SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 30, 2004
PHC, Inc.
(Exact Name of Registrant as Specified in its Charter)
Massachusetts
(State of Incorporation or Organization)
0-22916 04-2601571
(Commission File Number) (I.R.S. Employer
Identification No.)
200 Lake Street, Suite 102, Peabody, Massachusetts 01960
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (978) 536-2777
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Item 2. Acquisition of Assets
On April 30, 2004, the Company closed on the acquisition of Phoenix-based
Pivotal Research Centers, LLC, ("Pivotal") significantly expanding the Company's
clinical research capabilities and geographic presence. The Company purchased
100% of the membership interest in Pivotal Research Centers, LLC, from the
former owners, Louis Kirby, Carol Colombo and Anthony Bonacci. In addition to
its currently enrolling research contracts, the acquisition brings with it the
expertise and reputation of Pivotal's founder, Louis Kirby, MD and its CEO,
Michael Colombo.
Pivotal performs all phases of clinical research for Phase I-IV drugs under
development through two dedicated research sites, including one of the largest
single psychiatric sites in the country. Pivotal currently has approximately 22
enrolling studies and an additional 31 ongoing studies with approximately 75-80
percent of Pivotal's research activity in central nervous system (CNS) research,
With a current client base including AstraZeneca, Bristol Meyers Squibb,
Cephalon, Forest, GlaxoSmithKline, Lilly, Merck, Mylan, Novartis, Organon,
Sepracor and Wyeth, the Company currently has protocols in Alzheimer's disease,
ADHD, Diabetes Type II, Generalized Anxiety Disorder, Insomnia, Major Depressive
Disorder, Obesity, Pain, Parkinson's Disease, and Shift Work Sleep Disorder.
The Company paid $1.5 million in cash and $500,000 in PHC, Inc. Class A
common stock based on the closing market price of $1.17. Additionally, the
Company agreed to three performance-based notes which are staged during the next
five years based on future profitability and secured by all the assets of
Pivotal as well as by PHC, Inc.'s ownership interest in Pivotal.
Note A is a secured promissory note with a face value of $1,000,000, with
an annual interest rate of 6%, a maturity date of December 31, 2008 and payments
due in quarterly installments beginning January 2005. The outstanding principal
will be adjusted in the first and second years of the note based on adjusted
EBITDA as defined in the agreement of $780,000. Adjusted EBITDA of greater than
$780,000 for each period increases the note value by the difference and adjusted
EBITDA of less than $780,000 will decrease the note value by the difference.
Quarterly payments are then made based on the adjusted value of the note.
Note B is a secured promissory note with a face value of $500,000, with an
annual interest rate of 6%, a maturity date of December 31, 2008 and payments
due in quarterly installments beginning January 2007. The outstanding principal
will be adjusted on February 1, 2006 based on annual adjusted EBITDA as defined
in the agreement of $780,000 for the adjustment period of January 1, 2005
through December 31, 2006. Adjusted EBITDA greater than $780,000 for the
adjustment period increases the note value by the difference and adjusted EBITDA
of less than $780,000 for the adjustment period will decrease the note value by
the difference. Quarterly payments are then made based on the adjusted value of
the note
Note C is a secured promissory note with a face value of $1,000,000, with
an annual interest rate of 6%, a maturity date of March 31, 2009 and annual
payments commencing on March 31, 2005. Note payment amounts will be determined
based on the adjusted EBITDA as defined in the agreement of the non-Pivotal
Research business for each payment period beginning at the effective date of the
agreement and ending on December 31, of 2004 and each year thereafter multiplied
by .35. In addition, this note provides for the issuance of up to $200,000 in
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PHC, Inc. Class A common stock, should the total of the five note payments be
less than the $1,000,000 face value of the note.
In addition to the usual representations and warranties made in agreements
such as this, the Membership Purchase agreement also includes a sellers'
covenant to the buyers not to compete or interfere with the business and a
buyers' covenant regarding the timely collection and transfer of the accounts
receivable of the seller and the public registration of the closing stock. In
addition, the sellers also provided an indemnification to the buyer from and
against any and all losses including, but not limited to, any litigation whether
or not disclosed resulting from a pre-closing event, facts, circumstances or
conditions whether or not asserted prior to the closing date.
In conjunction with the Membership Purchase Agreement, the Company also
executed, employment and non-compete agreements with Dr. Louis C. Kirby and
Michael J. Colombo.
Dr. Kirby's employment agreement extends from April 30, 2004 through
December 31, 2006 and calls for an annual base salary of $200,000, subject to
adjustment from time to time at the discretion of the Board of Directors, and
incentive compensation of $30,000 if the adjusted EBITDA as defined in the
Membership Purchase agreement is greater than $780,000.
Mr. Colombo's employment agreement extends from April 30, 2004 through
December 31, 2006 and calls for an annual base salary of $150,000, subject to
adjustment from time to time at the discretion of the Board of Directors, and
incentive compensation of $15,000 if the adjusted EBITDA as defined in the
Membership Purchase agreement is greater then $730,000 but less than $800,000 or
$25,000 if the adjusted EBITDA as defined in the Membership Purchase agreement
is greater than $800,000. Additional incentive compensation will be provided to
Mr. Colombo based on combined adjusted EBITDA of all clinical research business
in excess of $800,000, with incremental increases for amounts over $800,000.
The loan adjustment periods and payment dates in the notes and the
employment agreement were amended to reflect the closing date of April 30, 2004,
as agreed to by Sellers and Buyers pursuant to Section 2.6(a) of the Purchase
Agreement
The Company determined that it would be in the best interest of the
shareholders to finance this transaction entirely through equity, since debt
with favorable terms was not available. Therefore, the Company offered 2,800,000
shares of Class A Common Stock at $1.10 per share in a private placement. The
private placement also included 25% warrant coverage at an exercise price of
$1.10 per share with a three-year term and standard anti-dilution features. This
offering was completed in two stages. As a result of the first stage of the
offering, in March 2004, the Company issued 684,999 shares of Class A Common
Stock for $753,500 and warrants to purchase 171,248 additional shares of Class A
Common Stock. As a result of second stage of this offering, in April 2004, the
Company issued 1,918,196 shares of Class A Common Stock for $2,110,016 and
warrants to purchase 479,549 additional shares of Class A Common Stock. The
private placement facilitated the closing of the acquisition without incurring
any additional bank debt, and also provides the necessary working capital for
Pivotal to execute its business plan.
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Item 7. Financial Statements and Exhibits
It is impractical to provide the required financial information for this
acquisition at this time as the Seller has not yet provided the Company with the
necessary financial statements. Appropriate financial information will be
provided within 60 days.
( c ) Exhibits
4.22 Form of Subscription Agreement and warrant
10.27 Membership Purchase Agreement between PHC, Inc and Pivotal Research
Centers, LLC and its Sellers Louis C. Kirby, Carol A. Colombo and
Anthony A. Bonacci dated April 30, 2004.
10.28 Pledge Agreement entered into April 30, 2004 by and between PHC, Inc.
and Louis Kirby, Carol Colombo and Anthony Bonacci.
10.29 Security Agreement entered into April 30, 2004 by and between PHC,
Inc. and Louis Kirby, Carol Colombo and Anthony Bonacci.
10.30 Secured Promissory Note dated April 30, 2004 in the amount of
$1,000,000 by PHC, Inc. in favor of Louis C. Kirby, Carol Colombo and
Anthony Bonacci. (Note A)
10.31 Secured Promissory Note dated April 30, 2004 in the amount of
$500,000 by PHC, Inc. in favor of Louis C. Kirby, Carol Colombo and
Anthony Bonacci. (Note B)
10.32 Secured Promissory Note dated April 30, 2004 in the amount of
$1,000,000 by PHC, Inc. in favor of Louis C. Kirby, Carol Colombo and
Anthony Bonacci. (Note C)
10.33 Kirby employment and Non-Compete Agreement.
10.34 Colombo employment and Non-Compete Agreement.
10.35 First Amendment to Membership Purchase Agreement and Colombo
employment agreement and Note C.
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SIGNATURE
Pursuant to the requirements of the securities exchange act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PHC, INC.
Date: May 13, 2004 By: /s/ Bruce A. Shear
_____________________
Bruce A. Shear
President
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