8-K/A 1 k8a_629.txt AMENDMENT TO 8K FINANCIAL STATEMENTS 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 --