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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 [FEE REQUIRED] for the fiscal year ended June 30, 1999
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 [NO FEE REQUIRED] for the transition period from to
Commission file number: 0-23524
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 (New area code)
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, 1999 were $ 19,139,496.
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 September 15, 1999, was $6,353,776. (See
definition of affiliate in Rule 12b-2 of Exchange Act).
At September 15, 1999, 5,610,194 shares of the issuer's Class A Common Stock and
727,170 shares of the issuer's Class B Common Stock were outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
Yes No X
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
PHC, Inc. with its subsidiaries (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 the Las Vegas, Nevada area; 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.
("BSC"), 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.
The Company's 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 and
subacute facilities (i.e., facilities designed to provide care to individuals
who no longer require hospital care but who require some medical care), which
permits the Company to provide its clients with efficient and customized
treatment without the significant costs associated with the management and
operation of general acute care hospitals. The Company tailors these programs
and services to "safety-sensitive" industries and concentrates its marketing
efforts on the transportation, oil and gas exploration, heavy equipment,
manufacturing, law enforcement, gaming, and health services industries.
Harbor Oaks provides psychiatric care to children, adolescents and adults.
The Company draws patients from the local population and uses the facility as a
mental health resource to complement its substance abuse facilities. Harmony
Healthcare and Total Concept provide psychiatric treatment for adults,
adolescents and children. BSC is a manager of psychological service providers
with contracts at over 35 long-term care facilities. NPP provides outpatient
psychiatric treatment for adults, adolescents and children in the Metropolitan
Detroit area.
Behavioral Health Online, Inc. designs, develops and maintains the
Company's web site, Behavioralhealthonline.com. The web site, was designed to
provide products, information, and instruction to behavioral health
professionals and consumers for a fee.
In May 1998 the Company closed Good Hope Center, a substance abuse
treatment facility located in West Greenwich, Rhode Island and entered into an
agreement terminating the lease for the facility. All obligations under this
closure agreement were met by June 30, 1999. In June, 1998 the Company's sub
acute long-term care facility, Franvale Nursing and Rehabilitation Center, 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 receivership was terminated September 16,
1998 and on October 5, 1998 Quality Care Centers of Massachusetts, Inc. filed a
Chapter 7 bankruptcy petition. A Trustee has been appointed; however, the
bankruptcy proceedings have not been finalized. For additional information see
"Business-Closed and Discontinued Operations-Franvale." In January 1999 the
Company closed its 80% owned outpatient operations in Virginia, Pioneer
Counseling of Virginia, Inc. The Company sold this business and retained
accounts receivable and most fixed assets, to the minority owners in exchange
for their shares of stock in Pioneer Counseling of Virginia, Inc., approximately
$25,000, release from the first mortgage on the property of approximately
$506,000 and release from Notes Payable to the minority owners of $20,000.
The Company intends to limit its business operations to behavioral health
through facilities providing services to particular markets through customized,
outcome-oriented programs, which the Company believes produce overall cost
savings to the patient or client organization and its web site which will
provide behavioral health professionals with the educational tools required to
keep them abreast of behavioral health breakthroughs and keep individuals
informed of current issues in behavioral health of interest to them.
The Company's substance abuse facilities provide treatment services
designed to prevent relapse. Such services, while potentially more costly on a
per patient stay basis, often result in long-term health care cost savings to
insurers, patients and patients' families. The goal of the Company's psychiatric
treatment programs is to provide care at the lowest level of intensity
appropriate for the patient in an integrated delivery system that includes
inpatient and outpatient treatment opportunities. The integrated nature of the
Company's psychiatric programs, which generally involves the same caregivers
supervising different treatment modalities, provides for efficient care delivery
and the avoidance of repeat procedures and diagnostic and therapeutic errors.
The Company was organized as a Delaware corporation in 1976 under the name
American International Health Services, Inc. In 1980, the Company merged into an
inactive publicly held Massachusetts Corporation and was the surviving
corporation in the merger. The Company changed its name to "PHC, Inc." as of
November 24, 1992. The Company is based in Massachusetts and is unaffiliated
with an inactive Minnesota corporation of the same name. The Company does
business under the trade name "Pioneer Healthcare" and "Pioneer Behavioral
Health." With the exception of the services provided directly by the Company
under the name Pioneer Development Support Services, the Company operates as a
holding company, providing administrative, legal and programmatic support to its
subsidiaries. The Company's executive offices are located at 200 Lake Street,
Suite 102, Peabody, Massachusetts, 01960 and its telephone number is (978)
536-2777.
PSYCHIATRIC SERVICES INDUSTRY
Substance Abuse Facilities
Industry Background
The demand for substance abuse treatment services increased rapidly in the
last decade. The Company believes that the increased demand is related to
clinical advances in the treatment of substance abuse, greater societal
willingness to acknowledge the underlying problems as treatable illnesses,
improved health insurance coverage for addictive disorders and chemical
dependencies and governmental regulation which requires certain employers to
provide information to employees about drug counseling and employee assistance
programs.
To contain costs associated with behavioral health issues in the 1980s,
many private payors instituted managed care programs for reimbursement, which
included pre-admission certification, case management or utilization review and
limits on financial coverage or length of stay. These cost containment measures
have encouraged outpatient care for behavioral problems, resulting in a
shortening of the length of stay and revenue per day in inpatient chemical abuse
facilities. The Company believes that it has addressed these cost containment
measures by specializing in treating relapse-prone patients with poor prognoses
who have failed in other treatment settings. These patients require longer
lengths of stay and come from a wide geographic area. The Company continues to
develop alternatives to inpatient care including partial day and evening
programs in addition to on site and off site outpatient programs.
The Company believes that because of the apparent unmet need for certain
clinical and medical services, its strategy has been successful despite national
trends towards outpatient treatment, shorter inpatient stays and rigorous
scrutiny by managed care organizations.
Company Operations
The Company has been able to secure insurance reimbursement for longer-term
inpatient treatment as a result of its success with poor prognosis patients. The
Company's two substance abuse facilities work together to refer patients to the
center that best meets the patient's clinical and medical needs. Each facility
caters to a slightly different patient population including high-risk,
relapse-prone chronic alcoholics, drug addicts, minority groups and dual
diagnosis patients (those suffering from both substance abuse and psychiatric
disorders). The Company concentrates on providing services to insurers, managed
care networks and health maintenance organizations for both adults and
adolescents. The Company's clinicians often work directly with managers of
employee assistance programs to select the best treatment facility possible for
their clients.
Each of the Company's facilities operates a case management program for
each patient including a clinical and financial evaluation of a patient's
circumstances to determine the most cost-effective modality of care from among
outpatient treatment, detoxification, inpatient, day care, specialized relapse
treatment and others. In addition to any care provided at one of the Company's
facilities, the case management program for each patient includes aftercare.
Aftercare may be provided through the outpatient services provided by a
facility. Alternatively, the Company may arrange for outpatient aftercare, as
well as family and mental health services, through its numerous affiliations
with clinicians located across the country once the patient is discharged.
In general, the Company does not accept patients who do not have either
insurance coverage or adequate financial resources to pay for treatment. Each of
the Company's substance abuse facilities does, however, provide treatment free
of charge to a small number of patients each year who are unable to pay for
treatment, but who meet certain clinical criteria and who are believed by the
Company to have the requisite degree of motivation for treatment to be
successful. In addition, the Company provides follow-up treatment free of charge
to relapse patients who satisfy certain criteria. The number of patient days
attributable to all patients who receive treatment free of charge in any given
fiscal year is less than 5%.
The Company believes that it has benefited from an increased awareness of
the need to make substance abuse treatment services accessible to the nation's
workforce. For example, subchapter D of the Anti-Drug Abuse Act of 1988
(commonly known as The Drug Free Workplace Act), requires employers who are
Federal contractors or Federal grant recipients to establish drug free awareness
programs to inform employees about available drug counseling, rehabilitation and
employee assistance programs and the consequences of drug abuse violations. In
response to the Drug Free Workplace Act, many companies, including many major
national corporations and transportation companies, have adopted policies that
provide for treatment options prior to termination of employment.
Although the Company does not provide federally approved mandated drug
testing, the Company treats employees who have been referred to the Company as a
result of compliance with the Drug Free Workplace Act, particularly from
companies that are part of the gaming industry as well as safety sensitive
industries such as railroads, airlines, trucking firms, oil and gas exploration
companies, heavy equipment companies, manufacturing companies and health
services.
HIGHLAND RIDGE
Highland Ridge is a 34-bed, freestanding alcohol and drug treatment
hospital, which the Company has been operating since 1984. It is the oldest
facility dedicated to substance abuse in Utah. Highland Ridge is accredited by
the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") and
is licensed by the Utah Department of Health. Highland Ridge is recognized
nationally for its excellence in treating substance abuse disorders.
Most patients are from Utah and surrounding states. Individuals typically
access Highland Ridge's services through professional referrals, family members,
employers, employee assistance programs or contracts between the Company and
health maintenance organizations located in Utah.
Highland Ridge was the first private for-profit hospital to address
specifically the special needs of chemically dependent women in Salt Lake
County. In addition, Highland Ridge has contracted with Salt Lake County to
provide medical detoxification services targeted to women. The hospital also
operates a specialized continuing care support group to address the unique needs
of women and minorities.
A pre-admission evaluation, which involves an evaluation of psychological,
cognitive and situational factors, is completed for each prospective patient. In
addition, each prospective patient is given a physical examination upon
admission. Diagnostic tools, including those developed by the American
Psychological Association, the American Society of Addiction Medicine and the
Substance Abuse Subtle Screening Inventory are used to develop an individualized
treatment plan for each client. The treatment regimen involves an
interdisciplinary team which integrates the twelve-step principles of self-help
organizations, medical detoxification, individual and group counseling, family
therapy, psychological assessment, psychiatric support, stress management,
dietary planning, vocational counseling and pastoral support. Highland Ridge
also offers extensive aftercare assistance at programs strategically located in
areas of client concentration throughout the United States. Highland Ridge
maintains a comprehensive array of professional affiliations to meet the needs
of discharged patients and other individuals not admitted to the hospital for
treatment.
Highland Ridge periodically conducts or participates in research projects.
Highland Ridge was the site of a recent research project conducted by the
University of Utah Medical School. The research explored the relationship
between individual motivation and treatment outcomes. The research was regulated
and reviewed by the Human Subjects Review Board of the University of Utah and
was subject to federal standards that delineated the nature and scope of
research involving human subjects. Highland Ridge benefited from this research
by expanding its professional relationships within the medical school community
and by applying the findings of the research to improve the quality of services
the Company delivers.
SPECIALIZED TREATMENT SERVICE
In the spring of 1994, the Company began to operate a crisis hotline
service under contract with a major transportation client. The hotline, Pioneer
Development Support Services, or PDS2 ("PDS2"), 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, 1999. This operation is physically
located in Highland Ridge Hospital, but a staff dedicated to PDS2 provides the
services. PDS2 is currently operated by the parent entity, PHC, Inc.
MOUNT REGIS
Mount Regis is a 25-bed, freestanding alcohol and drug treatment center
located in Salem, Virginia, near Roanoke. The Company acquired the center in
1987. It is the oldest of its kind in the Roanoke Valley. Mount Regis is
accredited by the JCAHO, and licensed by the Department of Mental Health, Mental
Retardation and Substance Abuse Services of the Commonwealth of Virginia. In
addition, Mount Regis operates Changes, a freestanding outpatient clinic. The
Changes clinic provides structured intensive outpatient treatment for patients
who have been discharged from Mount Regis and for patients who do not need the
formal structure of a residential treatment program. The program is licensed by
the Commonwealth of Virginia and approved for reimbursement by major insurance
carriers
Mount Regis Center's programs are sensitive to needs of women and
minorities. The majority of Mount Regis clients are from Virginia and
surrounding states. In addition, because of its relatively close proximity and
accessibility to New York, Mount Regis has been able to attract an increasing
number of referrals from New York-based labor unions. Mount Regis has
established programs that allow the Company to better treat dual diagnosis
patients (those suffering from both substance abuse and psychiatric disorders),
cocaine addiction and relapse-prone patients. The multi-disciplinary case
management, aftercare and family programs are key to the prevention of relapse.
General Psychiatric Facilities
Introduction
The Company believes that its proven ability to provide high quality,
cost-effective care in the treatment of substance abuse has enabled it to grow
in the related behavioral health field of psychiatric treatment. The Company's
main advantage is its ability to provide an integrated delivery system of
inpatient and outpatient care. As a result of integration, the Company is better
able to manage and track patients.
The Company offers inpatient and partial hospitalization psychiatry
services through Harbor Oaks Hospital. The Company also currently operates seven
outpatient psychiatric facilities.
The Company's philosophy at these facilities is to provide the most
appropriate and efficacious care with the least restrictive modality of care. An
attending physician and a case manager with continuing oversight of the patient
as the patient receives care in different locations or programs handle case
management. The integrated delivery system allows for better patient tracking
and follow-up, and fewer repeat procedures and therapeutic or diagnostic errors.
Qualified, dedicated staff members take a full history on each new patient and
through test and evaluation procedures they provide a thorough diagnostic
write-up of the patient's condition. In addition a Physician does a complete
physical examination for each new patient. This information allows the
caregivers to determine which treatment alternative is best suited for the
patient and to design an individualized recovery program for the patient.
Managed health care organizations, state agencies, physicians and patients
themselves refer patients to our facilities. These facilities have a patient
population ranging from children as young as 5 years of age to senior citizens.
The psychiatric facilities treat a larger percentage of female patients than the
substance abuse facilities.
HARBOR OAKS
The Company acquired Harbor Oaks Hospital, a 64-bed psychiatric hospital
located in New Baltimore, Michigan, approximately 20 miles northeast of Detroit,
in September 1994. Harbor Oaks Hospital is licensed by the Michigan Department
of Commerce and it is accredited by JCAHO. Harbor Oaks provides inpatient
psychiatric care, partial hospitalization and outpatient treatment to children,
adolescents and adults. Harbor Oaks Hospital has serviced clients from Macomb,
Oakland and St. Clair Counties and has now expanded its coverage area to include
Wayne, Sanilac and Livingston Counties.
Until March 1998, Harbor Oaks Hospital worked in conjunction with New Life
Treatment Centers, Inc. ("New Life") to offer counseling programs with a
traditional Christian philosophy on an inpatient and partial hospitalization
basis. The Company and New Life terminated the contract by mutual agreement on
May 22, 1998.
The Company utilizes the Harbor Oaks facility as a mental health resource
to complement its nationally focused substance abuse treatment programs. Harbor
Oaks Hospital has a specialty program that treats substance abuse patients who
have a coexisting psychiatric disorder. This program provides an integrated
holistic approach to the treatment of individuals who have both substance abuse
and psychiatric problems. Both adults and adolescents can benefit from this
program.
On February 10, 1997, Harbor Oaks Hospital opened an 8-bed adjudicated
residential unit serving adolescents with a substance abuse problem and a
co-existing mental disorder who have been adjudicated to have committed criminal
acts and who have been referred or required to undergo psychiatric treatment by
a court or family service agency. The patients in the program range from 13 to
18 years of age. The program provides patients with educational and recreational
activities and adult life functioning skills as well as treatment. Typically, a
patient is admitted to the unit for an initial period of 30 days to six months.
A case review is done for any patient still in the program at six months, and
each subsequent six-month period thereafter, to determine if additional
treatment is required. State authorization allowed the Company to increase the
number of beds in the adjudicated residential unit to twelve on May 1, 1998 and
twenty on June 26, 1998.
In addition to direct patient care, Harbor Oaks works with major
manufacturers of psychiatric pharmaceuticals to assist in the study of the
effects of certain FDA approved products in the treatment of specific mental
illness.
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, the Mirage and Treasure Island resorts with a rapid
response program to provide immediate assistance 24 hours a day. Harmony also
provides outpatient psychiatric care and inpatient psychiatric case management
through a capitated rate behavioral health carve-out with Pacific Care
Insurance.
Total Concept EAP
Total Concept, an outpatient clinic located in 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 four psychiatric clinics in Michigan. The clinics provide
outpatient psychiatric and substance abuse treatment to children, adolescents
and adults operating under the name Pioneer Counseling Center. The four clinics
are located in close proximity to the Harbor Oaks facility, which provides more
efficient integration of inpatient and outpatient services, a larger coverage
area and the ability to share personnel which results in cost savings.
BSC-NY, Inc.
BSC provides management and administrative services to psychotherapy and
psychological practices in the greater New York City metropolitan area.
Behavioral Health Online, Inc.
BHO designs, develops and maintains the Company's web site,
Behavioralhealthonline.com. The web site when fully operational will provide
behavioral health professionals with the educational tools required to keep them
abreast of behavioral health breakthroughs and keep individuals informed of
current issues in behavioral health of interest to them. The site was launched
in May 1999.
Operating Statistics
The following table reflects selected financial and statistical information
for all psychiatric services.
Year Ended June 30,
1999 1998 1997
Inpatient*
Net patient service revenues $ 10,491,517 $ 13,640,801 $ 13,557,703
Net revenues per patient day(1) $ 400 $ 476 $ 414
Average occupancy rate (2) 58.4% 51.7% 58.8%
Total number of licensed beds at
end of period 123 123 172
Source of Revenues:
Private (3) 81.5% 86.9% 91.6%
Government (4) 18.5% 13.1% 8.4%
Partial Hospitalization and Outpatient
Net Revenues:*
Individual $ 5,356,008 $4,705,454 $ 5,629,760
Contract $ 1,682,453 $ 1,423,098 $ 1,459,580
Sources of revenues:
Private 98.9% 94.0% 98.4%
Government 1.1% 6.0% 1.6%
Other Psychiatric Services
PDSS (5) $ 942,637 $ 763,086 $ 629,761
Practice Management (6) $ 576,881 $ 713,750 $ 650,852
* Includes revenue from Good Hope Center which was closed in May 1998:
Inpatient $ 0 $1,012,679 $ 1,300,745
Outpatient $ 0 $ 331,057 $ 457,018
* Includes revenue from Pioneer Counseling of Virginia which was closed in
January 1999:
Outpatient $ 537,688 $ 963,352 $ 227,601
(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) PDSS, Pioneer Development and Support Services, provides clinical support,
referrals management and professional services for a number of the
Company's national contracts.
(6) Practice Management revenue is produced through BSC-NY.
Closed and Discontinued Operations
Franvale
The Company engaged Oasis Management Company ("Oasis") on November 1, 1996
to June 30, 1997 to provide management services to Franvale. On February 19,
1997, the Massachusetts Department of Public Health, as the result of a routine
survey, cited the Company's Franvale Nursing and Rehabilitation Center
("Franvale") for serious patient care and safety deficiencies. The State imposed
a civil penalty on the Company of $3,050 per day and reduced it to $2,250 per
day on March 12, 1997. The State reduced the fine to $90,545 in total after the
Company filed an appeal. The Department of Public Health and the federal agency,
HCFA, notified the Company at the time of the original citation, that Franvale
would be terminated from the Medicare and Medicaid programs unless Franvale was
in substantial compliance with regulatory requirements by March 14, 1997.
Franvale submitted a plan of correction to the Department of Public Health and
on March 12, 1997, as the result of a resurvey by the Department of Public
Health, a new statement of deficiencies was issued, which contained a
significant number of violations but recharacterized the level of seriousness of
the deficiencies to a lower degree of violation and which extended the
threatened date of termination to April 30, 1997.
As a result of the new statement of deficiencies, the Department of Public
Health had precluded the Company from admitting new patients to its Franvale
facility until at least April 30, 1997. However, on April 11, 1997, the Company
received authority to admit new patients on a case-by-case basis. The State
permitted previous patients to be readmitted to the Franvale facility only after
a case-by-case review by the Department of Public Health. The Company was
obligated to notify the attending physician of each resident of Franvale who was
found to have received substandard care of the deficiency notice and was
obligated also to notify the Massachusetts board which licenses the
administrator of Franvale.
On April 19, 1997 the Department of Public Health, Division of Health Care
Quality completed a follow-up survey of the Franvale Nursing Home. As a result
of this survey it was determined that all deficiencies cited from the April 17,
1997 visit had been corrected and the restrictions on Franvale's ability to
admit patients were lifted.
The Company replaced the management team at Franvale and expended
significant sums for staffing and programmatic improvements in order to bring
the facility into substantial compliance at the earliest possible date. The
Company conducted an intensive staff review, which resulted in a total
reorganization. The new staff was provided with in-service training.
On January 29, 1998 Franvale was again cited for patient care and safety
deficiencies by the Massachusetts Department of Public Health as a result of a
routine survey. A civil penalty of $224,250 was imposed for the period of time
that the facility was not in compliance. At the time of the citation the Company
was notified by the Department of Public Health and by the federal agency, HCFA,
that Franvale would be terminated from the Medicare and Medicaid programs if the
facility was not in substantial compliance with regulatory requirements by
February 21, 1998. As a result of this statement of deficiencies Franvale was
precluded from readmitting patients or admitting new patients. As of February
13, 1998 the ban from readmission was removed; however, Franvale was still
unable to admit new patients until after the resurvey was completed and the
facility was found to be in substantial compliance with Federal requirements.
On April 14, 1998 the State completed the resurvey of Franvale to determine
if the facility had corrected all patient care and safety deficiencies cited by
the Massachusetts Department of Public Health in its January 29, 1998 routine
survey. As a result of the resurvey the facility was found to be in substantial
compliance with regulatory requirements. In its letter of April 23, 1998 the
State Department of Public Health advised the facility that "all deficiencies
were found to have been corrected" and the facility "is now in substantial
compliance ...with the federal regulations applicable to long term care
facilities". The Department of Public Health also advised the facility in this
letter that it was withdrawing its recommendation to the Health Care Finance
Administration (HCFA) that the facility certification be terminated, and
recommending the denial of payment for new admissions and any civil monetary
penalties imposed on the facility cease as of the date the facility alleged that
it was in substantial compliance, which was March 29, 1998.
Despite the successful survey as documented in the Department's letter, the
notice continues by advising the facility that the "limitation on admissions
previously imposed ... shall remain in effect, irrespective of whether HCFA
accepts the state's recommendation to rescind its pending Medicaid termination
action, on the grounds that the Department has initiated and there is currently
pending a license revocation action against the facility.
On February 12, 1998, the Company entered into an Asset Purchase Agreement
with Lexington Healthcare Group, Inc. to sell substantially all the assets and
liabilities of Franvale Nursing and Rehabilitation Center. The inability of
Franvale to admit new patients and the State's pending license revocation made
completion of the sale an impossibility.
As a result of the decrease in census resulting from the inability of
Franvale to admit new patients and the limitations on its ability to re-admit
patients, the monetary penalties and the expenses that had been incurred by the
Company in correcting the cited deficiencies, continued facility cash flow
deficit of approximately $80,000 monthly, the stall of the sale of Franvale and
the probability that the State would not lift the admission freeze on the
facility, the Company concluded that it should file for protection under Chapter
11 of the United States Bankruptcy Code for the wholly owned subsidiary Quality
Care Centers of Massachusetts, Inc. which operates Franvale Nursing and
Rehabilitation Center.
On May 26, 1998 Franvale Nursing and Rehabilitation Center, filed for
reorganization under Chapter 11 of the United States bankruptcy Code in the
Eastern Division of the District of Massachusetts at Boston, Massachusetts. The
case was assigned to C J Kenner. On May 27, 1998 on motion of Franvale, the
court authorized the appointment of a Trustee and appointed Joseph Braunstein as
the Chapter 11 Trustee. On May 29, 1998, the Bankruptcy Court terminated the
Chapter 11 proceeding determining that there was no likelihood of reorganization
since the prospective acquirer of the facility was now imposing certain terms
unacceptable to all interested parties and that the transfer of patients and
liquidation of assets could be as readily effectuated in a state court
receivership under the aegis of the Massachusetts Health Care Statutes and
accordingly dismissed the Chapter 11 case. On June 1, 1998, on the Petition of
the Attorney General of the Commonwealth of Massachusetts on behalf of the
Department of Public Health with the acquiescence of Franvale, Robert Griffin
was appointed by J. Kottmyer as Receiver to transfer the patients and close the
facility expeditiously.
In October 1998 the Company's Bankruptcy Attorney received notification
that as of September 30, 1998 the patient care receivership for Quality Care
Centers of Massachusetts, Inc. was terminated. On October 5, 1998, in response
to the termination of the State Receivership, the Company filed for protection
under Chapter 7 of the United States bankruptcy Code in the Eastern Division of
the District of Massachusetts at Boston, Massachusetts. On October 7, 1998 the
court appointed Mark G. DeGiacomo as the Chapter 7 Trustee.
As a consequence of Franvale's bankruptcy and subsequent receivership, a
number of claims have been asserted against the Company or may be asserted
against the Company in the future. To date, such claims are as follows:
The Commonwealth of Massachusetts named Franvale, the Company and Bruce
Shear as party defendants in the Commonwealth receivership action, C.A. No.
98-2783 in the Superior Court, Suffolk County. On June 28, 1999, the Superior
Court entered a judgment of dismissal, dismissing the case without prejudice and
without costs, as of September 16, 1998. The Company understands that the
facility has been closed, all patients transferred and that the Commonwealth
receiver has resigned.
The Commonwealth of Massachusetts may institute a claim seeking to recover
any expenses incurred but not recovered by the Commonwealth as a consequence of
Franvale's receivership. The Commonwealth has a receivership statute that allows
the Commonwealth to seek indemnification for receivership expenses from
"licensee[s], persons responsible for the affairs of the licensee, or the
owner." Under Commonwealth law, the Commonwealth could seek to hold the Company
liable as a "licensee" or "a person responsible for the affairs of the licensee
[Franvale]." Management believes that there are defenses to any such claim. At
this time the potential claim does not appear to be a material issue, however,
since the Company understands that Franvale's collectible accounts receivable
are far in excess of the operating expenses and the receiver's fees that were
incurred during the receivership.
On or about September 14, 1998, the Company and its wholly owned
subsidiary, Franvale, were each served with document subpoenas in connection
with an on-going investigation of Franvale being conducted by the Massachusetts
Medicaid Fraud Control Unit. The focus of the investigation appears to be the
quality of patient care provided by Franvale during the period of early 1997
until the facility was placed into receivership in June 1998. The Company has
cooperated fully with the investigation including the production of documents.
While no specific dollar demand has yet been asserted by the state, the Attorney
General's office has indicated that a payment will be required to settle this
action. Preliminary negotiations between the Company and the State are under
way.
The Company has been named as a defendant in a proceeding captioned
Healthcare Services Group, Inc. v. Quality Care Centers of Massachusetts, Inc.
and PHC, Inc., C.A. No. 98-132 (Sup. Ct., Suffolk Co., MA). The plaintiff,
supplier of housekeeping and laundry services to Franvale, alleges two causes of
action against the Company in the Substitute First Amended Complaint. In Count
III (Accord and Satisfaction), plaintiff seeks $51,845 for the Company's alleged
breach of an agreement to pay plaintiff the money it was owed. In Count IV
(Guaranty), plaintiff alleges that the Company agreed to pay Franvale's debt but
did not do so; plaintiff seeks a judgment of $67,412. The Company filed an
answer contesting plaintiff's claims. Plaintiff propounded requests for
admissions to which the Company responded. Plaintiff recently noticed two
depositions and served the Company with a request for documents. Discovery was
set to close September 1, 1999, but was extended by the consent of the parties.
At this time it is not possible for the Company to evaluate the likelihood of an
unfavorable outcome or to predict the Company's potential loss. Based on the ad
damnum clause of the Substitute First Amended Complaint, the maximum potential
loss to the Company is alleged to be $67,412, plus costs and interest from the
date of demand.
On or about November 4, 1998, Mellon US Leasing, a division of Mellon
Leasing Corporation, a successor in interest to US Capital Corp. ("Mellon"),
brought a lawsuit against the Company in the Superior Court for Essex County,
Massachusetts, C.A. No. 98-2116. Mellon alleged that the Company had guaranteed
a lease agreement entered into by Quality Care Centers of Massachusetts, on
which Quality Care had defaulted. Mellon sought damages of $222,005, plus
interest costs and reasonable attorney's fees. Since the company did guarantee
of this debt of the subsidiary at the inception of the lease, on or about July
28, 1999, the Company and Mellon reached an agreement in principle, although no
documents have yet been signed memorializing the settlement. The terms of the
settlement are that the Company will pay Mellon the sum of $150,000 over a
period of 36 months at the interest rate of 9 percent per year in exchange for
dismissal of the lawsuit and the execution of releases.
The liquidation of the assets and liabilities of Franvale may result in a
non-cash financial statement gain of approximately $2,000,000. In the quarter
ended December 31, 1998 the company was relieved of the HUD mortgage of
approximately $6,741,000 and surrendered the underlying assets amounting to
approximately $4,329,000. The recognition of the gain has been deferred until
final resolution of all contingent liabilities.
Good Hope Center
Good Hope Center is a 49-bed substance abuse treatment facility located in
West Greenwich, Rhode Island which, until May, 1998 was operated by the
Company's subsidiary PHC of Rhode Island, Inc.
The Good Hope Center operated at a loss for the fiscal years ended June 30,
1998 and 1997 because of a decline in census, length of stay and lower
reimbursements from third party payors. Efforts to increase length of stay and
improve market share were unsuccessful requiring the closure of the facility.
In May 1998 the Company closed Good Hope Center and entered into an
agreement terminating the lease for the facility. As of June 30, 1999, the
company paid all of the expenses related to the facility and met all of the
terms of the agreement. During the fiscal year ended June 30, 1999, the Company
collected over $100,000 in accounts receivable previously written off resulting
in Net Income of approximately $108,000 for the facility for the year.
Pioneer Counseling of Virginia, Inc.
In June 1998 the Company decided to close the Blacksburg Clinic and
consolidate the Blacksburg resources and operations with the Salem Clinic
operations to enhance profitability of Pioneer Counseling of Virginia, Inc. The
write down of assets and anticipated costs related to the closing of the
Blacksburg clinic are reflected in the accompanying June 30, 1998 Financial
Statements. In December 1998 the Company decided to close the remaining Pioneer
Counseling of Virginia clinic located in Salem, Virginia. Since the Company was
required by contract to give 30-days notice to contract therapists before
closing the clinic, in January 1999 the Company closed its 80% owned outpatient
operations in Virginia, Pioneer Counseling of Virginia, Inc. The Company sold
this business, excluding accounts receivable and most fixed assets, to the
minority owners in exchange for their shares of stock in Pioneer Counseling of
Virginia, Inc. approximately $25,000, release from the first mortgage on the
property of approximately $506,000 and release from Notes Payable to the
minority owners of $20,000.
Operating Statistics
The following table reflects closed and discontinued operations:
For the Year Ended
June 30
1999 1998 1997
Discontinued Operations
Franvale:
Loss $ 0 $(2,220,296) $(1,958,756)
Closed Operations
Good Hope Center
Income (Loss) $ 108,372 $(1,540,772) $ (642,119)
Pioneer Counseling Centers of
Virginia, Inc.
Loss $ (811,957) $ (583,188) $ (120,914)
The Company experienced a recovery of accounts written off resulting in net
income from Good Hope Center in fiscal year 1999. No further significant
recoveries of this nature are expected in future periods.
Business Strategy
The Company's objective is to become a 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.
The Company employs six individuals dedicated to marketing among the
Company's facilities. Each facility performs marketing activities in its local
region. The National Marketing Director of the Company coordinates the majority
of the Company's national marketing efforts. In addition, employees at certain
facilities perform national marketing activities independent of the National
Marketing Director. The Company, with the support of its owned integrated
outpatient systems and management services, continues to pursue more at-risk
contracts and outpatient, managed health care fee-for-service contracts. In
addition to providing excellent services and treatment outcomes, the Company
will continue to negotiate pricing policies to attract patients for long-term
intensive treatment which meet length of stay and clinical requirements
established by insurers, managed health care organizations and the Company's
internal professional standards.
The Company's integrated system of comprehensive outpatient mental health
clinics and physician practices managed by the Company complement the Company's
inpatient facilities. These clinics and medical practices are strategically
located in Nevada, Virginia, Kansas City, Michigan, Utah and New York. They make
it possible for the Company to offer wholly integrated, comprehensive, mental
health services for corporations and managed care organizations on an at-risk or
exclusive fee-for-service basis. Additionally, the Company operates Pioneer
Development and Support Services (PDS2) located in the Highland Ridge facility
in Salt Lake City, Utah. PDS2 provides clinical support, referrals, management
and professional services for a number of the Company's national contracts. It
gives the Company the capacity to provide a complete range of fully integrated
mental health services.
The Company has been successful in securing a number of national accounts
with a variety of corporations including: Boyd Gaming, Canadian Rail, Conrail,
CSX, the IUE, MCC, MGM, Station Casinos, Union Pacific Railroad, Union Pacific
Railroad Hospital Association, VBH, and others.
In addition to its direct patient care services, the Company launched its
web site, Behavioralhealthonline.com, in May 1999. Although many of the articles
published on the web site are of interest to the general public, the Company's
primary target market is the behavioral health professional. When fully
operational the site will not only provide information to the behavioral health
professional, but will also provide a time and cost effective alternative for
acquiring the professional educational units required each year.
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,
employees and treatment facilities.
Revenue Sources And Contracts
The Company has entered into relationships with numerous employers, labor
unions and third-party payors to provide services to their employees and members
for the treatment of substance abuse and psychiatric disorders. In addition, the
Company admits patients who seek treatment directly without the intervention of
third parties and whose insurance does not cover these conditions in
circumstances where the patient either has adequate financial resources to pay
for treatment directly or is eligible to receive free care at one of the
Company's facilities. The Company's psychiatric patients either have insurance
or pay at least a portion of treatment costs. Free treatment provided each year
amounts to less than 5% of the Company's total patient days.
Each contract is negotiated separately, taking into account the insurance
coverage provided to employees and members, and, depending on such coverage, may
provide for differing amounts of compensation to the Company for different
subsets of employees and members. The charges may be capitated, or fixed with a
maximum charge per patient day, and, in the case of larger clients, frequently
result in a negotiated discount from the Company's published charges. The
Company believes that such discounts are appropriate as they are effective in
producing a larger volume of patient admissions. The Company treats non-contract
patients and bills them on the basis of the Company's standard per diem rates
and for any additional ancillary services provided to them by the Company.
Quality Assurance And Utilization Review
The Company has established comprehensive quality assurance programs at all
of its facilities. These programs are designed to ensure that each facility
maintains standards that meet or exceed requirements imposed upon the Company
with the objective of providing high-quality specialized treatment services to
its patients. To this end, the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") survey and accredit the Company's inpatient facilities
and the Company's outpatient facilities comply with the standards of National
Commission Quality Assurance ("NCQA") although the facilities are not NCQA
certified. The Company's professional staff, including physicians, social
workers, psychologists, nurses, dietitians, therapists and counselors, must meet
the minimal requirements of licensure related to their specific discipline, in
addition to each facility's own internal quality assurance criteria. The Company
participates in the federally mandated National Practitioners Data Bank, which
monitors professional accreditation nationally.
In response to the increasing reliance of insurers and managed care
organizations upon utilization review methodologies, the Company has adopted a
comprehensive documentation policy to satisfy relevant reimbursement criteria.
Additionally, the Company has developed an internal case management system,
which provides assurance that services rendered to individual patients are
medically appropriate and reimbursable. Implementation of these internal
policies has been integral to the success of the Company's strategy of providing
services to relapse-prone, higher acuity patients.
Government Regulation
The Company's business and the development and operation of the Company's
facilities are subject to extensive federal, state and local government
regulation. In recent years, an increasing number of legislative proposals have
been introduced at both the national and state levels that would effect major
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. In addition, many states, including the Commonwealth of
Massachusetts and the State of Michigan, are considering reductions in state
Medicaid budgets.
Health Planning Requirements
Some of the states in which the Company operates, and many of the states
where the Company may consider expansion opportunities, have health planning
statutes which require that prior to the addition or construction of new beds,
the addition of new services, the acquisition of certain medical equipment or
certain capital expenditures in excess of defined levels, a state health
planning agency must determine that a need exists for such new or additional
beds, new services, equipment or capital expenditures. These state determination
of need or certificate of need ("DoN") programs are designed to enable states to
participate in certain federal and state health related programs and to avoid
duplication of health services. DoN's typically are issued for a specified
maximum expenditure, must be implemented within a specified time frame and often
include elaborate compliance procedures for amendment or modification, if
needed. Several states, including the Commonwealth of Massachusetts, have
instituted moratoria on some types of DoN's or otherwise stated an intent not to
grant approvals for certain health services. Such moratoria may adversely affect
the Company's ability to expand in such states, but may also provide a barrier
to entry to potential competitors.
Licensure and Certification
State regulatory authorities must license all of the Company's facilities.
The Company's Harbor Oaks facility is certified for participation as a provider
in the Medicare and Medicaid programs.
The Company's initial and continued licensure of its facilities, and
certification to participate in the Medicare and Medicaid programs, depends upon
many factors, including accommodations, equipment, services, patient care,
safety, personnel, physical environment, the existence of adequate policies,
procedures and controls and the regulatory process regarding the facility's
initial licensure. Federal, state and local agencies survey facilities on a
regular basis to determine whether such facilities are in compliance with
governmental operating and health standards and conditions for participating in
government programs. Such surveys include review of patient utilization and
inspection of standards of patient care. The Company has procedures in place to
ensure that its facilities are operated in compliance with all such standards
and conditions. To the extent these standards are not met, however, the license
of a facility could be restricted, suspended or revoked, or a facility could be
decertified from the Medicare or Medicaid programs.
Medicare Reimbursement
Currently the only facility of the Company that receives Medicare
reimbursement is Harbor Oaks. For the fiscal year ended June 30, 1999 13.11% of
revenues for Harbor Oaks were derived from Medicare programs.
The Medicare program generally reimburses psychiatric facilities pursuant
to its prospective payment system ("PPS"), in which each facility receives an
interim payment of its allowable costs during the year which is later adjusted
to reflect actual allowable direct and indirect costs of services based upon the
submission of a cost report at the end of each year. However, current Medicare
payment policies allow certain psychiatric service providers an exemption from
PPS. In order for a facility to be eligible for exemption from PPS, the facility
must comply with numerous organizational and operational requirements.
PPS-exempt providers are cost reimbursed, receiving the lower of reasonable
costs or reasonable charges. The Medicare program fiscal intermediary pays a per
diem rate based upon prior year costs, which may be retroactively adjusted upon
the submission of annual cost reports.
The Harbor Oaks facility is currently PPS-exempt. The amount of its
cost-based reimbursement may be limited by the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA") and regulations promulgated under the Act.
Generally, TEFRA limits the amount of reimbursement a facility may receive to a
target amount per discharge, adjusted annually for inflation. The facility's
reasonable Medicare operating costs divided by Medicare discharges, plus a per
diem allowance for capital costs during its base year of operations determines
the target amount. It is not possible to predict the ability of Harbor Oaks to
remain PPS-exempt or to anticipate the impact of TEFRA upon the reimbursement
received by Harbor Oaks in future periods.
In order to receive Medicare reimbursement, each participating facility
must meet the applicable conditions of participation set forth by the federal
government relating to the type of facility, its equipment, its personnel and
its standards of medical care, as well as compliance with all state and local
laws and regulations. In addition, Medicare regulations generally require that
entry into such facilities be through physician referral. The Company must offer
services to Medicare recipients on a non-discriminatory basis and may not
preferentially accept private pay or commercially insured patients.
Medicaid Reimbursement Currently the only facility of the Company that
receives reimbursement under any state Medicaid program is Harbor Oaks. A
portion of Medicaid costs is paid by states under the Medicaid program and the
federal matching payments are not made unless the state's portion is made.
Accordingly, the timely receipt of Medicaid payments by a facility may be
affected by the financial condition of the relevant state.
Harbor Oaks is a participant in the Medicaid program administered by the
State of Michigan. The Company receives reimbursement on a per diem basis,
inclusive of ancillary costs. The state determines the rate and adjusts it
annually based on cost reports filed by the Company.
Fraud and Abuse Laws
Various federal and state laws regulate the business relationships and
payment arrangements between providers and suppliers of health care services,
including employment or service contracts, and investment relationships. These
laws include the fraud and abuse provisions of the Medicare and Medicaid
statutes as well as similar state statutes (collectively, the "Fraud and Abuse
Laws"), which prohibit the payment, receipt, solicitation or offering of any
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.
Employees
As of September 15, 1999, the Company had 299 employees of which 6 were
dedicated to marketing, 79 (12 part time) to finance and administration and 214
(91 part time) to patient care. All of the Company's 299 employees are leased
from Inovis, formerly International Personnel Resources, LTD. ("IPR"), a
national employee-leasing firm. The Company has elected to lease its employees
to provide more favorable employee health benefits at lower cost than would be
available to the Company as a single employer and to eliminate certain
administrative tasks which otherwise would be imposed on the management of the
Company. The agreement provides that Inovis will administer payroll, provide for
compliance with workers' compensation laws, including procurement of workers'
compensation insurance and administering claims, and procure and provide
designated employee benefits. The Company retains the right to reject the
services of any leased employee and Inovis has the right to increase its fees at
any time upon thirty days' written notice or immediately upon any increase in
payroll taxes, workers' compensation insurance premiums or the cost of employee
benefits provided to the leased employees.
The Company believes that it has been successful in attracting skilled and
experienced personnel. Competition for such employees is intense, however and
there can be no assurance that the Company will be able to attract and retain
necessary qualified employees in the future. None of the Company's employees are
covered by a collective bargaining agreement. The Company believes that its
relationships with its employees are good.
INSURANCE
Each of the Company's facilities maintains separate professional liability
insurance policies. Mount Regis, Harbor Oaks, Harmony Healthcare, Total Concept,
NPP and BSC have coverage of $1,000,000 per claim and $3,000,000 in the
aggregate. Highland Ridge has limits of $1,000,000 per claim and $6,000,000 in
the aggregate. In addition, these entities maintain general liability insurance
coverage in similar amounts.
The 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 new lease agreement in Peabody covers approximately 4,800 square feet
for a 60-month term, which expires September 17, 2004. The current annual
payment under the lease is $72,000 and increases to $87,516 in the final year.
This space will also house Behavioral Health Online, Inc. 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 Company is currently operating on a month to month
basis until the lease is finalized. The lease currently in negotiations is for a
five-year agreement, which provides for monthly rental payments of approximately
$15,000, which includes housekeeping and maintenance for the first six months,
and includes changes in rental payments each year based on increases or
decreases in the CPI. After the initial six month term the faqcility will pay
yet undetermined additional amount each month for housekeeping and
maintenance.The leae in its current form would expire December 31, 2004, and
includes an option to renew for an additional five years. The Company believes
that these premises are adequate for its current and anticipated needs.
Mount Regis Center
The Company owns the Mount Regis facility, which consists of a three-story
wooden building located on an approximately two-acre site in a residential
neighborhood. The building consists of over 14,000 square feet and is subject to
a mortgage in the approximate amount of $460,000. The facility is used for both
inpatient and outpatient services. The Company believes that these premises are
adequate for its current and anticipated needs.
Psychiatric Facilities
The Company owns or leases premises for each of its psychiatric facilities.
Harmony, Total Concept, NPP and BSC each lease their premises. The Company
believes that each of these premises is leased at fair market value and coule 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
$1,600,000 mortgage on this property. The Company believes that these premises
are adequate for its current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
As a consequence of Franvale's bankruptcy and subsequent receivership, a
number of claims have been asserted against the Company or may be asserted
against the Company in the future. To date, such claims are as follows:
The Commonwealth of Massachusetts named Franvale, the Company and Bruce
Shear as party defendants in the Commonwealth receivership action, C.A. No.
98-2783 in the Superior Court, Suffolk County. On June 28, 1999, the Superior
Court entered a judgment of dismissal, dismissing the case without prejudice and
without costs, as of September 16, 1998. The Company understands that the
facility has been closed, all patients transferred and that the Commonwealth
receiver has resigned.
The Commonwealth of Massachusetts may institute a claim seeking to recover
any expenses incurred but not recovered by the Commonwealth as a consequence of
Franvale's receivership. The Commonwealth has a receivership statute that allows
the Commonwealth to seek indemnification for receivership expenses from
"licensee[s], persons responsible for the affairs of the licensee, or the
owner." Under Commonwealth law, the Commonwealth could seek to hold the Company
liable as a "licensee" or "a person responsible for the affairs of the licensee
[Franvale]." Management believes that there are defenses to any such claim. At
this time the potential claim does not appear to be a material issue, however,
the Company understands that Franvale's collectible accounts receivable are far
in excess of the operating expenses and the receiver's fees that were incurred
during the receivership.
On or about September 14, 1998, the Company and its wholly owned
subsidiary, Franvale, were each served with document subpoenas in connection
with an on-going investigation of Franvale being conducted by the Massachusetts
Medicaid Fraud Control Unit. The focus of the investigation appears to be the
quality of patient care provided by Franvale during the period of early 1997
until the facility was placed into receivership in June 1998. The Company has
cooperated fully with the investigation including the production of documents.
While no specific dollar demand has yet been asserted by the state, the Attorney
General's office has indicated that a payment will be required to settle this
action. Preliminary negotiations between the Company and the State are under
way.
The Company has been named as a defendant in a proceeding captioned
Healthcare Services Group, Inc. v. Quality Care Centers of Massachusetts, Inc.
and PHC, Inc., C.A. No. 98-132 (Sup. Ct., Suffolk Co., MA). The plaintiff,
supplier of housekeeping and laundry services to Franvale, alleges two causes of
action against the Company in the Substitute First Amended Complaint. In Count
III (Accord and Satisfaction), plaintiff seeks $51,845 for the Company's alleged
breach of an agreement to pay plaintiff the money it was owed. In Count IV
(Guaranty), plaintiff alleges that the Company agreed to pay Franvale's debt but
did not do so; plaintiff seeks a judgment of $67,412. The Company filed an
answer contesting plaintiff's claims. Plaintiff propounded requests for
admissions to which the Company responded. Plaintiff recently noticed two
depositions and served the Company with a request for documents. Discovery was
set to close September 1, 1999, but has been extended by the consent of the
parties. At this time it is not possible for the Company to evaluate the
likelihood of an unfavorable outcome or to predict the Company's potential loss.
Based on the ad damnum clause of the Substitute First Amended Complaint, the
maximum potential loss to the Company is alleged to be $67,412, plus costs and
interest from the date of demand.
On or about November 4, 1998, Mellon US Leasing, a division of Mellon
Leasing Corporation, a successor in interest to US Capital Corp. ("Mellon"),
brought a lawsuit against the Company in the Superior Court for Essex County,
Massachusetts, C.A. No. 98-2116. Mellon alleged that the Company had guaranteed
a lease agreement entered into by Quality Care Centers of Massachusetts, on
which Quality Care had defaulted. Mellon sought damages of $222,005, plus
interest costs and reasonable attorney's fees. Since the company did guarantee
of this debt of the subsidiary at the inception of the lease on or about July
28, 1999, the Company and Mellon reached an agreement in principle, although no
documents have yet been signed memorializing the settlement. The terms of the
settlemen are that the Company will pay Mellon the sum of $150,000 over a period
of 36 months at the interest rate of 9 percent per year in exchange for
didmissal of the lawsuit and the execution of releases.
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, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Units, Class A Common Stock and Class A Warrants have been
traded on the NASDAQ National Market under the symbols "PIHCU," "PIHC" and
"PIHCW," respectively, since the Company's initial public offering which was
declared effective on March 3, 1994. There is no public trading market for the
Company's Class B Common Stock. 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.
1998
First Quarter $ 3 9/16 $ 2 1/4
Second Quarter $ 3 $ 1 7/8
Third Quarter $ 2 13/16 $ 1 7/8
Fourth Quarter $ 2 7/16 $ 1 5/8
1999 First Quarter $ 2 $ 5/8
Second Quarter $ 1 1/16 $ 9/16
Third Quarter $ 1 3/4 $ 13/16
Fourth Quarter $ 1 15/32 $ 13/16
2000
First Quarter(through
September 15, 1999) $1 5/16 $ 15/16
On September 15, 1999, the last reported sale price of the Class A Common
Stock was $1.09375. On September 15, 1999 there were 452 holders of record of
the Company's Class A Common Stock and 312 holders of record of the Company's
Class B Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. While
there are currently no restrictions on the Company's ability to pay dividends,
the Company anticipates that in the future, earnings, if any, will be retained
for use in the business or for other corporate purposes, and it is not
anticipated that cash dividends in respect of 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 and financial position of the Company and
such other factors as the Company's Board of Directors, in its discretion, deems
relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion and analysis of the financial condition and
results of operations of the Company for the years ended June 30, 1999 and 1998.
It should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere herein. During the fiscal years several
businesses were acquired or closed which makes comparability of period results
difficult. See "Psychiatric Service Industry - Operating Statistics" in Part
One, Item One of this report for further detail.
Overview
The Company presently provides health care services through two substance
abuse treatment centers, a psychiatric hospital and seven outpatient psychiatric
centers (collectively called "treatment facilities"). The profitability of the
Company is largely dependent on the level of patient census at these treatment
facilities. 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 because of the fixed components of these expenses. The
Company's most recent addition, Behavioral Health Online, Inc., is a provider of
behavioral health information and education through its web site.
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 ongoing debates and initiatives regarding
the restructuring of the health care system in its entirety. The extent of any
regulatory changes and their impact on the Company's business is unknown.
Managed care has had a profound impact on the Company's operations, in the form
of shorter lengths of stay, extensive certification of benefits requirements and
reduced payment for services.
Results of Operations
Years Ended June 30, 1999 and 1998
The Company experienced an increase in profitability from its continuing
operations. Earnings before taxes, interest, depreciation and amortization for
currently operating facilities increased by $1,351,169 for the year year ended
June 30, 1999 to $845,747 from a loss for the year ended June 30, 1998 of
$505,422. These amounts exclude income and loss for both years for the
California, Rhode Island, and Virginia operations. Although net revenue for the
operating facilities decreased by 2%, approximately $337,000, for the year ended
June 30, 1999, many changes toward more efficient operations resulted in
non-proportional decreases in many operating expenses. Total consultant fees
related to patient care decreased 16% to $2,273,601 for the year ended June 30,
1999 from $2,721,960 for the year ended June 30, 1998. While patient care
related payroll expense increased only 2% to $5,507,138 for the year ended June
30, 1999 from $5,417,628 for the year ended June 30, 1998. This is a combined 4%
reduction in the cost of salaries related to patient care as a result of the
more efficient use of salaried employees time and the reduction in the use of
non-employee therapists for patient care. More efficient ordering has resulted
in a decrease of 62% in the cost of hospital supplies excluding food, laboratory
fees and pharmacy, which also decreased. A change in laboratory service provider
and more efficient management of requests for lab tests resulted in a 37%,
approximately $76,000, decrease in laboratory fees expense for the fiscal year
ended June 30, 1999. A change in pharmacy and a shift in some pharmacy billing
from our facilities to the vendor resulted in a 7%, approximately $14,000,
decrease in pharmacy costs for the operating facilities. Savings were also
evident in administrative expenses for the operating facilities. More efficient
ordering also resulted in a decrease of 10.8%, approximately $25,000, in the
cost of general office supplies and expense. Consolidating marketing efforts
contributed toward a 24%, approximately $74,000, decrease in marketing,
promotion, and travel expenses. More efficient staffing in administrative
positions resulted in a decrease of 17%, approximately $458,000, in
administrative payroll, while the cost of administrative consultants also
decreased 26% or approximately $63,000. Bad debt expenses also decreased 27%,
approximately $775,000, due to the considerable charge to bad debt expense in
the previous year and the current decline in accounts receivable. Because most
of the changes outlined above were in place for all of the year ended June 30,
1999, the Company does not expect to experience the same decreases in expenses
in future years but intends to work at maintaining the current level of
expenses. The Company will, however, continue to evaluate operations looking for
less expensive alternatives to provide the same quality service.
The Company reduced its total loss by $5,090,703 for the fiscal year ended
June 30, 1999 compared to June 30, 1998. The Company also continued to divest
itself of facilities operating at a loss. The remaining Pioneer Counseling of
Virginia clinic was closed in January 1999 resulting in approximately $300,000
in expenses to write-down intangible assets. The total loss recorded for Pioneer
Counseling of Virginia, including this expense was approximately $810,000. The
final cost of the release from two of the Michigan outpatient clinic leases is
also reflected in the current fiscal year. The Company also experienced a loss
of approximately $160,000 through its start up operations for
Behavioralhealthonline.com. The web site produces minimal revenues during the
development stages when operating costs are high. The web site is expected to be
fully operational in the third quarter of the fiscal year 2000.
In the fiscal year ended June 30, 1998 the Company experienced a loss from
the discontinued operations of Franvale Nursing and Rehabilitation Center of
approximately $2,200,000.
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.
Total patient care revenue from all facilities, decreased 10% to
$19,139,496 for the year ended June 30, 1999 from $21,246,189 for the year ended
June 30, 1998. This decline in revenue is due primarily to the decline in census
and closure of Good Hope Center in Rhode Island. Net inpatient care revenue from
psychiatric services decreased 12% to $11,955,143 for the fiscal year ended June
30, 1999 compared to $13,640,801 for the year ended June 30, 1998 and net
outpatient care revenue decreased 7% to $5,574,835 for the year ended June 30,
1999 from $6,008,552 for the year ended June 30, 1998. Revenues from Practice
Management and Pioneer Development and Support Services ("PDSS") increased 3% to
$1,519,518 for the year ended June 30, 1999 from $1,476,836 for the year ended
June 30, 1998.
Total patient care expenses for all facilities decreased 12% to $9,384,070
for the year ended June 30, 1999 from $10,706,639 for the year ended June 30,
1998. This decrease in patient care expenses is largely a result of the closure
of Good Hope Center and the Virginia clinics. The Company expects these expenses
to decline in fiscal 2000 as compared to fiscal 1999. Total administrative
expenses for all facilities decreased 17% to $7,865,013 for the year ended June
30, 1999 from $9,488,631 for the year ended June 30, 1998. This decrease in
administrative expense is due largely to the one-time charges recorded in the
fiscal year ended June 30, 1998. Expenses for the closure of Good Hope Center
and the Blacksburg Clinic were among these one-time charges.
Year 2000 Compliance
The Company was unable to reach an agreement with its Information Systems
Vendor to upgrade its current accounts receivable software to accommodate a
four-digit year. The Company has identified alternative software solutions,
which are year 2000 compliant. The software installation is anticipated to be
operational by the deadline; however, as a precaution, the Company has contacted
each of its facilities' fiscal intermediaries and has been granted an extension
of time beyond the HCFA deadline for year 2000 compliance. In the event that
installation of the software is delayed, each facility is making plans to
complete the billing process by adding the four-digit year 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 has already upgraded the
network software at the corporate offices and most of its facilities and is
currently upgrading hardware to accommodate all required software upgrades.
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 operation 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 is in the
process of identifying alternate sources for these goods and services.
To date the Company has expended approximately $60,000 on items relating to
the year 2000 issues and anticipates approximately $165,000 in additional
expenses relating to the upgrade of Company's computer systems.
Liquidity and Capital Resources
For the two fiscal years ended June 30, 1999, the Company met its cash flow
needs through accounts receivable financing and by issuing debt and equity
securities as follows:
DATE TRANSACTION TYPE NUMBER PROCEEDS MATURITY TERMS STATUS
OF DATE
SHARES
9/97 Common Stock 172,414 $500,000 N/A Issued with Common
warrants at Stock Sold
a 3.3% discount
outstanding
9/97 Warrant issued as part 86,207 -- 09/30/2002 exercise price
of the units in the $2.90
Private Placement of
Common Stock
9/97 Warrant issued in 150,000 -- 05/31/2002 exercise price outstanding
exchange for cash $2.50
and financial advisory
services
12/97 Mortgage advance -- $500,000 10/31/2001 Prime Plus 5% outstanding
3/98 Warrant issued as a 3,000 -- 03/10/2003 exercise price outstanding
penalty for late $2.90
registration of
Private Placement
Common Stpck
3/98 Note Payable -- $350,000 05/10/99 Prime Plus 3.5% outstanding
as extended
3/98 Warrants issued as 52,500 -- 03/10/2003 exercise price outstanding
additional interest $2.38
on 3/98 debt
3/98 Common Stock issued to 227,347 $534,265 N/A N/A N/A
the former owners of
BSC-NY, Inc. for the
earn out agreement in
lieu of cash
3/98 Convertible Preferred 950 $950,000 03/18/2000 6% Interest per outstanding
Stock year convertible
at 80% of 5 day
average bid price
3/98 Warrants issued 49,990 -- 03/18/2001 exercise price outstanding
in connection $2.31
with the Private
Placement of
Convertible
Preferred Stock
on 3/98
5/98 Note Payable - -- $50,000 on demand 12% annual outstanding
Related Party interest rate
6/98 Note Payable - -- $50,000 on demand 12% annual outstanding
Related Party interest rate
7/98 Warrants issued as 52,500 -- 07/10/2003 exercise price outstanding
additional interest $1.81
on extension of 3/98
debt
7/98 Warrants issued as 20,000 -- 07/10/2003 exercise price outstanding
additional interest $1.81
on extension of 3/98
debt
8/98 Warrants issued for 50,000 -- 08/15/2001 exercise price outstanding
services $1.75
8/98 Note Payable - -- $100,000 on demand 12% annual outstanding
Related Party interest rate
12/98 Shares issued for 304,097 -- -- -- outstanding
price guarantee
12/98 Convertible Debentures -- $500,000 12/02/2004 12% annual outstanding
interest
convertible at
$2.00 in $1,000
increments
12/98 Warrants issued in 165,000 06/2004 issued from Dec outstanding
Private Placement thru June;
exercisable at
$1.00 to $2.00
01/99 Warrants for services 94,000 05/2004 issued from Jan outstanding
thru June;
exercisable at
$1.00 to $1.45
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Accounts receivable from patient
care, net of allowance for doubtful accounts, decreased 14.6% to $6,938,227
during the year ended June 30, 1999 from $8,126,972 at June 30, 1998. This
decrease in accounts receivable is largely the result of the write-down of the
accounts receivable for closed facilities, 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. At the same time, the Company continues to increase reserves for
bad debt based on potential insurance denials and past difficulty in
collections. In February 1998 the Company entered into an accounts receivable
funding revolving credit agreement with Healthcare Financial Partners-Funding
II, L.P. ("HCFP"), on behalf of five of its subsidiaries, which provides for
funding of up to $4,000,000 based on outstanding receivables. The outstanding
balance on this receivables financing on June 30, 1999 was approximately
$1,669,830.
The Company believes that it has sufficient financing available to sustain
existing operations for the foreseeable future. The Company also intends to
renew the expansion of its existing 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.
The liquidation of the assets and liabilities of Franvale may result in a
non-cash financial statement gain of approximately $2,000,000. In the quarter
ended December 31, 1998 the company was relieved of the HUD mortgage of
approximately $6,741,000 and surrendered the underlying assets amounting to
approximately $4,329,000. The recognition of the gain has been deferred until
final resolution of all contingent liabilities.
ITEM 7. FINANCIAL STATEMENTS.
AT PAGE
Index F-1
Independent auditors' report F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of changes in stockholders' equity F-5
Consolidated statements of cash flows F-6, F-7
Consolidated notes to financial statements F-8
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, 1999 are as
follows:
Name Age Position
Bruce A. Shear 44 Director, President and Chief Executive Officer
Robert H. Boswell 50 Senior Vice President
Paula C. Wurts 50 Controller, Assistant Clerk and Assistant
Treasurer
Gerald M. Perlow, M.D. 61 Director and Clerk
Donald E. Robar (1)(2) 62 Director and Treasurer
Howard W. Phillips 69 Director
William F. Grieco (1) 45 Director
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
All of the directors hold office until the annual meeting of stockholders
next following their election, or until their successors are elected and
qualified. The Compensation Committee reviews and sets executive compensation.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. There are no family relationships among any of the
directors or officers of the Company.
Information with respect to the business experience and affiliations of the
directors and officers of the Company is set forth below.
BRUCE A. SHEAR has been President, Chief Executive Officer and a Director
of the Company since 1980 and Treasurer of the Company from September 1993 until
February 1996. From 1976 to 1980 he served as Vice President, Financial Affairs,
of the Company. Mr. Shear has served on the Board of Governors of the Federation
of American Health Systems for over ten years. Mr. Shear received an M.B.A. from
Suffolk University in 1980 and a B.S. in Accounting and Finance from Marquette
University in 1976.
ROBERT H. BOSWELL has served as the Senior Vice President of the Company
since February 1999 and as Executive Vice Prisident of the Company from 1992
until 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.
PAULA C. WURTS has served as the Controller of the Company since 1989 and
as Assistant Treasurer since 1993 and as Assistant Clerk since January 1996. 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 cardiologist in private
practice 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, the
American College of Physicians and the Massachusetts Medical Center. From 1987
to 1990, Dr. Perlow served as the Director, Division of Cardiology, at
AtlantiCare Medical Center in Lynn, Massachusetts. From October 30, 1996 to
March 1, 1997, Dr. Perlow served as President and Director of Shliselberg
Physician Services, P.C. formerly Perlow Physicians, P.C. which has a management
contract with BSC. Dr. Perlow currently holds no ownership interest in
Shliselberg Physician Services, P.C. Dr. Perlow received compensation of $8,333
for the period. 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 since February, 1996. 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. Mr. Phillips currently is a member of the Board
of Directors of Food Court Entertainment Network, Inc., an operator of shopping
mall television networks, and Telechips Corp., a manufacturer of visual phones.
WILLIAM F. GRIECO has served as a Director of the Company since February
18, 1997. Since August 1999 Mr. Grieco has been a self-employed law consultant.
From November 1995 to July 1999 he served as Senior Vice President and General
Counsel for Fresenius Medical Care North America. From 1989 until November of
1995, Mr. Grieco was a partner at Choate, Hall & Stewart. Mr. Grieco received a
BS from Boston College in 1975, an MS in Health Policy and Management from
Harvard University in 1978 and a JD from Boston College Law School in 1981.
Compliance With Section 16(A) Of The Exchange Act
Based on a review of Forms 3 and 4 furnished to the company, all directors,
officers and beneficial owners of more than ten percent of any class of equity
securities of the Company registered pursuant to Section 12 of the Securities
Exchange Act filed on a timely basis reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year.
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
Two executive officers of the Company received compensation in the 1999
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 1999,1998, and 1997:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
___________________ _____________
(a) (b) (c) (d) (e) (g) (i)
Name and Other Annual Securities All Other
Principal Year Salary Bonus Compensation Underlying Compensation
Position Options/SARs
$ $ $ # $
_______________________________________________________________________________
Bruce A. Shear 1999 $300,195(1) -- $ 6,490(2) 50,000 $21,622
President and 1998 $309,167(1) -- $ 8,363(3) 50,000 $51,256
Chief Executive 1997 $294,167(1) -- $12,633(4) -- --
Officer
Robert H. Boswell 1999 $111,083 $800 $ 7,955(5) 65,000 $29,753
Senior Vice 1998 $102,750 -- $ 7,836(6) 15,000 $14,149
President 1997 $ 92,750 -- $ 6,687(7) 5,000 $ 6,821
(1) Although the last Board of Director authorized base salary effective July
1, 1995, $310,000 base salary was drawn as listed above.
(2) This amount represents (i) $1,341 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii)
$2,792 in premiums paid by the Company with respect to life insurance for
the benefit of Mr. Shear and (iii) $2,357 personal use of a Company car
held by Mr. Shear
(3) This amount represents (i) $1,341 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii)
$4,768 in premiums paid by the Company with respect to life insurance for
the benefit of Mr. Shear and (iii) $2,254 personal use of a Company car
held by Mr. Shear.
(4) This amount represents (i) $2,687 contributed by the Company to the
Company's Executive Employee Benefit Plan on behalf of Mr. Shear, (ii)
$6,769 in premiums paid by the Company with respect to life insurance for
the benefit of Mr. Shear and (iii) $3,177 personal use of a Company car
held by Mr. Shear.
(5) This amount represents (i) $6,000 automobile allowance, (ii) $357
contributed by the Company to the Company's Executive Employee Benefit Plan
on behalf of Mr. Boswell (iii) $704 in other benefits paid by the Company
on behalf of Mr. Boswell and (vi) $894 in benefit derived from the purchase
of shares through the employees stock purchase plan.
(6) This amount represents (i) $6,000 automobile allowance, (ii) $408
contributed by the Company to the Company's Executive Employee Benefit Plan
on behalf of Mr. Boswell (iii) $408 in other benefits paid by the Company
on behalf of Mr. Boswell (iv) $115 in Class A Common Stock issued to
employees and (v) $905 in benefit derived from the purchase of shares
through the employees stock purchase plan.
(7) This amount represents (i) an automobile allowance and (ii) $897 in benefit
derived from the purchase of shares through the employees stock purchase
plan.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
services as members of the Board. Directors who are not employees of the Company
receive $2,500 stipend per year and $1,000 for each Board meeting they attend.
In addition, directors of the Company are entitled to receive certain stock
option grants under the Company's Non-Employee Director Stock Option Plan (the
"Director Plan").
COMPENSATION COMMITTEE
The Compensation Committee consists of Mr. Donald Robar and Dr. Gerald
Perlow. The compensation Committee met once during fiscal 1999. Mr. Shear does
not participate in discussions concerning, or vote to approve, his salary.
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. The
Stock Plan provides for the issuance of a maximum of 300,000 shares of the Class
A Common Stock of the Company pursuant to the grant of incentive stock options
to employees and the grant of nonqualified stock options or restricted stock to
employees, directors, consultants and others whose efforts are important to the
success of the Company.
The Board of Directors administers the Stock Plan. Subject to the
provisions of the Stock Plan, the Board of Directors has the authority to select
the optionees or restricted stock recipients and determine the terms of the
options or restricted stock granted, including: (i) the number of shares, (ii)
option exercise terms, (iii) the exercise or purchase price (which in the case
of an incentive stock option cannot be less than the market price of the Class A
Common Stock as of the date of grant), (iv) type and duration of transfer or
other restrictions and (v) the time and form of payment for restricted stock and
upon exercise of options. Generally, an option is not transferable by the option
holder except by will or by the laws of descent and distribution. Also,
generally, no option may be exercised more than 60 days following termination of
employment. However, in the event that termination is due to death or
disability, the option is exercisable for a period of one year following such
termination.
During the fiscal year ended June 30, 1999, the Company issued additional
options to purchase 212,500 shares of Class A Common Stock under the 1993 Stock
Plan at a price per share ranging from $1.03 to $1.25. 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.
During the fiscal years ended June 30, 1998 and June 30, 1999 no options
were exercised.
On November 17, 1997 the Board of Directors voted to amend the 1993 Stock
Plan to increase the number of shares of Class A Common Stock available for
issuance under the plan from 300,000 shares to 400,000 shares. The Stockholders
approved this amendment at the annual meeting on December 26, 1997. On September
15, 1998 the Board of Directors voted to amend the 1993 Stock Plan to increase
the number of shares of Class A Common Stock available for issuance under the
plan from 400,000 shares to 1,000,000 shares. The Stockholders approved this
amendment at the annual meeting on December 23, 1998.
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. An offering period under the plan began on
February 1, 1997 and ended on January 31, 1998. Twenty-four employees purchased
an aggregate of 14,743 shares of Class A Common Stock. A new offering commenced
on February 1, 1998 and ended on January 31, 1999. Eleven employees purchased an
aggregate of 15,475 shares of Class A Common Stock. Eleven employees are
participating in the current offering period under the plan, which began on
February 1, 1999 and will end on January 31, 2000.
On November 17, 1997 the Board of Directors voted to amend The Plan to
increase the number of shares of Class A Common Stock available for issuance
under the plan from 100,000 shares to 150,000 shares. The Stockholders approved
this amendment to the plan at the annual meeting on December 26, 1997.
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. Non-qualified options to purchase a
total of 30,000 shares of Class A Common Stock are available for issuance under
the Director Plan.
The Board of Directors or a committee of the Board administers the Director
Plan. Under the Director Plan, each director of the Company who was a director
at the time of adoption of the Director Plan and who was not a current or former
employee of the Company received an option to purchase that number of shares of
Class A Common Stock as equals 500 multiplied by the years of service of such
director as of the date of the grant. At the first meeting of the Board of
Directors subsequent to each annual meeting of stockholders, each non-employee
director is granted under the Director Plan an option to purchase 2,000 shares
of the Class A Common Stock of the Company. The option exercise price is the
fair market value of the shares of the Company's Class A Common Stock on the
date of grant. The options are non-transferable and become exercisable as
follows: 25% immediately and 25% on each of the first, second and third
anniversaries of the grant date. If an optionee ceases to be a member of the
Board of Directors other than for death or permanent disability, the unexercised
portion of the options, to the extent unvested, immediately terminate, and the
unexercised portion of the options which have vested lapse 180 days after the
date the optionee ceases to serve on the Board. In the event of death or
permanent disability, all unexercised options vest and the optionee or his or
her legal representative has the right to exercise the option for a period of
180 days or until the expiration of the option, if sooner.
On February 18, 1997, the Company issued options to purchase 6,000 shares
of Class A Common Stock under the Director Plan at an exercise price of $3.50
per share. On January 22, 1998, the Company issued options to purchase 6,000
shares of Class A Common Stock under the Director Plan at an exercise price of
$2.06. On February 23, 1999, the Company issued options to purchase 6,000 shares
of Class A Common Stock under the Director Plan at an exercise price of $1.03.
As of June 30, 1999, none of the options issued had been exercised.
On November 17, 1997 the Board of Directors voted to amend the Director
Plan to increase the number of shares of Class A Common Stock available for
issuance under the plan from 30,000 shares to 50,000 shares. The Stockholders
approved the amendment to the plan at the annual meeting on December 26, 1997.
The following table provides information about options granted to the named
executive officers during fiscal 1999 under the Company's Stock Plan, Employee
Stock Purchase Plan and Non-Employee Director Stock Plan.
Individual Grants
____________________
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration
Granted in Fiscal Year ($/Share) Date
Name #
_________________ _____________ ______________ ___________ ___________
Bruce A. Shear 50,000 23.5% $1.17 3/15/2004
Robert H. Boswell 50,000 23.5% $1.25 9/15/2003
15,000 7.0% $1.20 2/23/2004
All Directors and 183,000 83.8% $1.03-$1.25 9/15/2003-2/23/0224
Officers as a
group (7 persons)
The following table provides information about options exercised by the
named executive officers during fiscal 1999 and the number and value of options
held at the end of fiscal 1999.
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
Shares FY-End (#) FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
____ ____________ ____________ ______________ _____________
Bruce A. Shear -- -- 37,500/62,500 $0/$0
Robert H. Boswell -- -- 69,000/45,000 $0/$0
All Directors and
Officers as a group
(7 persons) -- -- 198,000/163,250 $0/$0
In February 1997, all 95,375 shares underlying the then outstanding
employee stock options were repriced to the current market price, using the
existing exercise durations. In September 1998, all 21,875 options due to
expire, were extended for an additional five years. Also in September 1998, all
183,875 shares underlying the then outstanding employee stock options were
repriced to the current market price, using the existing exercise durations.
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 capital stock of the Company currently outstanding) as of August
15, 1999 by (i) each person known by the Company to beneficially own more than
5% of any class of the Company's voting securities, (ii) each director of the
Company, (iii) each of the named executive officers as defined in 17 CFR
228.402(a)(2) and (iv) all directors and officers of the Company as a group.
Unless otherwise indicated below, to the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to their shares
of Common Stock, except to the extent authority is shared by spouses under
applicable law. In preparing the following table, the Company has relied on the
information furnished by the persons listed below:
Name and Address Amount and Nature Percent of
Tital of Class of Beneficial Owner of Beneficial Owner Class (12%)
Class A Common Stock Gerald M. Perlow 27,750(1) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Donald E. Robar 22,750(2) *
c/o PHC, Inc.
200 Lake Street
Peabody, MA 01960
Bruce A. Shear 58,000(3) 1.0%