SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
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
-- 1 --
PHC, Inc. (the "Company") hereby amends its Current Report on Form 8-K, event
date April 30, 2004, in order to supply additional information regarding the
acquisition and to file the financial statements and pro forma financial
information required by Item 7 of Form 8-K.
Item 2. Acquisition of Assets
In connection with the acquisition, the Company is obligated to pay $280,000 and
issue 200,000 warrants to purchase shares of Class A common stock as a finder's
fee to Bathgate Capital. For more information on the acquisition, see the
Company's current report on form 8-K filed with the Securities and Exchange
Commission on May 13, 2004.
-- 2 --
Item 7. Financial Statements and Exhibits
a) AUDITED FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
PIVOTAL RESEARCH CENTERS, LLC
CONTENTS
Page No.
INDEPENDENT AUDITORS' REPORT ON THE
FINANCIAL STATEMENTS 4
FINANCIAL STATEMENTS
Balance Sheets 5
Statements of Earnings 6
Statements of Cash Flows 7
Notes to Financial Statements 8 - 11
-- 3 --
INDEPENDENT AUDITORS' REPORT
To the Members
Pivotal Research Centers, LLC. Peoria, Arizona
We have audited the accompanying balance sheets of Pivotal Research Centers,
LLC, an Arizona corporation, as of June 30, 2003 and 2002 and the related
statements of earnings and cashflows, for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with U. S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pivotal Research Centers, LLC.,
as of June 30, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended in conformity with U. S. generally accepted
accounting principles.
/s/ Woods & Dwyer, P.L.C.
October 23, 2003
-- 4 --
PIVOTAL RESEARCH CENTERS, LLC
BALANCE SHEETS
June 30, 2003 and 2002
ASSETS
2003 2002
CURRENT ASSETS
Cash and cash equivalents $ 561,706 $ 339,749
Accounts receivable 1,182,376 815,628
Prepaid and other expenses 64,519 18,614
____________ ___________
Total current assets 1,808,601 1,173,991
____________ ___________
PROPERTY AND EQUIPMENT, at cost
Computer equipment 89,166 85,413
Furniture and fixtures 113,518 113,029
Medical equipment 48,316 48,316
Leasehold improvements 51,097 51,097
____________ ___________
302,097 297,855
Less accumulated depreciation 216,466 163,651
____________ ___________
85,631 134,204
____________ ___________
Deposits and other assets 31,524 26,580
____________ ___________
Total Assets $1,925,756 $1,334,775
============ ==========
LIABILTIES AND EQUITY
2003 2002
LIABILITIES
Accounts payable and other $ 87,229 $ 63,974
Accrued payroll, payroll taxes and benefits 146,882 65,044
____________ ___________
Total current liabilities 234,111 129,018
____________ ___________
MEMBER'S EQUITY
Capital contributions 293,806 293,806
Retained earnings 1,397,839 911,951
____________ ___________
1,691,645 1,205,757
____________ ___________
Total Liabilities and owners equity $ 1,925,756 1,334,775
____________ ___________
See Independent Auditors' Report and Notes to Financial Statements
-- 5 --
PIVOTAL RESEARCH CENTERS, LLC
STATEMENTS OF EARNINGS
For the Years Ended June 30, 2003 and 2002
2003 2002
Pharmaceutical study revenue $3,941,428 $3,171,667
Cost of revenue 1,477,974 1,284,998
____________ ___________
Gross profit 2,463,454 1,886,669
____________ ___________
Operating expenses 1,737,246 1,774,951
____________ ___________
Income from operations 726,208 111,718
____________ ___________
Other income (expense)
Interest income, net 3,780 6,240
____________ ___________
3,780 6,240
____________ ___________
Net income 729,988 117,958
____________ ___________
Retained earnings, beginning of year 911,951 1,019,393
Less distributions 244,100 225,400
____________ ___________
Retained earnings, end of year $1,397,839 $ 911,951
=========== ===========
See Independent Auditors' Report and Notes to Financial Statements
-- 6 --
PIVOTAL RESEARCH CENTERS, LLC
STATEMENT OF CAHS FLOWS
For the Years Ended June 30, 2003 and 2002
2003 2002
Cash flows from operating activities
Net earnings (loss) $ 729,988 $ 117,958
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities
Depreciation 52,815 60,884
782,803 178,842
Accruals of expected future operating cash
receipts and payments
Decrease (increase) in:
Accounts receivable (366,748) 7,948
Prepaid expense and other (45,655) (1,241)
Deposits and other assets (5,194) --
Increase (decrease) in:
Accounts payable and other 23,255 (2,776)
Accrued payroll, payroll taxes and benefits 81,838 59,302
_________ ________
(312,504) 63,233
_________ _________
Net cash provided (used) by operating
activities 470,299 242,075
_________ _________
Cash flows from investing activities
Acquisition of property and equipment (4,242) (13,599)
_________ _________
Net cash provided (used) by investing activities (4,242) (13,599)
_________ _________
Cash flows from financing activities:
Distributions (244,100) (225,400)
_________ _________
Net cash provided (used) by financing activities (244,100) (225,400)
_________ _________
Net increase (decrease) in cash 221,957 3,076
Cash and cash equivalents at beginning of year 339,749 336,673
Cash and cash equivalents at end of year 561,706 339,749
========== =========
Supplemental Cash Flow Disclosure
Interest Expense $951 $1,117
========== =========
See Independent Auditors' Report and Notes to Financial Statements
-- 7 --
PIVOTAL RESEARCH CENTERS, LLC
NOTES TO FINANCIAL STATEMENTS
For the years ended June 30, 2003 and 2002
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES AND OTHER GENERAL MATERS
Nature of Operations
The Company was formed in the State of Arizona in January of 1997, and is
currently engaged in clinical drug testing, primarily in Maricopa County in the
State of Arizona. These clinical operations encompass all activities associated
with the management, administration, and documentation of drug testing
protocols.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with maturities of 90 days or less to be cash
equivalents.
Accounts Receivable
Due to the nature of its customers, management believes that all accounts
receivable are fully collectible. Therefore, no allowance for doubtful accounts
has been provided for the years ended June 30, 2003 and 2002.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs are charged
against operations in the year incurred, and major additions to property and
equipment are capitalized. When assets are sold or retired, the cost and related
accumulated depreciation are removed from the appropriate accounts, and the
resulting gain or loss is included in operations. Depreciation is provided for
by the straight-line method over the following estimated useful lives:
Computer Equipment 3 -5 years
Furniture and Fixtures 5 years
Medical Equipment 5 years
Leasehold Improvements 5 years
Depreciation expense for the years ended June 30, 2003 and 2002 was
approximately $52,815 and $60,844, respectively.
Accrued Payroll, Payroll Taxes and Benefits
At June 30 2003 and 2002, accrued payroll, payroll taxes and benefits consist of
the following:
Accrued wages $ 41,166 $ 37,496
Accrued bonus 72,600 --
Accrued paid time off (PTO) 33,116 27,548
_________ _________
$146,882 $65,044
========= =========
-- 8 --
PIVOTAL RESEARCH CENTERS, LLC
NOTES TO FINANCIAL STATEMENTS
For the years ended June 30, 2003 and 2002
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES AND OTHER GENERAL MATERS (Continued)
Employees are eligible to receive an annual bonus based upon certain performance
criteria achieved by the Company. Bonus amounts are computed and paid as of
December 31. The amounts accrued at June 30, 2003 and 2002, are based upon
anticipated results of operations for the twelve months ended December 31, 2003
and 2002.
PTO (Paid Time Off) is accrued each pay period from the date of hire and is
based upon years of employment with the Company. The available PTO for all
employees is computed annually at September 30th. If at the end of the next full
year of employment the employee has not used up more than the number of PTO
hours recorded during the prior year of employment, the number of hours not used
is transferred into a Serious Health Condition account to be used in the event
of an extended illness or other approved leave of absence.
Income Tax Status
The Company has elected to be treated as a partnership for federal and state
income tax purposes. Consequently, all tax effects of the Company's income or
loss are passed through to the members. As a result, no provision for income
taxes has been recorded in these financial statements.
Revenue Recognition
Pharmaceutical study revenue is recognized only after a pharmaceutical study
contract has been awarded and the patient has been selected and accepted based
on study criteria and billable units of service are provided.
Advertising Costs
The Company expenses all non-direct response advertising costs, as incurred. For
the years ended June 30, 2003 and 2002, the Company charged to expense $620,500
and $444,900 in advertising costs, respectively.
Note 2 USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires the members to make estimates and assumptions
which affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 3 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivables, other current assets,
accounts payable, and accrued expenses approximate fair value based on their
short-term maturity.
-- 9 --
PIVOTAL RESEARCH CENTERS, LLC
NOTES TO FINANCIAL STATEMENTS
For the years ended June 30, 2003 and 2002
NOTE 4 CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk are cash, major customers and vendors.
Cash
Concentrations of credit risk with respect to cash exist because, as of June 30,
2003 and 2002, approximately $324,700 and $208,700 was in excess of FDIC and
SIPC coverage for those funds.
Major Customers
For the years ended June 30, 2003 and 2002, sales to four, and three customers
aggregated 50% and 47% of the Company's total sales, respectively. As of June
30, 2003 and 2002 these customers comprised 37% and 49% of the ending accounts
receivable balance reported in these financial statements, respectively.
Major Vendors
For the years ended June 30, 2003 and 2002, purchases from, one vendor
aggregated 24% and 20% of the Company's total expenditures, respectively. As of
June 30, 2003 and 2002, this customer comprised 21% and 48% of the ending
accounts payable balance reported in these financial statements, respectively.
NOTE 5 OPERATING LEASES
Real Estate
The Company, leases office space in Peoria, and Mesa, Arizona. The Peoria lease
is a six-year lease arrangement which began January 1, 2001 at a base rate of
approximately $16,200 per month, adjustable annually and personally guaranteed
by a 95% member. The Mesa lease is a five-year lease that began March 1, 2002,
at a base rate of approximately $9,000 per month, adjustable annually. The
Company leases office equipment for operational use at both its Peoria and Mesa
locations. Operating lease payments are $750 and $1,200 per month with maturity
dates through December of 2005.
Summary
Future minimum lease payments on operating leases for real estate and equipment
are as follows, for the years ended June 30, (excluding taxes and applicable
fees):
2004 $ 352,045
2005 361,241
2006 316,342
2007 112,677
__________
$1,142,305
==========
For the years ended June 30, 2003 and 2002, total lease expense charged to
operations was approximately $396,000 and $395,000, respectively.
-- 10 --
PIVOTAL RESEARCH CENTERS, LLC
NOTES TO FINANCIAL STATEMENTS
For the years ended June 30, 2003 and 2002
NOTE 6 RETIREMENT PLAN
The Company has a profit sharing 401(k) plan, covering substantially all
employees who qualify with respect to age and length of service. This plan does
not provide for employer matching or discretionary contributions.
NOTE 7 CONTINGENCIES
Subsequent to the date of the audit report but prior to its issuance, the
Company and a pharmaceutical company were named as co-defendants in a lawsuit
filed in Arizona Superior Court. The pharmaceutical has indemnified the Company
and has undertaken direct responsibility for litigation and settlement related
to the claim. Management anticipates that the pharmaceutical company will settle
the claim and expects that the Company will experience no economic loss.
-- 11 --
b) INTERIM FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
PIVOTAL RESEARCH CENTERS
INTERIM FINANCIAL STATEMENTS
For the nine months ended
March 31, 2004
CONTENTS
Page No
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
ON THE FINANCIAL STATEMENTS 13
FINANCIAL STATEMENTS
Balance Sheet 14
Statement of Earnings 15
Statement of Cash Flows 16
Notes to Financial Statements 17 - 21
-- 12 --
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Members of
Pivotal Research Centers, LLC. Peoria, Arizona
We have reviewed the accompanying balance sheet of Pivotal Research Centers,
LLC, as of the March 31, 2004, and the related Statements of earnings and cash
flows for the nine months ended, in accordance with Statements of Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of the management of Pivotal Research Centers, LLC.
A review consists principally of inquires of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principals.
/s/ Woods & Dwyer, P.L.C.
June 14, 2004
-- 13 --
PIVOTAL RESEARCH CENTERS, LLC
BALANCE SHEET
March 31, 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 597,725
Accounts receivable 1,101,015
Prepaid and other expenses 71,136
____________
Total Current Assets 1,769,876
____________
PROPERTY AND EQUIPMENT, at cost
Computer equipment 95,812
Furniture and fixtures 115,905
Medical equipment 60,940
Leasehold improvements 51,097
____________
323,754
Less accumulated depreciation 247,087
____________
76,667
____________
Deposits and Other Assets 30,107
____________
Total Assets $1,876,650
============
LIABILITIES
Accounts payable and other $ 63,517
Accrued payroll, payroll taxes and benefits 165,750
____________
Total current liabilities 229,267
____________
MEMBERS' EQUITY
Capital contributions 293,806
Retained earnings 1,353,577
____________
Total Liabilities and owners equity $ 1,876,650
===========
See Independent Accounts' Review Report and Notes to Financial Statements
-- 14 --
PIVOTAL RESEARCH CENTERS, LLC
STATEMENT OF EARNINGS
For The Nine Months Ended March 31, 2004
Pharmaceutical study revenue $3,249,861
Cost of revenue 1,288,554
___________
Gross profit 1,961,307
___________
Operating expenses 1,353,312
___________
Income from operations 607,995
___________
Other income (expense)
Interest income, net 5,343
___________
5,343
Net income 613,338
___________
Retained earnings, beginning of period 1,397,839
Less distributions 657,600
Retained earnings, end of period $ 1,353,577
===========
See Independent Accounts' Review Report and Notes to Financial Statements
-- 15 --
PIVOTAL RESEARCH CENTERS, LLC
STATEMENT OF CASH FLOWS
For The Nine Months Ended March 31, 2004
Net earnings (loss) $613,338
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating activities:
Depreciation 30,621
__________
643,959
Accruals of expected future operating
cash receipts and payments
Decrease (increase) in:
Accounts receivable 81,361
Prepaid expense and other (6,617)
Deposits and other 1,417
Increase (decrease) in
Accounts payable and other (23,712)
Accrued payroll, payroll taxes and benefits 18,868
__________
71,317
Net cash provided by operating activities 715,276
__________
Cash flows from investing activities
Acquisition of property and equipment (21,657)
__________
Net cash provided (used) by investing activities (21,657)
__________
Cash flows from financing activities:
Distributions (657,600)
__________
Net cash provided (used) by financing activities (657,600)
__________
Net increase (decrease) in cash 36,019
Cash and cash equivalents at beginning of year 561,706
__________
Cash and cash equivalents at end of year $597,725
==========
See Independent Accountants' Review Report and Notes to Financial Statements
-- 16 --
PIVOTAL RESEARCH CENTERS, LLC
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended March 31, 2004
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES AND OTHER GENERAL MATTERS
Nature of Operations
The Company was formed in the State of Arizona January of 1997, and is currently
engaged in clinical drug testing, primarily in Maricopa County in the State of
Arizona. These clinical operations encompass all activities associated with the
management, administration, and documentation of drug testing protocols.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with maturities of 90 days or less to be cash
equivalents.
Accounts Receivable
Due to the nature of its customers, management believes that all accounts
receivable are fully collectible. Therefore, no allowance for doubtful accounts
has been provided for the nine months ended March 31, 2004.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs are charged
against operations in the year incurred, and major additions to property and
equipment are capitalized. When assets are sold or retired, the cost and related
accumulated depreciation are removed from the appropriate accounts, and the
resulting gain or loss is included in operations. Depreciation is provided for
by the straight-line method over the following estimated useful lives:
Computer Equipment 3-5 years
Furniture and Fixtures 5 years
Medical Equipment 5 years
Leasehold improvements 5 years
Depreciation expense for the nine months ended March 31, 2004 was approximately
$30,600.
-- 17 --
PIVOTAL RESEARCH CENTERS, LLC
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended March 31, 2004
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES AND OTHER GENERAL MATTERS (Continued)
Accrued Payroll, Payroll Taxes and Benefits
At March 31, 2004, accrued payroll benefits consist of the following:
Accrued wages $ 55,132
Accrued bonus 35,500
Accrued paid time off (PTO) 40,618
________
$131,250
========
Employees are eligible to receive an annual bonus based upon certain performance
criteria achieved by the Company. Bonus amounts are computed and paid as of
December 31. The amount at March 31, 2004 is based upon anticipated results of
operations for the twelve months ended December 31, 2004.
PTO is accrued each pay period from the date of hire and is based upon years of
employment with the Company. The available PTO for all employees is computed
annually at September 30th. If at the end of the next full year of employment
the employee has not used up more than the number of PTO hours recorded during
the prior year of employment, the number of hours not used is transferred into a
Serious Health condition account to be used in the event of an extended illness
or other approved leave of absence.
Income Tax Status
The Company has elected to be treated as a partnership for federal and state
income tax purposes. Consequently, all tax effects of the Company's income or
loss are passed through to the members. As a result, no provision for income
taxes has been recorded in these financial statements.
-- 18 --
PIVOTAL RESEARCH CENTERS, LLC
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended March 31, 2004
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES AND OTHER GENERAL MATTERS (Continued)
Revenue Recognition
Pharmaceutical study revenue is recognized only after a pharmaceutical
study contract has been awarded and the patient has been selected and
accepted based on study criteria and billable units of service are
provided.
Advertising Costs
The Company expenses all non-direct response advertising costs as
incurred. For the nine months ended March 31, 2004, the Company
charged to expense approximately $198,000 in advertising costs.
NOTE 2 USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires the members to make estimates
and assumptions which affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 3 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivables, other current
assets, accounts payable, and accrued expenses approximate fair value
based on their short-term maturity,
NOTE 4 CONCENTRATION OF CREDIT RISK
Concentrations that potentially subject the Company to credit risk are
cash, major customers and major vendors.
-- 19 --
PIVOTAL RESEARCH CENTERS, LLC
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended March 31, 2004
NOTE 4 CONCENTRATION OF CREDIT RISK (Continued)
Cash
Concentrations of credit risk with respect to cash exist because, as
of March 31, 2004, approximately $599,000 was in excess of FDIC and
SIPC coverage for those funds.
Major Customers
For the nine months ended March 31, 2004, sales to two customers
comprised approximately 20% of the Company's total sales. As of March
31, 2004 these two customers along with one other comprised
approximately 34% of the ending accounts receivable balance reported
in these financial statements.
Major Vendors
For the nine months ended March 31, 2004 purchases from one vendor
approximated 13% of the Company's total direct expenditures.
NOTE 5 OPERATING LEASES
Real Estate
The Company, leases office space in Peoria, and Mesa, Arizona. The
Peoria lease is a six-year lease arrangement, which began January 1,
2001 at a base rate of approximately $16,200 per month, adjustable
annually and personally guaranteed by a 95% member. The Mesa lease is
a five-year lease that began March 1, 2002, at a base rate of
approximately $9,000 per month, adjustable annually.
The Company leases office equipment for operational use at both its
Peoria and Mesa locations. Operating lease payments are approximately
$730 and $1,180 per month with maturity dates through December of
2005.
Summary
Future minimum lease payments on operating leases for real estate and
equipment are as follows, for years ended March 31, (excluding taxes
and applicable fees):
2005 $336,112
2006 334,518
2007 169,015
________
$839,645
========
For the nine months ended March 31, 2004, total lease expense charged
to operations was approximately $298,000.
NOTE 6 RETIREMENT PLAN
The Company has a profit sharing 401 (k) plan, covering substantially
all employees who qualify with respect to age and length of service.
This plan does not provide for employer matching or discretionary
contributions.
-- 20 --
PIVOTAL RESEARCH CENTERS, LLC
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended March 31, 2004
NOTE 7 CONTINGENCIES
Subsequent to the date of the review report but prior to its issuance,
the Company and a pharmaceutical company were named as co-defendants
in a lawsuit filed in Arizona Superior Court. The pharmaceutical has
indemnified the Company and has undertaken direct responsibility for
litigation and settlement related to the claim. Management anticipates
that the pharmaceutical company will settle the claim and expects that
the Company will experience no economic loss.
NOTE 8 SUBSEQUENT EVENT
Effective April 30, 2004, the members of the Company sold their
ownership interest to PHC, Inc., d.b.a. Pioneer Behavioral Health
(Pioneer). Pioneer is a public Company whose stock is traded on the
OTC Bulletin Board. They paid $1.5 million in cash and $500,000 in
PHC, Inc. common stock plus performance based notes, which were staged
during the next five years based on future profitability.
-- 21 --
c) PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Financial Information
The following unaudited pro forma condensed combined balance sheet as of March
31, 2004, the related unaudited pro forma condensed combined statements of
operations for the fiscal year ended June 30, 2003 and for the nine months ended
March 31, 2004, all give pro forma effect to the acquisition of 100% of the
membership interest in Pivotal Research Centers, LLC ("Pivotal").
These unaudited pro forma condensed combined financial statements are presented
for illustrative purposes only and do not purport to be indicative of the
results of operations for future periods or the results that actually would have
been realized had the Company and Pivotal been a consolidated company during the
specified periods.
The unaudited pro forma condensed combined financial statements are based on the
respective audited and unaudited historical consolidated financial statements
and the notes thereto of the Company and Pivotal after giving effect to the
acquisition using the purchase method of accounting and assumptions and
adjustments described below and in the notes of the unaudited pro forma
condensed combined financial statements.
The unaudited pro forma condensed combined statements of operations for the year
ended June 30, 2003 and the nine months ended March 31, 2004 assume the
acquisition occurred on July 1, 2002.
In the accompanying unaudited pro forma condensed combined balance sheet as of
March 31, 2004, the estimated purchase price of Pivotal is allocated to the
estimated fair value of the assets acquired and liabilities assumed based on the
balance sheet on the date of acquisition. The final purchase price allocation
will be based upon independent appraisals of certain intangible assets of
Pivotal. The preliminary purchase price allocation included in the accompanying
unaudited pro forma condensed combined financial statements is based upon
estimates which are subject to audit and revision.
The pro forma adjustments are based upon available information and upon certain
assumptions as described in the notes to the unaudited pro forma condensed
combined financial statements that the Company's management believes are
reasonable in the circumstances.
The unaudited pro forma condensed combined financial statements and accompanying
notes should be read in conjunction with the historical consolidated financial
statements and accompanying notes thereto of the Company included in its Annual
Report on Form 10-KSB for the year ended June 30, 2003 as well as its Quarterly
Report on Form 10-QSB for the three and nine months ended March 31, 2004, which
were filed with the Securities and Exchange Commission on September 19, 2003 and
May 13, 2004, respectively.
-- 22 --
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended June 30, 2003
(in thousands, except per share data)
Historical Pro Forma
Combined
PHC, Inc. Pivotal Adjustments Company
_______________________________________________________________________________
Revenues:
Patient care, net $21,243 $ -- $ -- $21,243
Pharmaceutical study 941 3,941 -- 4,882
Contract support services 1,649 -- -- 1,649
________ ________ ________ _________
Total revenues 23,833 3,941 -- 27,774
________ ________ ________ _________
Operating expenses:
Patient care expenses 11,830 -- -- 11,830
Cost of contract support services 1,398 1,478 -- 2,876
Provision for doubtful accounts 1,108 -- -- 1,108
Website expenses 217 -- -- 217
Administrative expenses 7,834 1,737 228 (a) 9,799
________ ________ ________ ___________
Total operating expenses 22,387 3,215 228 25,830
________ ________ ________ ___________
Income from operations 1,446 726 (228) 1,944
________ ________ ________ ___________
Other income (expense):
Interest income 13 4 (4) (b) 13
Other income, net 115 -- -- 115
Interest expense (542) -- -- (c) (542)
________ ________ ________ ___________
Total other expense, net (414) 4 ( 4) (414)
________ ________ ________ ___________
Income before income taxes 1,032 730 (232) 1,530
Provision for income taxes 54 -- -- 54
________ ________ ________ ___________
Net income applicable to
common shareholders $ 978 $ 730 $ (232) $ 1,476
======== ======== ======== ===========
Basic net ncome per common share $ 0.07 $ 0.09
======= ===========
Basic weighted average number of
shares outstanding 13,944,047 16,289,593
========== ===========
Diluted net ncome per common
share $ 0.07 $ 0.09
========== ===========
Diluted weighted average
number of shares outstanding 14,564,078 17,014,725
========== ===========
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
-- 23 --
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Nine Months Ended March 31, 2004
(in thousands, except per share data)
Historical Pro Forma
Combined
PHC, Inc. Pivotal Adjustments Company
_______________________________________________________________________________
Revenues:
Patient care, net $ 16,324 $ -- $ -- $ 16,324
Pharmaceutical study 500 3,250 -- 3,750
Contract support services 2,240 -- -- 2,240
________ ________ ________ ________
Total revenues 19,064 3,250 -- 22,314
________ ________ ________ ________
Operating expenses:
Patient care expenses 9,034 -- -- 9,034
Cost of contract support services 1,667 1,289 -- 2,956
Provision for doubtful accounts 1,113 -- -- 1,113
Website expenses 219 -- -- 219
Administrative expenses 7,447 1,353 180 (a) 8,980
________ ________ ________ ________
Total operating expenses 19,480 2,642 180 22,302
________ ________ ________ ________
Income(loss) from operations (416) 608 (180) 12
________ ________ ________ ________
Other income (expense):
Interest income 26 5 (5) (b) 26
Other income, net 77 -- -- 77
Interest expense and other
financing costs (466) -- -- (c) (466)
________ ________ ________ ________
Total other expense, net (363) 5 (5) (363)
________ ________ ________ ________
Income(loss) before income taxes (779) 613 (185) (351)
Provision for income taxes 11 -- -- 11
________ ________ ________ ________
Net income(loss) (790) 613 (185) (362)
________ ________ ________ ________
Income applicable to common
shareholders $ (790) 613 (185) (362)
========= ======== ======== =======
Basic and diluted income per
common share $ (0.06) $ (0.02)
========= =========
Basic and diluted weighted average
number of shares outstanding 14,149,261 16,494,807
=========== ===========
The accompanying notes are an integral part of these unaudited
pro forma condensed financial statements.
-- 24 --
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 2004
(in thousands, except per share data)
Historical Pro Forma
Combined
PHC, Inc. Pivotal Adjustments Company
_______________________________________________________________________________
ASSETS
Current assets:
Cash and cash equivalents $ 964 $ 598 $ (538) (d) $1,024
Accounts receivable, net 4,924 1,101 (1,101) (e) 4,924
Prepaid expenses 273 71 8 (f) 352
Third party settlement receivables 10 -- -- 10
Other receivables and advances 307 -- 39 (g) 346
Deferred income tax assets, net 809 -- -- 809
________ ________ ________ ________
Total current assets 7,287 1,770 (1,592) 7,465
Accounts receivable, noncurrent 505 -- -- 505
Other receivables 94 -- -- 94
Property and equipment, net 1,297 77 8 (h) 1,382
Customer Relationships -- -- 2,400 (i) 2,400
Goodwill 969 -- 369 (j) 1,338
Other assets 385 30 (4) (k) 411
________ ________ ________ _______
Total assets $10,537 $ 1,877 $ 3,481 $13,595
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,403 $ 63 $ (63) (l) 1,403
Notes payable--related parties 100 -- -- 100
Current maturities of long-term
debt 1,886 -- -- 1,886
Revolving credit note 1,675 -- -- 1,675
Deferred revenue 65 -- 56 (m) 121
Current portion of obligations
under capital leases 26 -- -- 26
Accrued payroll, payroll taxes
and benefits 1,117 166 (30) (n) 1,253
Accrued expenses and other
liabilities 1,413 -- 5 (o) 1,418
Convertible debentures 250 -- -- 250
________ ________ ________ _______
Total current liabilities 7,935 229 (32) 8,132
________ ________ ________ _______
Long-term debt 432 -- 200 (p) 632
Obligations under capital leases,
net of current portion 24 -- -- 24
________ ________ ________ _______
Total noncurrent liabilities
456 -- 2,500 656
________ ________ ________ _______
Total liabilities 8,391 229 2,468 8,788
________ ________ ________ _______
Stockholders' equity:
Class A common stock, $.01 par value;
20,000,000 shares authorized,
14,354,059 shares issued at March
31, 2004 144 -- 23 (q) 167
Class B common stock, $.01 par
value; 2,000,000 shares
authorized, 726,991 outstanding
convertible into 726,991
shares of Class A common stock 7 -- -- 7
Additional paid-in capital 20,107 294 2,344 (r) 22,745
Treasury stock, 148,020 shares
of Class A common stock at March
31, 2004, at cost (121) -- -- (121)
Accumulated deficit (17,991) 1,354 (1,354) (s) (17,991)
________ ________ ________ _______
Total stockholders' equity 2,146 1,648 1,013 4,807
Total liabilities and
stockholders' equity $ 10,537 $ 1,877 $ 3,481 $13,595
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited
pro forma condensed combined financial statements.
-- 25 --
Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note 1. Basis of Presentation and Purchase Price
Included in the accompanying unaudited pro forma condensed combined financial
statements are PHC, Inc. and all previously owned subsidiaries and Pivotal
Research Centers, LLC, which was acquired by PHC, Inc. on April 30, 2004.
The Phoenix-based Pivotal significantly expands 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.
The Company paid $1.5 million in cash and $500,000 in PHC, Inc. Class A common
stock. The value of Class A common stock was determined in accordance with
EITF-99-12, "Determination of the Measurement Date for the Market Price of
Acquirer Securities issued in a Purchase Business Combination." 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 $1,000,00P0, 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. Whereby 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
notes.
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 notes
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, 2004 and each year thereafter multiplied by
..35. In addition this note provides for the issuance of up to $200,000 in PHC,
Inc. Class A common stock, should the total of the five notes payments be less
then the $1,000,000 face value of the Note.
In accordance with SFAS No 141, "Business Combinations", the value of the notes
is considered to be contingent consideration and will be recorded as additional
purchase price as the contingencies are resolved and the price is fixed.
However, the floor of Note C of $200,000 was recorded as purchase price on the
date of acquisition.
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 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, conditions
whether or not asserted prior to the Closing Date.
-- 26 --
Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note 1. Basis of Presentation and Purchase Price (continued)
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.
In connection with the acquisition, the company is obligated to pay
$280,000 and issue 200,000 warrants to purchase shares of Class A common
stock as a finder's fee to Bathgate Capital valued at $51,000 using the
Black-Scholes. In addition to this amount, the Company expended an
additional $323,000 in expenses related to the transaction which are
included as additional purchase price in the related pro forma financial
information.
The following is a summary of estimated total purchase price:
Cash Paid $1,500,000
Common Stock 500,000
Note C Value 200,000
Acquisition Costs 654,000
___________
$2,854,000
===========
The following table indicates the estimated purchase price allocations:
Furniture and Equipment $ 85,000
Customer Relationships 2,400,000
Goodwill 369,000
____________
$2,854,000
Pioneer determined that it would be in the best interest of the shareholders to
finance this transaction through equity as opposed to debt, since favorable debt
issuance was not available. Therefore, the Company offered 2,000,000 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 liquidity features. As a result of
this transaction the Company issued 1,918,196 shares of Class A Common Stock for
approximately $2,110,000 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.
Note 2. Pro Forma Adjustments
The following describes the pro forma adjustments made to the accompanying
unaudited pro forma condensed combined financial statements:
(a) Administrative expenses are adjusted as follows:
i. to reflect decreased depreciation based on the use of straight
line depreciation for three years on the acquired fixed assets.
This amounts to an adjustment of $24,000 for the year ended June
30, 2003 and $9,000 for the nine months ended March 31, 2004.
ii. to reflect additional audit expenses of $1,000 per month.
iii. to reflect increased amortization expense of $20,000 monthly
based on the allocation of the purchase price of $2.4 million to
customer relationships with an estimated life of 10 years.
(b) Interest income from the Pivotal records was eliminated as depository
accounts of Pivotal were not transferred as a part of the acquisition.
(c) Interest expense was not increased as the only acquisition debt
recorded in the acquisition relates to the issuance of common stock.
-- 27 --
Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note 2. Pro Forma Adjustments (continued)
(d) Cash was adjusted as follows:
i. to reflect the closing Pivotal cash of $23,000.
ii. to record the cash received in the sale of common stock of
$2,110,000.
iii. to record the cash payment made for the acquisition of
$1,500,000.
iv. To record the payment of acquisition expenses of $603,000.
(e) Pivotal Accounts Receivables were retained by the sellers and
eliminated from the balance sheet.
(f) Prepaid expenses of Pivotal were increased to show $79,000 which was
purchased by PHC as shown in the closing statement.
(g) Other receivables was increased $39,000 to reflect the amount due to
PHC from the sellers to compensate for accrued expenses in the closing
statement.
(h) Property and equipment was increased $8,000 to reflect the estimated
fair value of the purchased fixed assets.
(i) Customer relationship was increased by $2,400,000 to reflect the
estimated fair value of this intangible asset purchased.
(j) Goodwill was increased to reflect the remaining purchase price
allocation.
(k) Other assets was decreased to reflect the fair value of deposits
purchased by PHC as shown in the closing statement.
(l) Accounts payable was decreased as payment is the responsibility of the
sellers as reflected in the closing statement.
(m) Deferred revenue was increased by $56,000 to show prepayment received
by the sellers on current studies as shown in the closing statement.
(n) Accrued payroll, payroll taxes, and benefits was decreased to show the
responsibility of PHC for future payment as shown in the closing
statement.
(o) Accrued expenses was increased to show the responsibility of PHC for
future payment as shown in the closing statement.
(p) Long-term debt was increased to reflect the Notes payable to the
sellers as part of the purchase price of Pivotal.
(q) Class A common stock was increased by $23,000 to show the effect of
the par value of 427,350 shares issued as a part of the Pivotal
acquisition and 1,918,196 shares issued as part of the private
placement.
(r) Additional paid in capital was decreased by $294,000 to eliminate the
sellers capital; increased by $2,587,000 to reflect the shares issued
in the acquisition and private placement; and increased by $51,000 to
reflect the value of the warrants issued by the Company as a finder's
fee to Bathgate Capital.
(s) Accumulated deficit was decreased by $1,354,000 to eliminate the
retained earnings of the sellers.
-- 28 --
Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note 3. Pro Forma Income (Loss) Per Share
For the year ended June 30, 2003 and nine months ended March 31, 2004, the
unaudited pro forma basic and diluted income (loss) per share amounts are
calculated based on the weighted average number of PHC, Inc. common shares
outstanding prior to the acquisition plus the 427,350 shares issued upon closing
of the acquisition, plus the 1,918,196 shares issued in the private placement
outlined in Note 1. Common stock equivalents resulting from assumed exercise of
warrants issued in these transactions are not included in the diluted loss per
share calculation for the nine months ended March 31, 2004 because to do so
would have been anti-dilutive. However, such common stock equivalents are
included in the diluted income per share calculation for the year ended June 30,
2003.
-- 29 --
(d) EXHIBITS
The following exhibits were filed with the initial report on Form 8-K or are
being filed with this document.
*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.
**23.1 Consent of Wood & Dwyer, P.L.C. accountants for the acquired
company.
* Previously filed with Current Report on Form 8-K filed May 13, 2004
** Filed herewith
-- 30 --
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: June 29, 2004 By: /s/ Bruce A. Shear
________________________
Bruce A. Shear
President
-- 31 --