U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999. |_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ___________ Commission file number 0-23524 PHC, INC. (Exact name of small business issuer as specified in its charter) Massachusetts 04-2601571 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 200 Lake Street, Suite 102, Peabody MA 01960 (Address of principal executive offices) (Zip Code) 978-536-2777 (Issuer's telephone number) _______________________________________________________________________________ (Former Name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _ X No____ Applicable only to corporate issuers Number of shares outstanding of each class of common equity, as of October 31, 1999: Class A Common Stock 5,610,194 Class B Common Stock 727,170 Transitional Small Business Disclosure Format (Check one): Yes______ No X PHC, Inc. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - September 30, 1999 and June 30, 1999. Condensed Consolidated Statements of Operations - Three months ended September 30, 1999 and September 30, 1998. Condensed Consolidated Statements of Cash Flows - Three months ended September 30, 1999 and September 30, 1998. Notes to Condensed Consolidated Financial Statements - September 30, 1999. Item 2. Management's Discussion and Analysis or Plan of Operation PART II. OTHER INFORMATION Item 6. Exhibits Signatures PART I. FINANCIAL INFORMATION Item 1 Financial Statements PHC INC. AND SUBSIDIARIES (UNAUDITED) CONSOLIDATED BALANCE SHEETS Sept. 30 June 30 1999 1999 __________ _________ ASSETS Current assets: Cash & Cash Equivalents $ 57,597 $ 381,170 Accounts receivable, net of allowance for bad debts of $3,429,725 at Sept. 30, 1999, $ 3,647,848 at June 30, 1999 5,923,365 6,343,227 Prepaid expenses 225,847 101,865 Other receivables and advances 219,133 334,155 Deferred Income Tax Asset 459,280 459,280 Other Receivables, related party 77,245 53,517 ___________ _________ Total current assets 6,962,467 7,673,214 Accounts Receivable, noncurrent 575,000 595,000 Other receivables, noncurrent, related party, net of allowance for doubtful accounts of $782,000 Sept. 30, 1999 and June 30, 1999 3,054,122 2,908,113 Other Receivable 93,880 109,165 Property and equipment, net 1,456,196 1,483,319 Deferred income taxes 154,700 154,700 Deferred financing costs, net of amortization of $5,677 at Sept. 30, $64,041 at June 30, 1999 39,390 45,067 Goodwill, net of accumulated amortization of $143,878 at Sept. 30, 1999 and $116,900 at June 30, 1999 1,734,097 1,761,075 Other assets 376,457 297,781 _____________ ____________ Total assets $ 14,446,309 $15,027,434 _____________ ____________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $1,797,451 $ 1,832,750 Notes payable--related parties 200,000 200,000 Current maturities of long term debt 1,025,057 1,286,318 Revolving credit note 1,429,053 1,669,830 Current portion of obligations under capital leases 54,179 60,815 Accrued payroll, payroll taxes and benefits 282,229 333,955 Accrued expenses and other liabilities 1,380,476 1,459,290 Net current liabilities of discontinued operations 2,641,537 2,641,537 ___________ _________ Total current liabilities 8,809,982 9,484,495 ___________ _________ Long-term debt 1,883,267 1,730,230 Obligations under capital lease 41,868 51,657 Convertible debentures 500,000 500,000 ___________ _________ Total noncurrent liabilities 2,425,135 2,281,887 _____________ ____________ Total liabilities 11,235,117 11,766,382 _____________ ____________ Stockholders' Equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, 813 shares issued and outstanding Sept. 30, 1999 and June 30, 1999 8 8 Class A common stock, $.01 par value; 20,000,000 shares authorized, 5,612,970 and 5,612,930 shares issued Sept. 99 and June 99 respectively 56,129 56,129 Class B common stock, $.01 par value; 2,000,000 shares authorized, 727,170 and 727,210 issued Sept. 99 and June 99 respectively, convertible into one share of Class A Common Stock 7,272 7,272 Additional paid-in capital 15,989,729 15,967,176 Treasury stock, 2,776 shares at cost (12,122) (12,122) Accumulated Deficit (12,829,824) (12,757,411) _____________ ____________ Total Stockholders' Equity 3,211,192 3,261,052 _____________ ____________ Total Liabilities and Stockholders'Equity $14,446,309 $15,027,434 _____________ ____________ See Notes to Consolidated Financial Statements PHC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended September 30 1999 1998 (As restated) __________ ___________ Revenues: Patient Care, net $3,951,498 $4,476,738 Management Fees 265,404 199,453 Other 165,907 235,104 __________ ___________ Total revenue. 4,382,809 4,911,295 Operating expenses: Patient care expenses 2,125,408 2,308,051 Cost of Management Contracts 111,906 128,165 Provision for doubtful accounts 438,352 356,190 Administrative expenses 1,762,564 1,905,917 __________ ___________ Total operating expenses 4,438,230 4,698,323 __________ ___________ Income (loss) from operations (55,421) 212,972 __________ ___________ Other income (expense): Interest income 96,441 109,382 Interest expense (190,868) (312,312) Other income (expense), net 89,996 4,342 __________ ___________ Total other expense, net (4,431) (198,588) __________ ___________ Income (loss) before Provision for Taxes (59,852) 14,384 Provision for Income Taxes 100 911 __________ ___________ Net Income (loss) (59,952) 13,473 Dividends (12,463) (14,544) __________ ___________ Loss applicable to common shareholders $ (72,415) $ ( 1,071) __________ ___________ Basic and Diluted loss per common share $ (.01) $ (.00) Basic and Diluted weighted average number of shares outstanding 6,337,364 5,659,819 See Notes to Consolidated Financial Statements PHC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended September 30 1999 1998 (As restated) ___________________________ Cash flows from operating activities: Net Income (loss) $ (59,952) $ 13,473 Adjustments to reconcile net income or loss to net cash provided by (used in) operating activities: Depreciation and amortization 82,009 78,775 Compensatory stock options and stock and warrants issued for obligations 22,876 25,624 Changes in: Accounts receivable 400,432 (43,681) Prepaid expenses and other current assets (123,982) (25,289) Other assets (78,676) 30,436 Accounts payable (35,299) 344,811 Accrued expenses and other liabilities (130,540) (379,603) _____________ __________ Net cash provided by operating activities 76,868 44,546 _____________ __________ Cash flows from investing activities: Acquisition of property and equipment (27,965) (46,737) _____________ __________ Net cash used in investing activities (27,965) (46,737) _____________ __________ Cash flows from financing activities: Revolving debt, net (240,778) (123,968) Proceeds from borrowings 146,301 100,000 Payments on debt (270,891) (111,895) Deferred financing costs 5,677 (5,985) Preferred Stock Dividends (2,463) (1,763) Costs related to issuance of capital stock (10,322) -- _____________ __________ Net cash used in financing activities (372,476) (143,611) _____________ __________ NET INCREASE (DECREASE) IN CASH (323,573) (145,802) Beginning cash balance 381,170 227,077 _____________ __________ ENDING CASH BALANCE $ 57,597 $ 81,275 _____________ __________ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 195,764 $ 282,821 Income taxes 35,500 51,195 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of Preferred Stock in lieu of cash for Dividends due $ 10,000 $ 26,000 See Notes to Consolidated Financial Statements PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 1999 Note A - The Company PHC, Inc. (the "Company") is a national health care company specializing in the treatment of substance abuse, which includes alcohol and drug dependency and related disorders, and in the provision of psychiatric services. The Company currently operates two substance abuse treatment facilities: Highland Ridge Hospital, located in Salt Lake City, Utah; and Mount Regis Center, located in Salem, Virginia, near Roanoke and eight psychiatric facilities: Harbor Oaks Hospital, a 64-bed psychiatric hospital located in New Baltimore, Michigan; Harmony Healthcare, a provider of outpatient behavioral health services at two locations in Las Vegas, Nevada; Total Concept EAP, a provider of outpatient behavioral health services in Shawnee Mission, Kansas; and North Point-Pioneer, Inc. ("NPP") which operates four outpatient behavioral health centers under the name Pioneer Counseling Center in the greater Detroit metropolitan area. The Company also operates BSC-NY, Inc., which provides management and administrative services to psychotherapy and psychological practices in the greater New York City metropolitan area. Through its subsidiary, Behavioral Health Online, Inc., (BHO"), the Company operates its web site, Behavioralhealthonline.com. In June, 1998 the Company's sub acute long-term care facility, Franvale Nursing and Rehabilitation Center ("Franvale"), in Braintree, Massachusetts was closed in a State Receivership action which was precipitated when the Company caused the owner of the Franvale facility, Quality Care Centers of Massachusetts, Inc., to institute a proceeding under Chapter 11 of the Federal Bankruptcy Code. The net assets and liabilities of this facility are shown as discontinued operations on the accompanying financial statements. The liquidation of the assets and liabilities of Franvale may result in a non-cash financial statement gain of approximately $2,000,000. The recognition of the gain has been deferred until final resolution of all contingent liabilities. Note B - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending June 30, 2000. The accompanying financial statements should be read in conjunction with the June 30, 1999 consolidated financial statements and footnotes thereto included in the Company's 10-KSB filed on October 13, 1999 and 10-KSB/A filed on October 20, 1999. NOTE C - Restatement of September 30, 1998 financial information In July 1998 the Company issued warrants to purchase 72,500 shares of PHC, Inc. Class A common stock in a debt extension agreement. In error the value of these warrants was not charged as an expense during the period. The Company has restated the accompanying September 30, 1998 financial information to reflect the Black-Scholes value of these warrants as additional interest of $25,624. Item 2. Management's Discussion and Analysis or Plan of Operation PHC, INC. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net patient care revenue decreased 11.7% to $3,951,498 for the three months ended September 30, 1999 from $4,476,738 for the three months ended September 30, 1998. This decrease in revenue is due primarily to the close of the Virginia clinics, which accounted for $319,086 of the net revenue for the three months ended September 30, 1998 and an unusual, non-seasonal decline in census and revenue at Harbor Oaks and Mount Regis facilities. Marketing efforts have aided in increasing the census at Harbor Oaks but the census at Mount Regis center remained low through much of October 1999. Management fees increased by 33.1% to $265,404 for the three months ended September 30, 1999 from $199,453 for the three months ended September 30, 1998. This increase in revenue is due to increases in BSC-NY, Inc. related fees for the management of Psychological and Psychotherapy practices in New York. These management fees are expected to decline in future since they are now based on the expenses of BSC-NY, Inc. and there has been a decline in the expenses due to changes in operations and personnel. Administrative expenses decreased 7.5% to $1,762,564 for the three months ended September 30, 1999 from $1,905,917 for the three months ended September 30, 1998. Patient care expenses also decreased by 7.9% to $2,125,408 for the three months ended September 30, 1999 from $2,308,051 for the three months ended September 30, 1998. These decreases in expenses are due to the closing of the Salem, Virginia clinic in January 1999. Although some residual expenses related to the collection of receivables continued through the quarter ended September 30, 1999, these expenses have reduced considerably as expected. Year 2000 Compliance The Company's computer and software systems at the corporate office have all been tested and upgraded. All hardware and software at the corporate offices is now year 2000 compliant. Accounts receivable software has been upgraded and is currently year 2000 compliant at four of its eight operating facilities. The four remaining facilities are in the process of finalizing conversion decisions to allow for a smooth transition into the year 2000. All related system changes are expected to be final for testing by November 30, 1999 and operating live by December 31, 1999. In the event that installation of the software is delayed, each of the remaining facilities is making plans to complete the billing process by manually for those bills that are not currently processed through a third party electronic biller. Although this is a time consuming and costly alternative, it will allow the Company to continue processing bills. The Company is currently in the process of contacting each third party payor of accounts receivable, financial institution, major supplier of essential products and utility to request the status of their year 2000 compliance. The Company has received responses from approximately 60% of all vendors contacted. All operations critical equipment, telephones, elevators, etc., has been tested and found to be compliant. There are a few suppliers of goods and services critical to operations that have not yet responded. The Company has identified alternate sources for these goods and services. To date the Company has expended approximately $65,000 on items relating to the year 2000 issues and anticipates approximately $150,000 in additional expenses relating to the upgrade of Company's computer and telephone systems. Liquidity and Capital Resources A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. Net accounts receivable from patient care decreased during the quarter ended September 30, 1999 by 11.2%, approximately $440,000. This is primarily the result of a more aggressive collection policy. In response to today's healthcare environment, the Company's collection policy calls for earlier contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process. The Company continues to closely monitor its accounts receivable balances and is working to reduce amounts due consistent with growth in revenues. During the quarter ended September 30, 1999 the Company met its cash flow needs through ongoing accounts receivable financing and through debt and equity transactions as follows: DATE TRANSACTION TYPE NUMBER OF PROCEEDS MATURITY TERMS STATUS SHARES 7/99 Warrants issued for 10,000 07/01/2004 exercise price outstanding $1.00 7/99 Warrants issued for 37,500 07/05/2004 exercise price outstanding $1.45 8/99 Warrants issued for 10,000 08/01/2004 exercise price outstanding $1.00 8/98 Extension of existing $310,000 12/31/1999 $45,000 on outstanding signing plus prime 2.25% annual interest rate The Company believes that it has the necessary liquidity and capital resources and contingent funding commitments to sustain existing operations for the foreseeable future. The Company also intends to renew the expansion of its operations through new product lines and expansion of contracts. The Company will also expand through its web site operations offering the behavioral health professional goods and services unique and specific to their needs for a fee. Subsequent to September 30, 1999 the Company signed a promissory note for $160,000 in favor of Mellon US Leasing in settlement of the lease obligation of Quality Care Centers of Massachusetts, Inc., the Company's subsidiary that'instituted a proceeding under Chapter 11 of the Federal Bankruptcy Code. This lease obligation was fully guaranteed by the parent corporation, at the time of its original signing. The note calls for 36 monthly payments of $5,087.96 monthly beginning November 30, 1999 and bear interest at 9% per annum. FORWARD LOOKING STATEMENTS This quarterly report contains certain forward-looking statements regarding the Company, its business prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitations; the Company's ability to successfully and timely develop and finance new projects, the impact of competition on the Company's revenues, and changes in reimbursement rates, patient mix, and demand for the Company's services. When used, words such as believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report, news releases, and other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. PART II OTHER INFORMATION Item 6. Exhibits (a) Exhibit List Exhibit No. Description 10.68 Promissory Note by and between PHC, Inc. and Mellon US Leasing Corporation dated 27 Financial Data Schedule 99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Signatures In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHC, Inc. Registrant Date: November 15, 1999 /s/ Bruce A. Shear President Chief Executive Officer Date: November 15, 1999 /s/ Paula C. Wurts Controller Assistant Treasurer Exhibit 10.68 PROMISSORY NOTE $160,000.00 November _____ , 1999 For value received, PHC, Inc., d/b/a Pioneer Behavioral Health, (herein "Borrower"), promises to pay Mellon US Leasing, A Division of Mellon Leasing Corporation, or its assigns (herein "Lender"), at its offices of its attorneys, Cohn & Dussi, P.C. at 151 Merrimac Street, Suite 600, Boston, Massachusetts 02114 or such other address designated by Lender, the sum of One Hundred Sixty Thousand 00/1 00 ($160,000.00) Dollars, (the "Principal") together with interest thereon at the rate of Nine Percent (9%) per annum from November 1, 1999, payable as follows: Thirty-Six (36) consecutive monthly payments in the amount of Five Thousand Eighty-Seven and 96/100 ($5,087.96) Dollars per month commencing on November 1, 1999. Each monthly payment is due and payable on the thirtieth (30th) of each month until all monies due hereunder are paid. This Note may be prepaid in whole or in part at any time. Any prepayment shall be applied as directed by Borrower either to the last principal due hereunder or to proportionately reduce all succeeding payments. Lender shall accept payment of arrears; and if any defaulted payment is more than twenty (20) days in arrears, the Borrower shall pay as liquidated damages, in addition to all other amounts due hereunder, a late charge equal to five percent (5%) for each payment so in arrears, but only to the extent permitted by law. After the maturity date of this Note, the borrower shall pay interest on unpaid balances at the rate of twelve percent (12%) per annum. In the event Lender institutes an action upon this note, the borrower shall pay, in addition to unpaid principal, interest and late charges, the expenditures incurred by Lender, including costs and reasonable collection and attorneys' fees. In the event of default in the payment of any sums when due hereunder, at Lender's option, the due date of this Note may be accelerated so that the entire principal is immediately due and payable and the interest rate increases to twelve percent (12%) per annum. Borrower shall have the right to cure default by making payments within 30 days of the due date. Undersigned and any endorser waive presentment, demand for payment, notice of dishonor and protest and consent to any renewal, extension or modification of the terms of payment or release or substitution of security now or hereafter held as collateral for this Note. Any notices required hereunder shall be deemed sufficient if given personally in writing or delivered by regular First Class Mail to the party intended at its address shown herein or to any other intended recipient at its address shown below, or to such other address as the intended recipient shall have previously designated in writing. This Note shall be deemed delivered in Boston, Massachusetts, and the validity thereof shall be construed pursuant to the laws of the State of Massachusetts. The undersigned and each endorser hereby consent to the jurisdiction of any Federal Court in the State of Massachusetts or any State Court located in Massachusetts for any action or proceeding brought with respect to this Note. Nothing contained herein is intended to preclude Lender from commencing any action hereunder in any court having jurisdiction thereof. Service of process in any such action shall be sufficient if served by certified mail, return receipt requested, to the address of the party set forth herein. To the extent permitted by law, undersigned waives trial by jury in any action by or against Lender hereunder. This Note is given in full satisfaction of all amounts due from Borrower to Lender by reason of any transaction between Lender and either Borrower or any subsidiary of Borrower. (CORPORATE SEAL) PHC, Inc. d/b/a Pioneer Behavioral Health 200 Lake Street, Suite 102 Peabody, Massachusetts 01960 ATTEST: /s/ Terri Bates By: /s/ Bruce A. Shear Title: President -2- Exhibit 99.1 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR" PROVISIONS OF THE RIVATE LITIGATION REFORM ACT OF 1995 PHC, Inc. (the "Company") desires to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this Exhibit 99.1 in its Form 10-KSB in order to do so. The Company wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for the Company's current quarter and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. During its last fiscal year and in certain other fiscal years of its operation, the Company has generated losses and there can be no assurance that future losses will not occur. The Company has experienced a significant increase in accounts receivable in recent years and there can be no assurance that this trend will not continue, and that if it does, that it will not have a material adverse effect on the Company's cash flow and financial performance. The Company historically experiences and expects to continue to experience a decline in revenue in its fiscal quarters ending December 31 due to a seasonality decline in revenue from the Company's substance abuse facilities during such period. Payment for the company's substance abuse treatment is provided by private insurance carriers and managed care organizations; payment for long-term and subacute care is provided by private insurance carriers, managed care organizations and the Medicare and Medicaid programs; payment for psychiatric services is provided by private insurance carriers, managed care organizations and the Medicare and Medicaid programs. In general, revenues derived from the Medicare and Medicaid programs in connection with the long-term and subacute care services provided by the Company have been less profitable to the Company than revenues derived from private insurers and managed care organizations in connection with the substance abuse treatment provided by the Company and changes in the sources of the Company's revenues could significantly alter the Company's profitability. Additionally, the Company experiences greater delays in the collection of amounts reimbursable by the Medicare and Medicaid programs than in the collection of amounts reimbursable by private insurers and managed care organizations. Accordingly, a change in the Company's service mix from substance abuse to long-term care could have a materially adverse effect on the Company as would an increase in the percentage of the Company's patients who are insured by Medicare or Medicaid. Cost containment pressures from private insurers in the Medicare and Medicaid programs may begin to restrict the amount that the Company can charge for its services. There can be no assurance that the Company's existing facilities will continue to meet, or that proposed facilities will meet, the requirements for reimbursement by third party or government payors. The Company has substantial receivables from Medicare and Medicaid which constitute a concentration of credit risk should these agencies defer or be unable to make reimbursement payments as due. The Company often experiences significant delays in the collection of amounts reimbursable by third-party payors. Although the Company believes it maintains an adequate allowance for doubtful accounts, if the amount of receivables which eventually becomes uncollectible exceeds such allowance, the Company could be materially adversely affected. If a growing number of managed care organizations and insurance companies adopt policies which limit the length of stay for substance abuse treatment, the Company's business would be materially adversely affected. There can be no assurance that occupancy rates at the Company's facilities will continue at present levels. Similarly, there can be no assurance that the patient census will not decrease in the future. There can be no assurance that the Company will be successful in identifying appropriate acquisition opportunities, or if it does, that the Company will be successful in acquiring such facilities or that such acquired facilities will be profitable. The failure of the company to implement its acquisition strategy could have a materially adverse effect an the Company's financial performance. Moreover, the inherent risks of expansion could also have a material adverse effect on the Company's business. Additionally, the company's acquisition program will be directed by the President and Chief Executive officer of the Company and the Company does not intend to seek stockholder approval for any such acquisitions unless required by applicable law or regulations. Accordingly, investors will be substantially dependent upon the business judgment of management in making such acquisitions. Furthermore, the company's acquisition strategy is highly dependent on access to capital, of which there can be no assurance. The Company and the healthcare industry in general are subject to extensive federal, state and local regulation with respect to licensure and conduct of operations. There can be no assurance that the Company will be able to obtain new licenses to affect its acquisition strategy or maintain its existing licenses and reimbursement program participation approvals. It is not possible to accurately predict the content or impact of future legislation and regulations affecting the healthcare industry. In addition, both the Medicare and Medicaid programs are subject to statutory and regulatory changes and there can be no assurances that payments under those programs to the Company will, in the future, remain at a level comparable to the present level or be sufficient to cover the cost allocable to such patients. Bruce A. Shear the President and Chief Executive officer of the Company together with his affiliates is able to control all matters requiring approval of the stockholders, including the election of a majority of the directors, as a result of his ownership of the Company's stock. There can be no assurance that the Company will be successful in hiring or retaining the personnel it requires for continued growth, or that the Company will be able to continue to attract and retain highly qualified personnel, particularly skilled healthcare personnel. The healthcare business is highly competitive and subject to excess capacity. The Company has entered into relationships with large employers, healthcare institutions, labor unions and other key clients to provide treatment for chemical dependency and substance abuse as well as other services and the loss of any of these key clients would require the Company to expend considerable effort to replace patient referrals and would result in revenue losses to the Company and attendant loss in income. Existing environmental contamination at certain of the Company's facilities and potential future environmental contamination at facilities acquired by the company could have a materially adverse effect on the Company's operations. On October 31, 1994, the Company was served with a summons for a Civil Action in the Superior Court Department of the Trial Court of the Commonwealth of Massachusetts by NovaCare, Inc. ("NovaCare"), an entity which contracted with the Company in 1992 to provide rehabilitation therapy and related administrative services to the Company's long-term care facility (the "Action"). The complaint alleged that the Company owed NovaCare contractual damages in the amount of approximately $587,000, plus interest, attorney fees, costs of collection, and double or triple damages pursuant to a Massachusetts statute prohibiting unfair and deceptive trade practices. The Company filed a counterclaim alleging that NovaCare breached the contract in question and that the Company may be owed damages in excess of the amount sought by NovaCare. On February 13, 1996, the company settled the Action by agreeing to pay NovaCare an amount less than its claim. The Company is not paying NovaCare accrued interest, attorney's fees, costs of collection, or multiple damages. A portion of the settlement amount has already been paid. The balance of the settlement amount is payable over twelve (12) months with interest on the unpaid balance at 9.5%. In the event that the Company defaults on its obligation to pay the settlement amount, it has agreed to entry of judgment against it in the amount of $457, 637.46 (the "Judgment"). The Judgment represents the full unpaid balance of NovaCare's claim against the Company, including interest, attorney's fees, and costs of collection. Any amounts paid by the Company to NovaCare after February 9, 1996 shall be deducted from the Judgment. Until the settlement amount is paid, NovaCare will continue to hold a mortgage on a day care property owned by the Company in Saugus, Massachusetts. As of Fiscal Year Ended June 30, 1997, this obligation has been paid in full. Interruption by fire, earthquakes or other catastrophic events, power failures, work stoppages, regulatory actions or other causes to any of the Company's operations could have a materially adverse impact on the Company. The company has and in the future may enter into transactions in which it acquires businesses or obtains financing for a consideration that includes the issuance of stock, warrants, options or convertible debt at a price less than the value at which the Company's stock may then be trading in the public markets or which are convertible into or exercisable for Common Stock at a conversion rate or exercise price less than such value. Such transactions may result in significant dilution to the existing holders of the Company's stock. The Company has authorized 1,000,000 shares of Preferred Stock, the terms of which may be fixed and which may be issued by the Company's Board of Directors, without stockholder approval. The issuance of the Preferred Stock could have the effect of making it more difficult for a third party to acquire the Company and may result in the issuance of stock that dilutes the existing stockholders and has liquidation, redemption, dividend and other preferences superior to the Company's outstanding Class A Common Stock. NOTE: THIS DOES NOT DISCUSS PREFERRED STOCK, REDEMPTION OF WARRANTS, THE EFFECTS OF DE-LISTING FROM NASDAQ, PENNY STOCK RULES OR THIN FLOAT. THOSE SUBJECTS ARE, HOWEVER, INCLUDED IN THE RISK-FACTOR SECTION OF THE 06/97 S-3.