fee for conduct that
first manifested itself prior to the Company's acquisition of the subsidiary in
1996. The clinical psychologist declared bankruptcy and was not a party to the
proceeding. Although the Court subsequently reduced the award to $3.2 million,
plus applicable interest and taxable costs and attorney's fee, the Court has not
yet entered a judgment and is considering motions made by the defendants to
further reduce the award, to set aside the verdict or to declare a mistrial.
Plaintiff could also appeal the Court's reduction of the jury verdict. The
Company believes that substantial error was committed at trial and intends to
appeal any adverse judgment if and when entered. However, a bond or other
marketable collateral would be required to be posted in an amount equal to one
and one-half times the current value of any judgment when entered.
The Company's subsidiary, North Point-Pioneer, Inc., is covered by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company, which is insolvent and is being administered by the State of New York,
with the result that Frontier's ability to pay any judgment is unknown. If
Frontier formally goes into liquidation, the Company may have a claim against
the Michigan Property and Casualty Guaranty Fund, which could avail itself of
defenses available to Frontier and to Michigan statutory defenses. The entity
whose assets were acquired by the Company's subsidiary also carried malpractice
insurance in the amount of $1 million. Such carrier has, however, refused
coverage and filed an action in Michigan seeking a declaratory judgment to the
effect that it is not liable under such policy. The Company will take all steps
available to require this carrier to meet its obligations under such policy.
To date, there have been no meaningful settlement discussions. In December
2002, Plaintiff's counsel demanded the payment of $1,000,000 within 10 days,
which demand was not met. At a meeting on September 3, 2003, representatives of
Frontier's receiver acknowledged to the Company, Frontier's obligations under
the policy but acknowledged that payment of such obligations is subject to the
unresolved insolvency proceedings referred to above. The Company may recover a
portion of the legal fees expended to date on this matter. The Company believes
that any liability from thus litigation is neither probable nor reasonably
estimable and, as a result, no liability has been recorded at June 30, 2003.
F-20
-- 53 --
NOTE H - 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 2,000,000
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 500,000 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, 2003, options for 95,500 shares were granted under
this plan. A maximum of 350,000 shares may be issued under this plan. Each
outside director is granted an option to purchase 10,000 shares of Class A
common stock at fair market value on the date of grant, vesting 25% immediately
and 25% on each of the first three anniversaries of the grant and expiring ten
years from the grant date.
Under the above plans, at June 30, 2003, 1,126,551 shares were available
for future grant or purchase.
-- 54 --
The Company had the following activity in its stock option plans for fiscal 2003
and 2002:
Weighted-Average
Number Exercise
Of Price
Shares Per Share
_____________________________
Balance - June 30, 2001 1,141,000 $0.33
Granted 245,000 $0.51
Expired (111,000) $0.27
____________
Balance - June 30, 2002 1,275,000 $0.37
Granted 287,500 $0.73
Exercised (555,000) $0.25
Expired (15,500) $0.52
____________
Balance - June 30, 2003 992,000 $0.54
=============
F-21
-- 55 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE H - STOCK PLANS (CONTINUED)
The following tables summarize information about stock options outstanding and
exercisable at June 30, 2003:
Weighted-Average
Number Remaining Contractual
Exercise Outstanding Life of Options Number Exercisable
Price At June 30,2003 Outstanding (years) At June 30, 2003
_______________________________________________________________________________
$ .19 5,000 2.5 3,750
.22 8,000 2.5 6,000
.25 103,500 1.35 43,500
.30 332,500 2.75 249,375
.35 40,000 7.25 20,000
.45 33,000 3.5 16,500
.55 148,000 4 74,000
.60 20,000 4.25 5,000
.69 32,500 4.5 8,125
.70 25,000 4.5 25,000
.74 40,000 9.5 10,000
.75 175,000 4.5 46,250
.81 6,000 6.5 6,000
1.03 6,000 5.5 6,000
2.06 6,000 4.5 6,000
3.50 6,000 3.5 6,000
6.63 5,500 2.5 5,500
_______ ___________ _____ ________
$ .54 992,000 3.76 537,000
======= =========== ===== ========
The Company re-priced options to purchase 791,500 shares of class A common
stock in January 2001. During the fiscal year ended June 30, 2003, 555,000 of
the repriced options were exercised and 6,500 expired. As a result of this
modification, 103,500 of the options remaining at June 30, 2003 are subject to
variable accounting from the date of the modification as they become vested. The
compensation expense related to the vested re-priced options was approximately
$2,505 and $264,000 for the year ended June 30, 2003 and 2002, respectively.
F-22
-- 56 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE I - CERTAIN CAPITAL TRANSACTIONS (Con't)
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, 2003:
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
_________________________________________________________________________________________________________
07/10/1998 Warrants issued with extension of debt
$28,740 value charged to interest
expense over term of loan 100,983 shares $.94 per share July 2003
07/10/1998 Warrants issued with extension of debt
as price guarantee $14,779 value
charged to interest expense over term
of loan 37,489 shares $.80 per share July 2003
12/31/1998 Warrants issued with convertible debenture
$9,240 value charged to professional fees
over term of debentures 43,694 shares $.57 per share Dec 2004
12/31/1998 Warrants issued for convertible debentures
finders fee $25,873 value charged to
professional fees over term of
debentures 104,879 shares $.57 per share Dec 2003
-- 57 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE I - CERTAIN CAPITAL TRANSACTIONS (Con't)
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
__________________________________________________________________________________________________________
12/31/1998 Warrants issued for convertible
debentures finders fee $3,696 value
charged to professional fees over term
of debentures 19,358 shares $1.03 per share Dec 2003
12/31/1998 Warrants issued for convertible debentures
finders fee $3,246 value charged to
professional fees over term of
debentures 28,032 shares $ .80 per share Dec 2003
12/01/1998 Warrants issued for convertible debentures
finders fee $1,302 value charged to
professional fees over term of
debentures 17,478 shares $ .57 per share Dec 2003
01/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of
debentures 17,478 shares $ .57 per share Jan 2004
02/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of
debentures 17,396 shares $ .58 per share Feb 2004
03/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of
debentures 17,420 shares $ .57 per share Mar 2004
04/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of
debentures 17,420 shares $ .57 per share Apr 2004
05/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of
debentures 17,420 shares $ .57 per share May 2004
06/01/1999 Warrants issued for convertible debentures
finders fee $3,696 value charged to
professional fees over term of
debentures 17,362 shares $ .58 per share June 2004
-- 58 --
NOTE I- CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
__________________________________________________________________________________________________________
01/05/1999 Warrants issued for investment banker
services $18,100 value charged to
professional fees over service
period 69,747 shares $ .78 per share Jan 2004
04/05/1999 Warrants issued for investment banker
services $18,100 value charged to
professional fees over service
period 69,188 shares $ .79 per share Apr 2004
02/23/1999 Consultant warrant for investor relations
$1,307 value charged to professional
fees 5,388 shares $ .67 per share Feb 2004
04/21/1999 Consultant warrant for web site development
services $1,547 value charged to
professional fees 8,710 shares $ .57 per share Apr 2004
05/18/1999 Consultant warrant for web site advisory
services $1,848 value charged to
professional fees 8,684 shares $ .58 per share Apr 2004
05/18/1999 Warrant issued for management consultant
services $370 value charged to
professional fees 1,737 shares $ .58 per share May 2004
07/01/1999 Warrants issued for convertible debentures
finders fee $5,745 value charged to
professional fees over term of
debentures 17,281 shares $ .58 per share July 2004
08/01/1999 Warrants issued for convertible debentures
finders fee $4,187 value charged to
professional fees over term of
debentures 17,362 shares $ .58 per share Aug 2004
07/05/1999 Warrants for investment banker services
$12,944 value charged to professional
fees over service period 68,744 shares $ .79 per share July 2004
10/05/1999 Warrants for investment banker services
$6,042 value charged to professional fees
over service period 68,744 shares $ .79 per share Oct 2004
03/31/2000 Warrants issued for services $10,000
value charged to website development 16,483 shares $ .91 per share Mar 2005
05/26/2000 Warrants issued as additional interest on
debt $33,264 value charged to interest
expense 60,000 shares $1.50 per share May 2005
-- 59 --
NOTE I- CERTAIN CAPITAL TRANSACTIONS (CONTINUED)
Date of Number of Exercise Expiration
Issuance Description Shares Price Date
_________________________________________________________________________________________________________
12/20/2000 Warrants issued for investment banker
services $1,938 value charged to
professional fees 28,573 shares $ .15 per share Dec 2005
04/15/2001 Warrants issued for investor relations
consulting services $1,136 value charged
to professional fees 10,000 shares $ .25 per share Apr 2006
05/15/2001 Warrants issued for investor relations
consulting services $2,577 value charged
to professional fees 10,000 shares $ .25 per share May 2006
06/15/2001 Warrants issued for investor relations
consulting services $2,577 value charged
to professional fees 10,000 shares $ .25 per share June 2006
07/20/2001 Warrants issued for investor relations
consulting services $1,786 value charged
to professional fees 12,000 shares $ .35 per share July 2006
02/08/2002 Warrants issued for investor relations
consulting services $391 value charged
to professional fees 3,000 shares $ .50 per share Feb 2007
03/01/2002 Warrants issued for investor relations
consulting services $1,476 charged to
professional fees 34,874 shares $ .36 per share Mar 2007
03/01/2002 Warrants issued for investor relations
consulting services $398 charged to
professional fees 23,709 shares $ .63 per share Mar 2007
03/01/2002 Warrants issued for investor relations
consulting services $310 charged to
professional fees 3,000 shares $ .50 per share Mar 2007
04/01/2002 Warrants issued for investor relations
consulting services $310 value charged
to professional fees 3,000 shares $ .50 per share Apr 2007
05/01/2002 Warrants issued for investor relations
consulting services $790 charged to
professional fees 3,000 shares $ .50 per share May 2007
05/07/2002 Warrants issued as a finders fee in
connection with preferred stock
conversion. Equity transaction. 151,783 shares $ .45 per share May 2005
05/07/2002 Warrants issued as a finders fee in
connection with preferred stock
conversion. Equity transaction. 50,594 shares $ .50 per share May 2005
04/01/2003 Warrants issued for consulting services
$3,185 charged to professional fees. 10,000 shares $1.00 per share April 2008
F-23
-- 60 --
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 were $3,185 and $5,461
in fiscal 2003 and 2002, respectively.
On June 28, 2000, the Company issued 136,000 shares of Series C 8%
convertible preferred stock, with a stated and liquidation value of $10.00 per
share. During the fiscal year ended June 30, 2002, the remaining series C
preferred stock were converted into 3,483,583 shares of class A common stock. In
addition, 511,800 shares of class A common stock were issued in payment of
accrued dividends in fiscal 2002. During the fiscal year ended June 30, 2003, no
preferred stock was outstanding and no dividend obligation existed.
Under existing dilution agreements with other stockholders, the issuance of
common stock under agreements other than the employee stock purchase and option
plans will increase the number of shares issuable and decrease the exercise
price of certain of the above warrant agreements based on the difference between
the then current market price and the price at which the new common stock is
being issued. The dilutive effects of transactions through June 30, 2003 are
reflected in the table above. The value of the additional shares issuable as a
result of these dilution provisions was not material.
NOTE J - 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
-- 61 --
PHC, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
NOTE J - BUSINESS SEGMENT INFORMATION (CONTINUED)
BEHAVIORAL HEALTH
TREATMENT ADMINISTRATIVE ONLINE
SERVICES SERVICES SERVICES ELIMINATIONS TOTAL
For the Year ended
June 30, 2003
Revenues - external
customers $21,392,332 $ 2,440,991 $ 0 $ 0 $ 23,833,323
Revenues - intersegment 286,200 2,662,224 300,000 (3,248,424) 0
Segment net income (loss) 3,312,977 (2,118,408) (216,827) 0 977,742
Total assets 7,524,816 1,797,671 89,236 0 9,411,723
Capital expenditures 214,013 8,783 3,304 0 226,100
Depreciation &
amortization 149,017 36,526 13,152 0 198,695
Goodwill 969,099 0 0 0 969,099
Interest expense 402,260 140,009 0 0 542,269
Income tax expense 54,234 0 0 0 54,234
For the Year ended
June 30, 2002
Revenues - external
customers $ 21,114,504 $ 1,579,325 $ 4,439 $ 0 $ 22,698,268
Revenues - intersegment 162,468 1,896,000 300,000 (2,358,468) 0
Segment net income (loss) 3,421,774 (2,060,457) (277,422) 0 1,083,895
Total assets 7,834,299 1,541,976 97,340 0 9,473,615
Capital expenditures 89,957 34,405 0 0 124,362
Depreciation &
amortization 140,130 50,628 20,078 0 210,836
Goodwill 969,099 0 0 0 969,099
Interest expense 585,884 205,016 55 0 790,955
Income tax expense 15,446 0 0 0 15,446
-- 62 --
NOTE K - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
June 30, 2003 June 30, 2002
Accrued professional fees 683,277 654,883
Accrued operating expenses 263,294 232,315
Income tax payable 11,956 19,052
Total $ 958,527 $ 906,250
F-25
-- 63 --
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The preparation of this annual report on form 10-KSB did not result in any
disagreement with our accountants on accounting and financial disclosure
requirements.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified within the
SEC's Rules and Forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management was necessarily required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures to meet the
criteria referred to above. Based on the foregoing, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective.
Change in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluations.
-- 64 --
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, 2003 are as
follows:
Name Age Position
- --------------------------------------------------------------------------------
Bruce A. Shear 48 Director, President and Chief Executive Officer
Robert H. Boswell 55 Senior Vice President
Michael R. Cornelison 53 Executive Vice President
Paula C. Wurts 54 Controller, Treasurer and Assistant Clerk
Gerald M. Perlow, M.D. 65 Director and Clerk
Donald E. Robar (1)(2) 66 Director
Howard W. Phillips 73 Director
William F. Grieco (1)(2) 49 Director
David E. Dangerfield (1) 62 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 fifteen 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.
-- 65 --
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.
WILLIAM F. GRIECO has served as a Director of the Company since February
18, 1997. Mr. Grieco is engaged in the private practice of law, serving as
corporate counsel for science and technology companies on an outsourced basis.
From November 2001 to November 2002, he was Senior Vice President and General
Counsel of IDX Systems Corporation, a healthcare information technology Company.
From August 1999 to October 2001, Mr. Grieco was a Managing Director of Arcadia
Strategies, LLC, a legal and business consulting organization. From November
1995 to July 1999 he served as Senior Vice President and General Counsel for
Fresenius Medical Care North America. From 1989 until November of 1995, Mr.
Grieco was a partner at Choate, Hall & Stewart, a general service law firm. Mr.
Grieco received a BS from Boston College in 1975, an MS in Health Policy and
Management from Harvard University in 1978 and a JD from Boston College Law
School in 1981.
DAVID E. DANGERFIELD has served as a Director of the Company since December
2001. Since 1977, he has served as the Executive Director for Valley Mental
Health in Salt Lake City, Utah. Since 1974, Mr. Dangerfield has been a partner
for Professional Training Associates (PTA). In 1989, he became a consultant
across the nation for managed mental health care and the enhancement of mental
health delivery services. David Dangerfield serves as a Board member of the
Mental Health Risk Retention Group and Mental Health Corporation of America,
which are privately held corporations, and the Utah Hospital Association, which
is a state organization. Mr. Dangerfield graduated from the University of Utah
in 1972 with a Doctorate of Social Work after receiving his Masters of Social
Work from the University in 1967.
-- 66 --
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.
-- 67 --
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 2003
fiscal year, which exceeded $100,000. The following table sets forth the
compensation paid or accrued by the Company for services rendered to these
executives in fiscal year 2003, 2002 and 2001:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
(a) (b) (c) (d) (e) (g) (i)
Securities
Name and Other Annual Underlying All Other
Principal Year Salary Bonus Compensation Options/SARs Compensation
Position ($) ($) ($) (#) ($)
__________________________________________________________________________________________________________
Bruce A. Shear 2003 $306,771 $25,000 $15,730 (1) 40,000 $11,200
President and Chief 2002 $310,000 $37,500 $71,390 (2) 20,000 $ 3,400
Executive Officer 2001 $310,000 -- $19,571 (3) 67,000 $ 6,285
Robert H. Boswell 2003 $152,937 $40,147 $12,180 (4) 25,000 $ 7,000
Senior Vice President 2002 $137,000 $ 7,000 $67,301 (5) 25,000 $ 3,725
2001 $126,000 $16,309 $15,521 (6) 41,000 $ 3,864
Michael R. Cornelison 2003 $117,448 $30,000 $ 9,392 (7) 25,000 $ 7,000
Executive Vice President 2002 $114,333 -- $60,356 (8) 10,000 $ 1,700
2001 $ 96,000 $15,910 $14,160 (9) 41,000 $ 3,864
Paula C. Wurts 2003 $116,981 $22,000 $11,270 (10) 25,000 $ 7,000
Controller, Treasurer 2002 $111,800 $ 2,000 $36,825 (11) 25,000 $ 3,725
And Assistant Clerk 2001 $100,800 $ 6,414 $13,867 (12) 41,000 $ 3,864
-- 68 --
(1) This amount represents $4,057 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, $1,387 in premiums paid by the Company with respect to disability
insurance for the benefit of Mr. Shear, $2,009 in club membership dues paid
by the Company for the benefit of Mr. Shear and $3,509 personal use of a
Company car held by Mr. Shear.
(2) This amount represents $3,983 contributed by the Company to the Company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $4,768 in premiums
paid by the Company with respect to life insurance for the benefit of Mr.
Shear, $336 in club membership dues paid by the Company for the benefit of
Mr. Shear, $2,678 personal use of a Company car held by Mr. Shear and
$59,625 based on the intrinsic value of the repricing of options held by
Mr. Shear.
(3) This amount represents $3,799 contributed by the Company to the Company's
Executive Employee Benefit Plan on behalf of Mr. Shear, $4,768 in premiums
paid by the Company with respect to life insurance for the benefit of Mr.
Shear, $208 in club membership dues paid by the Company for the benefit of
Mr. Shear, $2,921 personal use of a Company car held by Mr. Shear and
$7,875 based on the intrinsic value of the repricing of options held by Mr.
Shear.
(4) This amount represents a $6,000 automobile allowance, $3,212 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $640 in membership dues paid by the Company for the benefit of
Mr. Boswell, $617 in benefit derived from the purchase of shares through
the employee stock purchase plan, $401 in club membership dues paid by the
Company for the benefit of Mr. Boswell and $1,950 based on the intrinsic
value of the repricing of options held by Mr. Boswell
(5) This amount represents a $6,000 automobile allowance, $2,323 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $640 in membership dues paid by the Company for the benefit of
Mr. Boswell, $363 in benefit derived from the purchase of shares through
the employee stock purchase plan, and $57,975 based on the intrinsic value
of the repricing of options held by Mr. Boswell.
(6) This amount represents a $6,000 automobile allowance, $1,195 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Mr. Boswell, $22 in Class A Common Stock issued to employees, $219 in
benefit derived from the purchase of shares through the employee stock
purchase plan and $8,085 based on the intrinsic value of the repricing of
options held by Mr. Boswell.
(7) This amount represents a $7,800 automobile allowance, $633 in membership
dues paid by the Company for the benefit of Mr. Cornelison, $309 in benefit
derived from the purchase of shares through the employee stock purchase
plan and $650 based on the intrinsic value of the repricing of options held
by Mr. Cornelison.
(8) This amount represents a $7,800 automobile allowance, $243 in medical
expenses reimbursed by the Company and $52,313 based on the intrinsic value
of the repricing of options held by Mr. Cornelison.
(9) This amount represents a $7,050 automobile allowance, $22 in Class A Common
Stock issued to employees and $7,088 based on the intrinsic value of the
repricing of options held by Mr. Cornelison.
-- 69 --
(10) This amount represents a $4,800 automobile allowance, $4,211 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $309 in benefit derived from the purchase of shares through the
employee stock purchase plan and $1,950 based on the intrinsic value of the
repricing of options held by Ms. Wurts.
(11) This amount represents a $4,800 automobile allowance, $4,319 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $181 in benefit derived from the purchase of shares through the
employee stock purchase plan and $27,525 based on the intrinsic value of
the repricing of options held by Ms. Wurts.
(12) This amount represents a $4,800 automobile allowance, $4,319 contributed by
the Company to the Company's Executive Employee Benefit Plan on behalf of
Ms. Wurts, $22 in Class A Common Stock issued to employees, $146 in benefit
derived from the purchase of shares through the employee stock purchase
plan and $4,580 based on the intrinsic value of the repricing of options
held by Ms. Wurts.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
services as members of the Board. Directors who are not employees of the Company
receive $5,000 stipend per year and $1,250 for each Board meeting they attend.
In addition, Directors of the Company are entitled to receive certain stock
option grants under the Company's Non-Employee Director Stock Option Plan (the
"Director Plan").
COMPENSATION COMMITTEE
During fiscal 2003 the Compensation Committee consisted of Mr. Donald Robar
and Dr. Gerald Perlow. The Compensation Committee met twice during fiscal 2003.
Mr. Shear does not participate in discussions concerning, or vote to approve,
his salary. At the June meeting of the Board of directors, the Board confirmed
Mr. Robar as a Compensation Committee member and appointed Mr. William Grieco as
the second member of the Compensation Committee. This Compensation Committee
member change is in response to the requirement of the SEC to provide an
independent compensation committee.
AUDIT COMMITTEE
During fiscal 2003 the Audit Committee consisted of Mr. Donald Robar, Dr.
Gerald Perlow and Mr. William Grieco. At the June meeting of the Board of
directors, the Board appointed Dr. David Dangerfield as the chairman of the
Audit Committee and confirmed the continued appointment of Mr. Robar and Mr.
Grieco. This Audit Committee member change is in response to the requirement of
the SEC to provide an independent Audit Committee, which includes a financial
expert. The Audit Committee met four times during fiscal 2003. All committee
members attended three of the four meetings. One committee member was absent
from one of the meetings.
OPTION PLANS
Stock Plan
The Board of Directors adopted the Company's Stock Plan on August 26, 1993
and the stockholders of the Company approved the plan on November 30, 1993 and
amended the plan on December 26, 1997, December 23, 1998, December 19, 2001 and
December 19, 2002. The Stock Plan provides for the issuance of a maximum of
2,000,000 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
-- 70 --
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, 2003, the Company issued additional
options to purchase 287,500 shares of Class A Common Stock under the 1993 Stock
Plan at a price per share ranging from $.60 to $.75. Generally, options are
exercisable upon grant for 25% of the shares covered with an additional 25%
becoming exercisable on each of the first three anniversaries of the date of
grant.
A total of 555,000 options were exercised, 364,500 in a cashless exercise
and 190,500 at $.25 each during the fiscal year ended June 30, 2003. A total of
1,250 options were exercised at $.25 each during the fiscal year ended June 30,
2002.
Employee Stock Purchase Plan
On October 18, 1995, the Board of Directors voted to provide employees who
work in excess of 20 hours per week and more than five months per year rights to
elect to participate in an Employee Stock Purchase Plan (the "Plan") which
became effective February 1, 1996. The price per share shall be the lesser of
85% of the average of the bid and ask price on the first day of the plan period
or the last day of the plan period. The plan was amended on December 19, 2001
and December 19, 2002 to allow for a total of 500,000 shares of class A common
stock to be issued under the plan.
As of June 30, 2003 a total of 131,199 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 2003. Six
employees are participating in the current offering period under the plan, which
began on February 1, 2003 and will end on January 31, 2004.
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, December 19, 2001 and December 19, 2002. Non-qualified options to purchase
a total of 350,000 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
-- 71 --
Directors subsequent to each annual meeting of stockholders, each
non-employee director is granted under the Director Plan an option to purchase
2,000 shares of the Class A Common Stock of the Company. The plan was amended
December 19, 2001 to increase the number of options issued each year from 2,000
per director to 10,000 per director. The option exercise price is the fair
market value of the shares of the Company's Class A Common Stock on the date of
grant. The options are non-transferable and become exercisable as follows: 25%
immediately and 25% on each of the first, second and third anniversaries of the
grant date. If an optionee ceases to be a member of the Board of Directors other
than for death or permanent disability, the unexercised portion of the options,
to the extent unvested, immediately terminate, and the unexercised portion of
the options which have vested lapse 180 days after the date the optionee ceases
to serve on the Board. In the event of death or permanent disability, all
unexercised options vest and the optionee or his or her legal representative has
the right to exercise the option for a period of 180 days or until the
expiration of the option, if sooner.
On February 18, 1997, the Company issued options to purchase 6,000 shares
of Class A Common Stock under the Director Plan at an exercise price of $3.50
per share. On January 22, 1998, the Company issued options to purchase 6,000
shares of Class A Common Stock under the Director Plan at an exercise price of
$2.06. On February 23, 1999, the Company issued options to purchase 6,000 shares
of Class A Common Stock under the Director Plan at an exercise price of $1.03.
On December 28, 1999, the Company issued options to purchase 6,000 shares of
class A common stock under the Director Plan at an exercise price of $.81. On
January 11, 2001, the Company issued options to purchase 6,000 shares of class A
common stock under the Director Plan at an exercise price of $.22. On December
19, 2001, the Company issued options to purchase 30,000 shares of class A common
stock under the Director Plan at an exercise price of $.35. On January 8, 2003
the Company issued options to purchase 40,000 shares of class A common stock
under the Director Plan at an exercise price of $.74 As of June 30, 2003, none
of the options issued had been exercised.
-- 72 --
The following table provides information about options granted to the named
executive officers during fiscal 2003 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Name Granted (#) in Fiscal ($/Share) Date
Year
___________________ ________________________________________________________________
Bruce A. Shear 40,000 13.9% $ .75 09/30/2007
Robert H. Boswell 25,000 8.7% $ .75 09/30/2007
Michael R. Cornelison 25,000 8.7% $ .75 09/30/2007
Paula C. Wurts 25,000 8.7% $ .75 09/30/2007
All Directors and
Officers as a group (9 205,000 71.3% $.74-$.75 09/30/2007-01/08/2013
Persons)
The following table provides information about options exercised by the
named executive officers during fiscal 2003 and the number and value of options
held at the end of fiscal 2003.
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired on Value at FY-End (#) at FY-End ($)
Name Exercise (#) Realized ($) Exercisable/ Exercisable/
Unexercisable Unexercisable
_____________________________________________________________________________________________
Bruce A. Shear 125,000 $ 63,750 70,250/81,750 $26,018/$23,673
Robert H. Boswell 73,005 45,263 49,500/49,833 $17,890/$12,713
Michael R. Cornelison 65,645 40,700 39,500/36,500 $14,565/$ 7,655
Paula C. Wurts 35,459 21,985 49,500/53,167 $17,890/$14,447
All Directors and Officers
as a group (9 persons) 375,536 $214,672 407,375/375,125 $135,456/$89,519
-- 73 --
In January 2001, all 791,500 shares underlying the then outstanding
employee stock options were repriced to $0.25, which was greater than the then
current market price, using the existing exercise durations. The computed effect
of the option repricing of $2,505 and $264,000 was charged to salaries in the
fiscal years ended June 30, 2003 and 2002, respectively.
-- 73 --
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of shares of the Company's Class A Common Stock and Class B Common Stock (the
only classes of common stock of the Company currently outstanding) as of August
1, 2003 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 sp4uses under applicable law. In preparing
the following table, the Company has relied on the information furnished by the
persons listed below: Percent Name and Address Amount and Nature of Title of
Class of Beneficial Owner of Beneficial Owner (13) Class
- ------------------------------------------------------------------------------
Class A Common Stock Bruce A. Shear 462,245(1) 3.4% c/o PHC, Inc. 200 Lake
Street Peabody, MA 01960
Robert H. Boswell 168,179(2) 1.3%
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Michael R.Cornelison 127,732(3) *
c/o PHC, Inc.
200 Lake Street
Peabody, Ma 01960
Paula C. Wurts 118,947(4) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Howard W. Phillips 116,500(5) *
P. O. Box 2047
East Hampton, NY 11937
Gerald M. Perlow 92,375(6) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 92,352(7) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
William F. Grieco 86,375(8) *
115 Marlborough Street
Boston, MA 02116
David E. Dangerfield 10,000(9) *
5965 South 900 East
Salt Lake City, UT 84121
All Directors and 1,274,705(10) 9.2%
Officers as a Group
(9 persons)
-- 75 --
Percent
Name and Address Amount and Nature of
Title of Class of Beneficial Owner of Beneficial Owner (13) Class
_______________________________________________________________________________
Class A Common Stock The Shaar Fund Ltd. 1,109,327 8.3%
(continued) c/o Citco Funds Services,
Curacao
Kaya Flamboyan 9
Curacao, Netherland Antilles
Peter S. Lynch 789,500 5.9%
82 Devonshire Street, S8A
Boston, MA 02109
Class B Common Bruce A. Shear 671,259(12) 92.3%
Stock (11) c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
All Directors and Officers 671,259 92.3%
as a Group (9 persons)
* Less than 1%
1. Includes 80,250 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.30
to $.75 per share.
2. Includes 55,750 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options at an exercise price range of $.25 to
$.75 per share.
3. Includes 45,750 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.75 per share.
4. Includes 55,750 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.25
to $.75 per share.
5. Includes 54,250 shares issuable pursuant to currently exercisable stock
options having an exercise price range of $.22 to $.75 per share.
6. Includes 48,125 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $.22 to $6.63 per share.
7. Includes 51,625 shares issuable pursuant to currently exercisable stock
options or stock options which will become exercisable within sixty days,
having an exercise price range of $.22 to $6.63 per share.
8. Includes 47,125 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $.22
to $3.50 per share.
9. Includes 10,000 shares of Class A Common Stock issuable pursuant to
currently exercisable stock options, having an exercise price range of $
.55 to $ .75 per share.
10. Includes an aggregate of 448,625 shares issuable pursuant to currently
exercisable stock options. Of those options, 5,500 have an exercise price
of $6.63 per share, 6,000 have an exercise price of $3.50 per share, 6,000
have an exercise price of $2.06 per share, 6,000 have an exercise price of
$1.03 per share, 6,000 have an exercise price of $.81 per share, 82,500
have an exercise price of $.75 per share, 10,000 have an exercise price of
$.74 per share, 74,000 have an exercise price of $.55 per share, 7,500 have
an exercise price of $.45 per share, 20,000 have an exercise price of $.35
per share, 199,875 have an exercise price of $.30 per share, 19,250 have an
exercise price of $.25 per share and 6,000 have an exercise price of $.22
per share.
11. Each share of class B common stock is convertible into one share of class A
common stock automatically upon any sale or transfer or at any time at the
option of the holder.
-- 76 --
12. 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.
13. "Amount and Nature of Beneficial Ownership". Each share of Class A Common
Stock is entitled to one vote per share and each share of Class B Common
Stock is entitled to five votes per share on all matters on which
stockholders may vote (except that the holders of the Class A Common Stock
are entitled to elect two members of the Company's Board of Directors and
holders of the Class B Common Stock are entitled to elect all the remaining
members of the Company's Board of Directors).
By virtue of the fact that Mr. Shear owns 92% of the class B shares and the
class B shareholders have the right to elect all of the directors except the two
directors elected by the class A shareholders, Mr. Shear has the right to elect
the majority of the members of the Board of directors and may be deemed to be in
control of the Company.
Based on the number of shares listed under the column headed "Amount and
Nature of Beneficial Ownership," the following persons or groups held the
following percentages of voting rights for all shares of common stock combined
as of August 1, 2003:
Bruce A. Shear ...................................22.39%
All Directors and Officers as a Group
(9 persons)......................................26.58%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Related Party Indebtedness
For approximately the last fourteen years, Bruce A. Shear, a director and
the President and Chief Executive Officer of the Company, and persons affiliated
and associated with him have made a series of unsecured loans to the Company and
its subsidiaries to enable them to meet ongoing financial commitments. The
borrowings generally were entered into when the Company did not have financing
available from outside sources and, in the opinion of the Company, were entered
into at market rates given the financial condition of the Company and the risks
of repayment at the time the loans were made. As of June 30, 2003, the Company
owed an aggregate of $100,000 to related parties.
During the period ended June 30, 2003, the Company paid Mr. Shear and
affiliates approximately $119,647 in principal and accrued interest under
various unsecured notes to meet short term working capital requirements. As of
June 30, 2003, the Company owed 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.
-- 77 --
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 4.39 to the Company's report on Form
10-QSB dated May 14, 2001. Commission file number 0-22916).
4.1 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).
4.2 Warrant Agreement by and between HealthCare Financial Partners, Inc.
and its subsidiaries (collectively "HCFP") and PHC, Inc. dated July
10, 1998 - Warrant No. 3 for 20,000 shares of Class A Common Stock.
(Filed as exhibit 4.14 to the Company's report on Form 10-KSB, filed
with the Securities and Exchange Commission on October 14, 1997.
Commission file number 0-22916).
4.3 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).
4.4 12% Convertible Debenture by and between PHC, Inc., and Dean & Co.,
datedDecember 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).
4.5 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).
4.6 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).
4.7 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).
4.8 Warrant Agreements by and between PHC, Inc., and George H. Gordon for
10,000 shares, 15,000 shares, 5,000 shares, 5,000 shares, 50,000
shares and 10,000 shares of Class A Common Stock dated December 31,
1998; 5,000 shares of Class A Common Stock dated December 1, 1998;
10,000 shares of Class A Common Stock dated January 1, 1999; and
10,000 shares of Class A Common Stock dated February 1, 1999. (Filed
as exhibit 4.24 to the Company's report on Form 10-QSB dated February
12, 1999. Commission file number 0-22916).
4.9 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).
-- 78 --
Exhibit No. Description
4.10 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).
4.11 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).
4.12 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).
4.13 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).
4.14 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).
4.15 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).
4.16 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).
4.17 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).
4.18 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).
4.19 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).
4.20 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).
4.21 Equity Purchase Warrant to purchase 1% equity in Behavioral Health
Online by and between PHC, Inc., and Heller Healthcare Finance dated
December 18, 2000. (Filed as exhibit 4.36 to the Company's report on
Form 10-KSB dated September 25, 2001. Commission file number 0-22916).
5.1 Opinion of Arent Fox Kintner Plotkin & Kahn, PPLC dated January 8,
2003. (Filed as an exhibit to the Company's Registration Statement on
Form S-8 dated January 8, 2003. Commission file number 333-102402).
-- 79 --
Exhibit No. Description
5.2 Opinion of Arent Fox Kintner Plotkin & Kahn, PPLC. (Filed as exhibit
5.2 to the Company's report on Form SB-2 dated June 19, 2002.
Commission file number 333-76137).
10.1 Deed of Trust Note of Mount Regis Center Limited Partnership in favor
of Douglas M. Roberts, dated July 28, 1987, in the amount of $560,000,
guaranteed by PHC, Inc., with Deed of Trust executed by Mount Regis
Center, Limited Partnership of even date. (Filed as exhibit 10.33 to
Form SB-2 dated March 2, 1994). Assignment and Assumption of Limited
Partnership Interest, by and between PHC of Virginia Inc. and each
assignor dated as of June 30, 1994. (Filed as exhibit 10.57 to Form
10-KSB on September 28, 1994).
10.2 Copy of Note of Bruce A. Shear in favor of Steven J. Shear, dated
December 1988, in the amount of $195,695; Pledge Agreement by and
between Bruce A. Shear and Steven J. Shear, dated December 15, 1988;
Stock Purchase Agreement by and between Steven J. Shear and Bruce A.
Shear, dated December 1, 1988. (Filed as exhibit 10.52 to the
Company's Registration Statement on Form SB-2 dated March 2, 1994.
Commission file number 333-71418).
10.3 Unconditional Guaranty of Payment and performance by and between PHC,
Inc. in favor of HCFP. (Filed as exhibit 10.112 to the Company's
quarterly report on Form 10-QSB, filed with the Securities and
Exchange Commission on February 25, 1997. Commission file number
0-22916).
10.4 Agreement between Family Independence Agency and Harbor Oaks Hospital
effective January 1, 1997. (Filed as exhibit 10.122 to the Company's
report on Form 10-KSB, with the Securities and Exchange Commission on
October 14, 1997. Commission file number 0-22916).
10.5 Master Contract by and between Family Independence Agency and Harbor
Oaks Hospital effective January 1, 1997. (Filed as exhibit 10.123 to
the Company's report on Form 10-KSB, filed with the Securities and
Exchange Commission on October 14, 1997. Commission file number
0-22916).
10.6 Financial Advisory Agreement, Indemnification Agreement and Warrant by
and between Brean Murray & Company and PHC, Inc. dated 06/01/97.
(Filed as exhibit 10.125 to the Company's report on Form 10-KSB, filed
with the Securities and Exchange Commission on October 14, 1997.
Commission file number 0-22916).
10.7 Loan and Security Agreement by and among HCFP Funding, Inc., and PHC
of Michigan, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., PHC of
Rhode Island, Inc., and Pioneer Counseling of Virginia, Inc. dated as
of February 18, 1998. (Filed as exhibit 10.139 to the Company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission
file number 333-59927).
10.8 Credit Line Deed of Trust by and between PHC of Virginia, Inc., and
HCFP Funding II, Inc. dated July 1998. (Filed as exhibit 10.140 to the
Company's Registration Statement on Form SB-2 dated July 24, 1998.
Commission file number 333-59927).
10.9 Promissory Note for $50,000 dated May 18, 1998 by and between PHC,
Inc. and Tot Care, Inc. (Filed as exhibit 10.142 to the Company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission
file number 333-59927).
10.10 Promissory Note for $50,000 dated June 9, 1998 by and between PHC,
Inc. and Tot Care, Inc. (Filed as exhibit 10.143 to the Company's
Registration Statement on Form SB-2 dated July 24, 1998. Commission
file number 333-59927).
10.11 Amendment No. 1 to Loan and Security Agreement in the amount of
$4,000,000 by and among HCFP Funding, Inc., and PHC of Michigan, Inc.,
PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Rhode Island, Inc.,
and Pioneer Counseling of Virginia, Inc. dated as of February 18,
1998. (Filed as exhibit 10.57 to the Company's report on Form 10-KSB
dated October 13, 1998. Commission file number 0-22916)
-- 80 --
Exhibit No. Description
10.12 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).
10.13 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).
10.14 Promissory Note for $532,000 dated May 30, 2000 by and between PHC,
Inc. and Irwin J. Mansdorf, Ph.D. (Filed as exhibit 10.76 to the
Company's report on Form 10-KSB, filed with the Securities and
Exchange Commission on September 29, 2000. Commission file number
0-22916).
10.15 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).
10.16 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).
10.17 Amendment number 2 to Loan and Security Agreement originally dated
February 18, 1998 by and among PHC, of Utah, Inc., PHC of Virginia,
Inc. and PHC of Michigan, Inc. and Heller Healthcare Finance, Inc. in
the amount of $3,000,000 amended as of May 24, 2001. (Filed as exhibit
10.46 to the Company's report on Form 10-KSB dated September 25, 2001.
Commission file number 0-22916).
10.18 Amendment Number 3 dated December 6, 2001 to Loan and Security
Agreement dated February 18, 1998 by and between PHC of Michigan,
Inc., PHC of Utah, Inc., and PHC of Virginia, Inc. and Heller
Healthcare Finance, Inc. providing collateral for the Loan and
Security Agreement in the amount of $3,000,000. (Filed as exhibit
10.50 to the Company's quarterly report on Form 10-QSB, filed with the
Securities and Exchange Commission on February 12, 2002. Commission
file number 0-22916).
10.19 Consolidating Amended and Restated Secured Term Note in the amount of
$2,575,542 dated December 6, 2001 by and between PHC of Michigan, Inc.
and. Heller Healthcare Finance, Inc. (Filed as exhibit 10.51 to the
Company's report on Form 10-QSB, filed with the Securities and
Exchange Commission on February 12, 2002. Commission file number
0-22916).
10.20 Amended and Restated Revolving Credit Note in the amount of
$3,000,000 dated December 6, 2001 by and between PHC of Michigan,
Inc., PHC of Utah, Inc. and PHC of Virginia, Inc. and. Heller
Healthcare Finance, Inc. (Filed as exhibit 10.52 to the Company's
report on Form 10-QSB, filed with the Securities and Exchange
Commission on February 12, 2002. Commission file number 0-22916).
10.21 Amended and Restated Consolidated Mortgage Note in the amount of
$5,688,598 dated December 6, 2001 by and between PHC of Michigan, Inc
and Heller Healthcare Finance, Inc. (Filed as exhibit 10.53 to the
Company's report on Form 10-QSB, filed with the Securities and
Exchange Commission on February 12, 2002. Commission file number
0-22916).
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Exhibit No. Description
10.22 Third Amended and Restated Cross-Collateralization and Cross-Default
Agreement dated December 6, 2001 by and between PHC, Inc., PHC of
Michigan, Inc., PHC of Utah, Inc. and PHC of Virginia, Inc. and.
Heller Healthcare Finance, Inc. (Filed as exhibit 10.54 to the
Company's report on Form 10-QSB, filed with the Securities and
Exchange Commission on February 12, 2002. Commission file number
0-22916).
10.23 The Company's 1993 Stock Purchase and Option Plan, as amended
December 2002. (Filed as exhibit 10.34 to the Company's report on Form
S-8 dated January 8, 2003. Commission file number 333-102402).
10.24 The Company's 1995 Non-Employee Director Stock Option Plan, as
amended December 2002. (Filed as exhibit 10.35 to the Company's report
on Form S-8 dated January 8, 2003. Commission file number 333-102402).
10.25 The Company's 1995 Employee Stock Purchase Plan, as amended December
2002. (Filed as exhibit 10.36 to the Company's report on Form S-8
dated January 8, 2003. Commission file number 333-102402).
*10.26 First Amended Consolidating Amended and Restated Secured Term Note by
and Between PHC Of Michigan, Inc. and Heller Healthcare Finance, Inc.
*21.1 List of Subsidiaries.
*23.1 Consent of BDO Seidman, LLP (independent auditors).
*31.1Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
*31.2 Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Filed herewith
(b) REPORTS ON FORM 8-K.
The Company filed one report on form 8-K during the quarter ended June 30,
2003. This report provided the same earnings information to the public as shown
in the Company's quarterly press release as required by Item 12 of the
instructions for form 8-K.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHC, INC.
Date: September 19, 2003 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 19, 2003
________________________ Executive Officer and
Bruce A. Shear Director (principal
executive officer)
/s/ PAULA C. WURTS Controller and Treasurer September 19, 2003
________________________ (principal financial
Paula C. Wurts and accounting officer)
/s/ GERALD M. PERLOW Director September 19, 2003
________________________
Gerald M. Perlow
/s/ DONALD E. ROBAR Director September 19, 2003
________________________
Donald E. Robar
/s/ HOWARD PHILLIPS Director September 19, 2003
________________________
Howard Phillips
/s/ WILLIAM F. GRIECO Director September 19, 2003
________________________
William F. Grieco
/S/ DAVID E. DANGERFIELD Director September 19, 2003
________________________
David E. Dangerfield
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