-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CQQj6QKPQ49mHFisAm1JUi1NAQCtphQKJQ2aYOrZipgdJuu8wfETu3fdMwY0JpTu NBQkNtJ2f6iVXKmAv1VwSg== 0000915127-01-500023.txt : 20010515 0000915127-01-500023.hdr.sgml : 20010515 ACCESSION NUMBER: 0000915127-01-500023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHC INC /MA/ CENTRAL INDEX KEY: 0000915127 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 042601571 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22916 FILM NUMBER: 1632160 BUSINESS ADDRESS: STREET 1: 200 LAKE ST STE 102 CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 9785362777 MAIL ADDRESS: STREET 1: 200 LAKE ST STREET 2: STE 102 CITY: PEABODY STATE: MA ZIP: 01960 10-Q 1 q10q3doc.txt FORM 10-Q QUARTER ENDED 03/31/01 U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001. |_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ______________ Commission file number 0-22916 _________ PHC, INC. (Exact name of small business issuer as specified in its charter) Massachusetts 04-2601571 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Lake Street, Suite 102, Peabody MA 01960 (Address of principal executive offices) (Zip Code) 978-536-2777 (Issuer's telephone number) - ------------------------------------------------------------------------------- Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X No___ Number of shares outstanding of each class of common equity, as of April 30, 2000: Class A Common Stock 8,508,308 Class B Common Stock 726,991 Transitional Small Business Disclosure Format (Check one): Yes______ No X PHC, Inc. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - March 31, 2001 and June 30, 2000. Condensed Consolidated Statements of Operations - Three months ended March 31, 2001 and March 31, 2000; Nine months ended March 31, 2001 and March 31, 2000. Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2001 and March 31, 2000. Notes to Condensed Consolidated Financial Statements - March 31, 2001. Item 2. Management's Discussion and Analysis or Plan of Operation PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits Signatures PART I. FINANCIAL INFORMATION Item 1 Financial Statements PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March, 31 June, 30 2001 2000 _________________________________________ ASSETS (Unaudited) Current assets: Cash & cash equivalents $ 75,319 $ 551,713 Accounts receivable, net of allowance for bad debts of $2,879,859 at March 31, 2001, 5,790,487 6,286,490 $2,850,470 at June 30, 2000 Prepaid expenses 112,393 120,481 Other receivables and advances 229,654 148,554 Deferred income tax asset 459,280 459,280 Other receivables, related party RPS 329,289 -- Other receivables, related party 78,256 77,500 ____________ ____________ Total current assets 7,074,678 7,644,018 Accounts receivable, noncurrent 736,000 642,000 Other receivables, noncurrent, related party, net of allowance for doubtful accounts of -- 3,239,456 $1,125,054 at June 30, 2000 (Note B) Other receivables 132,537 95,214 Property and equipment, net 1,361,767 1,327,630 Deferred income taxes 154,700 154,700 Deferred financing costs, net of amortization of $112,108 at March 31, 2001 and $87,555 at June 22,000 46,554 30, 2000 Goodwill, net of accumulated amortization of $251,667 at March 31, 2001 and $296,907 at June 1,093,170 2,630,265 30, 2000 (Note B) Other assets 127,284 107,972 _____________ _____________ Total assets $10,702,136 $15,887,809 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $2,617,879 $ 1,717,362 Notes payable--related parties 200,000 200,000 Current maturities of long-term debt 989,174 1,622,239 Revolving credit note 1,860,767 1,555,149 Deferred Revenue 19,504 -- Current portion of obligations under capital 18,946 45,482 leases Accrued payroll, payroll taxes and benefits 413,149 416,111 Accrued expenses and other liabilities 1,270,010 1,798,400 Net liabilities of discontinued operations (Note F) 965,213 1,884,234 _____________ _____________ Total current liabilities 8,354,642 9,238,977 _____________ _____________ Long-term debt 2,893,476 2,508,715 Obligations under capital leases 15,349 12,808 Convertible debentures 500,000 500,000 _____________ _____________ Total noncurrent liabilities 3,408,825 3,021,523 _____________ _____________ Total liabilities 11,763,467 12,260,500 _____________ _____________ Stockholders' equity (deficit): Preferred stock, $.01 par value; 1,000,000 shares authorized, 155,700 and 136,000 issued and outstanding March 31, 2001 and June 30, 2000, respectively 1,557 1,360 Class A common stock, $.01 par value; 20,000,000 shares authorized, 8,370,209 and 7,019,608 shares issued March 31, 2001 and 83,702 70,196 June 30, 2000, respectively Class B common stock, $.01 par value; 2,000,000 shares authorized, 726,991 issued and outstanding March 31, 2001 and June 30, 2000, convertible into one share of Class A common stock 7,270 7,270 Additional paid-in capital 18,676,954 17,895,162 Treasury stock, 14,526 and 2,776 shares at (22,122) (12,122) cost at March 31, 2001 and June 30, 2000 Notes receivable, common stock (80,000) -- Accumulated deficit (19,728,692) (14,334,557) _____________ _____________ Total stockholders' equity (deficit) (1,061,331) 3,627,309 _____________ _____________ Total liabilities and stockholders' equity (deficit) $10,702,136 15,887,809 ============= ============ See Notes to Condensed Consolidated Financial Statements. PHC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended March 31 March 31 ______________________________________________ 2001 2000 2001 2000 Revenues: Patient Care, net $5,763,309 $5,541,406 $15,516,547 $13,599,089 Management Fees -- 290,192 345,111 783,427 Pharmaceutical Study 115,196 -- 210,104 -- Website services 1,405 -- 16,486 -- Contract Support Services 334,945 148,434 723,098 469,076 __________ ___________ ___________ __________ Total revenue 6,214,855 5,980,032 16,811,346 14,851,592 __________ ___________ ___________ __________ Operating expenses: Patient care expenses 2,555,605 2,485,483 7,140,700 6,822,757 Cost of management contracts 288,470 147,133 651,602 364,899 Provision for doubtful accounts 289,687 532,248 1,914,594 1,522,691 Website expenses 365,946 200,817 1,103,835 548,657 Administrative expenses 1,980,646 1,895,836 5,427,774 5,373,104 Practice management closing expenses (Note B) -- -- 4,855,966 -- __________ ___________ ___________ __________ Total operating expenses 5,480,354 5,261,517 21,094,471 14,632,108 __________ ___________ ___________ __________ Income (loss) from operations 734,501 718,515 (4,283,125) 219,484 __________ ___________ ___________ __________ Interest income 8,288 111,604 22,774 309,780 Other income 24,663 7,481 46,790 55,597 Interest expense (268,661) (215,793) (782,826) (601,071) __________ ___________ ___________ __________ Total other expenses (235,710) (96,708) (713,262) (235,694) Income (loss) before Provision for Taxes 498,791 621,807 (4,996,387) (16,210) Provision for Income Taxes -- 53,189 44,450 53,289 __________ ___________ ___________ __________ Net income (loss) $ 498,791 $ 568,618 $(5,040,837) $ (69,499) =========== =========== =========== ========== BASIC AND DILUTED EARNINGS PER SHARE Net income (loss) $ 498,791 $ 568,618 $(5,040,837) $ (69,499) Dividends (31,613) (533,318) (180,385) (589,514) __________ ___________ ___________ __________ Income (loss) applicable to common shareholders $ 467,178 $ 35,300 $(5,221,222) $ (659,013) __________ ___________ ___________ __________ Basic income (loss) per common share $ 0.05 $ 0.00 $ (0.63) $ (0.10) Basic weighted average number of shares outstanding 8,655,613 7,225,013 8,264,481 6,645,742 Diluted income (loss) per common share $ 0.05 $ 0.00 $ (0.63) $ (0.10) Diluted weighted average number of shares outstanding 9,743,334 7,651,468 8,264,481 6,645,742 See Notes to Condensed Consolidated Financial Statements PHC INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended March 31 2001 2000 _____________________________ Cash flows from operating activities: Net loss $ (5,040,837) $ (69,499) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 187,942 249,474 Goodwill impairment 1,545,609 -- Write down of accounts receivable, 3,071,310 -- professional corporation Compensatory stock options, stock and warrants issued for obligations 22,630 104,490 Changes in: Accounts receivable 121,681 (580,750) Prepaid expenses 8,088 (60,419) Other assets (19,312) (22,511) Accounts payable 900,517 (148,397) Accrued expenses and other liabilities (511,848) 151,648 Net liabilities of discontinued operations (919,021) (327,335) _____________ ____________ Net cash used in operating activities (633,241) (703,299) Cash flows from investing activities: Acquisition of property and equipment (154,796) (64,231) Web development (70,226) -- Disposition of property, equipment and intangibles 3,689 -- _____________ ____________ Net cash used in investing activities (221,333) (64,231) Cash flows from financing activities: Revolving debt, net 305,618 244,811 Proceeds (repayment) of debt, net (272,299) 318,248 Deferred financing costs 24,554 (5,288) Preferred stock dividends (93,292) (4,809) Issuance of preferred stock at a discount 250,000 -- Common stock issued in earnout 297,500 -- Issuance of common stock -- 6,250 Cost related to issuance of capital stock (43,901) -- Notes issued for stock purchase (90,000) -- _____________ ____________ Net cash provided by financing activities 378,180 559,212 _____________ ____________ NET DECREASE IN CASH AND CASH EQUIVALENTS (476,394) (208,318) Beginning cash 551,713 381,170 _____________ ____________ ENDING CASH $ 75,319 $ 172,852 ============= ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 780,072 $ 616,071 Income taxes 94,780 88,689 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of preferred stock to common stock $ 143,000 $ 756,346 Issuance of preferred stock in lieu of cash dividends 0 33,386 Issuance of common stock in lieu of cash dividends 3,506 551,319 See Notes to Condensed Consolidated Financial Statements PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2001 Note A - The Company PHC, Inc. and its wholly owned subsidiaries (the "Company") is a national health care company specializing in behavioral health services including the treatment of substance abuse, which includes alcohol and drug dependency and related disorders and the provision of psychiatric services. The Company also provides management, administrative and online behavioral health services. The Company primarily operates under three business segments: (1) Behavioral health treatment services, including two substance abuse treatment facilities: Highland Ridge Hospital, located in Salt Lake City, Utah; and Mount Regis Center, located in Salem, Virginia, and eight psychiatric treatment locations which include Harbor Oaks Hospital, a 64-bed psychiatric hospital located in New Baltimore, Michigan and seven outpatient behavioral health locations (two in Las Vegas, Nevada operating as Harmony Healthcare, one in Shawnee Mission, Kansas operating as Total Concept and four locations operating as Pioneer Counseling Center in the Detroit, Michigan metropolitan area); (2) Behavioral health administrative services, including delivery of management, administrative and help line services. PHC, Inc. provides management and administrative services for its behavioral health treatment subsidiaries. BSC-NY, Inc., a subsidiary of PHC, Inc., which is now closed, provided management services on behalf of physician owned behavioral health practices in the greater New York City metropolitan area (see below). Pioneer Development and Support Services ("PDSS") provides help line services primarily through contracts with major railroads. Pioneer Pharmaceutical Research conducts studies of the effects of FDA approved psychiatric pharmaceuticals on a controlled population through contracts with major manufacturers of these pharmaceuticals; and (3) Behavioral health online services, which includes behavioral health education, training and products for the behavioral health professional, through its website wellplace.com formerly known as behavioralhealthonline.com. Note B - Practice Management Closing Expenses In December 2000 the Board decided to close its' BSC-NY, Inc. practice management operations due to recent deterioration of operating results. Revenues of BSC-NY, Inc were dependent on the success of the professional corporation, Rubenfaer Physician Services, P.C., for which it provided management services. Although the New York practice management operations reported operating income of approximately $131,000 for the fiscal year ended June 30, 2000, adverse business conditions resulted in a loss of approximately $399,000 for the six months ended December 31, 2000 before facility closing expenses of $4,855,966. These adverse operating conditions were caused by the decline in revenues produced by the professional corporation which is in the process of closing down its' business operations. The table below outlines practice management closing expenses. Goodwill impairment $1,545,609 Write down of the receivable due from the professional corporation 3,071,310 Lease termination and other expenses 239,047 _____________ $4,855,966 ============= Note C - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending June 30, 2001. The accompanying financial statements should be read in conjunction with the June 30, 2000 consolidated financial statements and footnotes thereto included in the Company's 10-KSB filed on September 29, 2000. Note D - Reclassifications Certain amounts have been reclassified to conform with the March 31, 2001 presentation. Note E - Business Segment Information The Company's behavioral health treatment services have similar economic characteristics, services, patients and clients. Accordingly, all behavioral health treatment services are reported on an aggregate basis under one segment. The Company's segments are more fully described in Note A above. Residual income and expenses from closed facilities are included in the administrative services segment. The administrative services segment for the nine months ended March 31, 2001 include $4,855,966 of facility closing expenses for the New York operations as detailed above. The following summarizes the Company's segment data: BEHAVIORAL HEALTH TREATMENT ADMINISTRATIVE ONLINE SERVICES SERVICES SERVICE ELIMINATIONS TOTAL _________________________________________________________ For the three months ended March 31, 2001 Revenues - external customers $5,763,309 $ 450,141 $ 1,405 $ -- $6,214,855 Revenues - intersegment -- 478,698 17,928 (496,626) -- Net income (loss) 1,173,941 (440,241) (234,909) -- 498,791 For the three months ended March 31, 2000 Revenues - external customers $5,541,406 $ 438,626 $ -- $ -- $5,980,032 Revenues - intersegment -- 464,000 -- (464,000) -- Net income (loss) 1,253,849 (559,414) (125,817) -- 568,618 For the nine months ended March 31, 2001 Revenues - external customers $15,516,547 $1,278,313 $ 16,486 $ -- $16,811,346 Revenues - intersegment -- 1,454,094 31,448 (1,485,542) -- Net income (loss) 2,148,422 (6,499,041) (690,218) -- (5,040,837) Total Assets 8,932,971 24,440,166 130,505 (22,801,506) 10,702,136 For the nine months ended March 31, 2000 Revenues - external customers $13,599,089 $1,252,503 $ -- $ -- $14,851,592 Revenues - intersegment -- 1,342,000 -- (1,342,000) -- Net income (loss) 1,294,107 (1,039,949) (323,657) -- (69,499) Total Assets 9,988,294 25,366,980 18,931 (19,761,349) 15,612,856 Note F - Net Liabilities of Discontinued Operations Net liabilities of discontinued operations relates to the Franvale closure in 1998 and consists of the following: March 31, June 30, 2001 2000 __________________________________ Debt forgiveness and reserve for contingencies $ 2,641,537 $ 2,641,537 Less legal and other expenses incurred to date 1,676,324 757,303 ____________ _____________ Net liabilities of discontinued operations 965,213 1,884,234 ============ ============ The recognition of gain, if any, has been deferred until final resolution of all contingent liabilities related to the discontinued operations. Item 2. Management's Discussion and Analysis or Plan of Operation PHC, INC. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net patient care revenue increased 4.0% to $5,763,309 for the three months ended March 31, 2001 from $5,541,406 for the three months ended March 31, 2000 and 14.1% to $15,516,547 for the nine months ended March 31, 2001 from $13,599,089 for the nine months ended March 31, 2000. This increase in revenue is due primarily to an increase in rates, a more favorable payor mix and an increase in patient days for the nine months ended March 31, 2001, over the same period last year. Marketing efforts have continued to aid in maintaining a high patient census at all three in patient facilities. The key indicators of profitability of inpatient facilities are patient days, or census, and payor mix. Patient days is the product of the number of patients times length of stay. Increases in the number of patient days result in higher census, which coupled with a more favorable payor mix (more patients with higher paying insurance contracts or paying privately) will usually result in higher profitability. Therefore, patient census and payor mix are monitored very closely. During the quarter ended December 31, 2000 the company decided to close the New York practice management operations due to recent deterioration of operating results. The nine months ended March 31, 2001 includes practice management closing expenses of $4,855,966 which consists of goodwill impairment of $1,545,609, write down of the receivable due from the professional corporation of $3,071,310 and lease termination and other expenses of $239,047. The practice management impaired goodwill and a substantial portion of the accounts receivable relate to the purchase of the operations which was partially paid through the issuance of PHC class A common stock. Income before interest, taxes, depreciation, amortization, dividends, Behavioral Health Online and the New York operations was $1,077,139 for the three months ended March 31, 2001 and $1,908,350 for the nine months ended March 31, 2001 compared to $1,018,718 and $847,179 for the same periods last year. Contract support services revenue provided by PDSS increased 125.7% to $334,945 for the three months ended March 31, 2001 from $148,434 for the three months ended March 31, 2000 and 54.2% to $723,098 for the nine months ended March 31, 2001 from $469,076 for the same period last year. The cost of providing these services increased 96.1% to $288,470 for the three months ended March 31, 2001 from $147,133 for the three months ended March 31, 2000 and 78.6% to $651,602 for the nine months ended March 31, 2001 from $364,899 for the same period last year. These changes in revenue and expenses are due primarily to the addition of a new contract, which is being serviced jointly by PDSS and Behavioral Health Online, and carries with it high startup costs and an increase in services provided under existing contracts. The company also booked a small amount of revenue for website products and services and is now providing an additional revenue producing service by developing and hosting private label websites for individual therapists. The company's failure to secure funding for further web development has forced the company to change direction of this subsidiary to primarily provide support to the other Pioneer subsidiaries and continue to produce revenues through the private label websites. The company also booked pharmaceutical study revenue of $115,196 for the three months ended March 31, 2001 and $210,104 for the nine months ended March 31, 2001 in its newest, fastest growing subsidiary, PPR, Inc., which does business as Pioneer Pharmaceutical Research. Administrative expenses remained relatively constant increasing approximately 4.5% for the quarter ended March 31, 2001 and increasing slightly over one percent for the nine months ended March 31, 2001 compared to the same periods last year. The largest increase was in contract expenses related to PDSS of 96.6% for the three months ended March 31, 2001 and 78.6% for the nine months ended March 31, 2001. We also experienced increased expenses for our capitated rate contract services in Nevada. Website expenses include all costs relevant to the development and the operations of the Wellplace.com website. Website expenses increased 82.3% to $365,946 for the period ended March 31, 2001 from $200,817 for the three months ended March 31, 2000 and 101.2% to $1,103,835 for the nine months ended March 31, 2001 from $548,657 for the same period last year. The company has taken steps to reduce expenses for the internet company, largely through reduced staffing and consolidating office space with the corporate office. Patient care expenses increased by 2.8% to $2,555,605 for the three months ended March 31, 2001 from $2,485,483 for the three months ended March 31, 2000 and 4.7% to $7,140,700 for the nine months ended March 31, 2001 from $6,822,757 for the nine months ended March 31, 2000. These increases in expenses are due primarily to the increase in patient days as noted above with the primary increases in expenses directly related to patient census such as payroll, food, laundry, patient transportation and pharmacy. Bad debt expense decreased 45.6% to $289,687 for the three months ended March 31, 2001 from $532,248 for the three months ended March 31, 2000. This decrease is due to a larger percentage of accounts receivable in aging categories less than 150 days from the date of service, which carries with it a lower reserve requirement. Bad debt expense did increase 25.7% to $1,914,594 for the nine months ended March 31, 2001 from $1,522,691 for the same period last year. This increase is due primarily to increased patient care revenues and the company's continued assessment of collection exposures. Interest expense increased 24.5% to $268,661 for the three months ended March 31, 2001 from $215,793 for the three months ended March 31, 2000 and 30.2% to $782,826 for the nine months ended March 31, 2001 from $601,071 for the same period last year. This increase is due to increased utilization of the accounts receivable revolving credit and additional interest paid to secure and maintain a $330,000 overline in December, which was paid in full in April 2001. . Preferred stock dividends decreased to $31,613 for the quarter ended March 31, 2001 from $533,318 for the quarter ended March 31, 2000. The decrease in dividends is due primarily to the recording of the additional beneficial conversion feature of the series B preferred stock recorded upon conversion of the last of the Series B preferred stock in the quarter ended March 31, 2000. The dividends recorded in the quarter ended March 31, 2001, are a result of the 8% per year dividend rate on the series C convertible preferred stock. We continue to closely monitor accounts receivable collections and are maintaining significant reserves for bad debts. The bad debt reserve was approximately 31% of the accounts receivable balance, which decreased 5.8% to $6,526,487 at March 31, 2001 from $6,928,490 at June 30, 2000. The reserve for bad debt is based on he current age of accounts receivable and is expected to decrease as our more aggressive collection practices decrease the number of days our patient receivables remain unpaid. In addition to decreasing the number of days our patient receivables remain outstanding, our more timely follow-up practice has resulted in fewer accounts charged to bad debts due to untimely filing of claims since errors on claims are identified and corrected in a more timely manner than in prior years. The $736,000 shown as non-current patient accounts receivable is presented at net realizable value. These amounts are due from individuals in payment for treatment on which extended payment plans have been arranged and are being met. During the three months ended March 31, 2001 costs of $66,796 were incurred related to discontinued operations. These costs represent additional legal fees paid and accrued as a result of the ongoing Quality Care Centers of Massachusetts litigation and investigation as previously reported. When the bankruptcy proceedings of that subsidiary have been finalized any remaining net liabilities of the bankrupt subsidiary will result in increased equity in that amount. Liquidity and Capital Resources A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. Net accounts receivable from patient care decreased during the nine months ended March 31, 2001 by 5.8%, approximately $402,000. The Company continues to closely monitor its accounts receivable balances and is working to reduce amounts due consistent with growth in revenues. During the quarter ended March 31, 2001 the Company met its operating needs through ongoing accounts receivable financing and through debt and equity transactions as follows: In March 2001 the Company issued 18,838 shares of class A common stock as performance bonuses to the chief executive officers of high performing facilities. During the quarter ended March 31, 2001 the Company issued warrants to purchase 25,000 shares of class A common stock as payment for consulting services. In March 2001 the company signed an amendment to the Secured Term Note dated March 1997 extending payments on the Note through March 2003. We utilize our accounts receivable funding facilities to the maximum extent available to meet current cash needs and sustain existing operations. Although our treatment facilities are operating at a profit, expenses incurred by our internet company, Behavioral Health Online, Inc., losses incurred by the New York practice management company and the cash required for the Franvale settlement have caused negative cash flow from operations and created the need for additional financing. We have reduced expenses of the internet company through staff reductions. We are also in the process of closing the unprofitable New York operations. Should our existing operations result in unanticipated losses, we may be required to borrow funds on less favorable terms than have been available in the past. Management believes cash from operations and current financing arrangements will meet the company's operating cash needs for the immediate future. PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company's annual meeting of stockholders was held on January 11, 2001. In addition to the election of directors (with regards to which (I) proxies were solicited pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, (II) there was no solicitation in opposition to the management's nominees as listed on the proxy statement, and (III) all of such nominees were elected), the stockholders ratified the selection by the Board of Directors of BDO Seidman, LLP as the Company's independent auditors for the fiscal year ending June 30, 2001. Item 6. Exhibits Exhibit No. Description ___________ ________________________________________________________________ 3.1.2 Restated Articles of Organization of the Registrant, as amended 4.39 Certificate of Designation of Series C Convertible Preferred Stock of PHC, Inc. adopted by the Board of Directors on June 15, 2000 and June 26, 2000. 4.40 Warrant Agreement issued to Union Atlantic Capital, LC. to purchase 25,000 Class A Common shares dated March 20, 2001 4.41 Warrant Agreement issued to Union Atlantic Capital, LC. to purchase 10,000 Class A Common shares dated April 15, 2001 10.53 Consolidated Restated Mortgage by and between PHC of Michigan, Inc. and Heller Healthcare Finance, Inc., Second Amended and Restated Cross-Collateralization and Cross-Default Agreement dated March 9, 2001. 10.54 Amendment number one, dated March 2001, to the Secured Term Note by and between PHC of Michigan, Inc. and Heller Financial Partners - Funding II, L.P. in the amount of $1,100,000 dated March 1997. Signatures In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHC, Inc. Registrant Date: May 14, 2001 /s/ Bruce A. Shear President Chief Executive Officer Date: May 14, 2001 /s/ Paula C. Wurts Controller Treasurer EX-3 2 ex10q312.txt ARTICLES OF AMENDMENT Exhibit 3.1.2 FEDERAL IDENTIFICATION NO. ___________________ __________ THE COMMONWEALTH OF MASSACHUSETTS Examiner William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 __________ ARTICLES OF AMENDMENT Name (General Laws, Chapter 156B, Section 72) Approved We, Bruce A. Shear, President/Vice President and Paula C. Wurts, Clerk/Assistant Clerk located at 200 Lake Street, Suite 102, Peabody, Massachusetts 01960 certify that these Articles of Amendment affecting articles numbered: Article 4 (Number those articles 1, 2, 3, 4, 5 and/or 6 being amended) of the Articles of Amendment were duly adopted at a meeting held on January 18, 2001, by vote of: C 163,700 shares of Series C 8% Convertible Preferred Stock of 163,700 P shares outstanding M R.A. __________ shares of __________ of shares outstanding 1** being at least a majority of each type, class or series outstanding and entitled to vote thereon: 2** being at least two-thirds of each type, class or series outstanding and entitled to vote thereon and of each type, class or series of stock whose rights are adversely affected thereby: Article 4 of the Corporation's Restated Articles of Organization filed with the Secretary of the Commonwealth of Massachusetts on December 17, 1993, as modified by the Certificate of Vote of Directors Establishing a Class or Series of Stock filed with the Secretary of the Commonwealth of Massachusetts on June 27, 2000 (the "Certificate of Vote"), which Certificate of Vote set forth the rights and preferences of the Corporation's Series C 8% Convertible Preferred Stock, is hereby being amended by: (i) the restatement of all such rights and preferences as set forth in Continuation Sheets 1 through 19 hereto; and (ii) adding such rights and preferences, as so restated, the Restated Articles of Organization as a new paragraph G, with such paragraph G to follow Continuation Sheets 4A-4H currently included as part of the Restated Articles of Organization. phc\shaar\amendment The foregoing amendments(s) will become effective when these Articles of Amendment are filed in accordance with General Laws, Chapter 156B, Section 6 unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later Later effective date: ____________________________________________________ SIGNED UNDER THE PENALTIES OF PERJURY, this 15th day of February, 2001. We, Bruce A. Shear, President and Paula C. Wurts, Assistant Clerk CONTINUATION SHEETS 1-19 PARAGRAPH G phc\shaar\amendment EX-4 3 ex10q439.txt AMENDED & RESTATED CERTIFICATE Exhibit 4.39 AMENDED AND RESTATED CERTIFICATE OF DESIGNATION OF SERIES C 8% CONVERTIBLE PREFERRED STOCK OF PHC, Inc. ------------------------------------------------------------ Pursuant to Section 25 of the Business Corporation Law of the State of Massachusetts ------------------------------------------------------------ PHC, Inc., a corporation organized and existing under the General Corporation Law of the State of Massachusetts (the "Corporation"), hereby certifies that the following resolutions were adopted by the Board of Directors of the Corporation on June 15, 2000 and on June 26, 2000 pursuant to authority of the Board of Directors as required by Section 26 of the Business Corporation Law of the State of Massachusetts: Resolved, that pursuant to the authority granted to and vested in the Board of Directors of this Corporation (the "Board of Directors" or the "Board") in accordance with the provisions of its Certificate of Incorporation, the Board of Directors hereby authorizes a series of the Corporation's previously authorized Preferred Stock, par value $.01 per share (the "Preferred Stock"), and hereby states the designation and number of shares, and fixes the relative rights, preferences, privileges, powers and restrictions thereof as follows: Series C 8% Convertible Preferred Stock: ARTICLE 1 Definitions The terms defined in this Article whenever used in this Certificate of Designation have the following respective meanings: (a) "Additional Capital Shares" has the meaning set forth in Section 6.1(c). (b) "Affiliate" has the meaning ascribed to such term in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. (c) "Business Day" means a day other than Saturday, Sunday or any day on which banks located in the State of New York are authorized or obligated to close. (d) "Closing Date" has the meaning set forth in the Securities Purchase Agreement. (e) "Capital Shares" means the Common Shares and any other shares of any other class or series of capital stock, whether now or hereafter authorized and however designated, which have the right to participate in the distribution of earnings and assets (upon dissolution, liquidation or winding-up) of the Corporation. (f) "Common Shares" or "Common Stock" means shares of class A common stock, par value $.01 per share, of the Corporation. (g) "Common Stock Issued at Conversion", when used with reference to the securities issuable upon conversion of the Series C Preferred Stock, means all Common Shares now or hereafter Outstanding and securities of any other class or series into which the Series C Preferred Stock hereafter shall have been changed or substituted, whether now or hereafter created and however designated. (h) "Conversion Date" means any day on which all or any portion of shares of the Series C Preferred Stock is converted in accordance with the provisions hereof. (i) "Conversion Notice" means a written notice of conversion substantially in the form annexed hereto as Annex I. (j) "Conversion Price" means on any date of determination the applicable price for the conversion of shares of Series C Preferred Stock into Common Shares on such day as set forth in Section 6.1. (k) "Corporation" means PHC, Inc., a Massachusetts corporation, and any successor or resulting corporation by way of merger, consolidation, sale or exchange of all or substantially all of the Corporation's assets, or otherwise. (l) "Current Market Price" means on any date of determination the closing bid price of a Common Share on such day as reported on Nasdaq; provided, if such security bid is not listed or admitted to trading on Nasdaq, as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing bid price of such security on the over-the-counter market on the day in question as reported by Bloomberg LP, or a similar generally accepted reporting service, as the case may be. (m) [Reserved] (n) "Dividend Period" means the semi-annual period commencing on and including the Issue Date or, if a dividend has previously been paid, the day after the immediately preceding Dividend Payment Due Date and ending on and including the immediately subsequent Dividend Payment Due Date. (o) "Dividend Payment Due Date" means March 31 and September 30 of each year. (p) "Dividend Rate" means 8% per annum, computed on the basis of a 360-day year. (q) "Holder" means The Shaar Fund Ltd., any successor thereto, or any Person or Persons to whom the Series C Preferred Stock is subsequently transferred in accordance with the provisions hereof. (r) "Issue Date" means, as to any share of Series C Preferred Stock, the date of issuance of such share. (s) "Junior Securities" means all capital stock of the Corporation except for the Series C Preferred Stock. (t) "Liquidation Preference" means, with respect to a share of the Series C Preferred Stock, an amount equal to the sum of (i) the Stated Value thereof, plus (ii) the aggregate of all accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) on such share of Series C Preferred Stock until the most recent Dividend Payment Due Date; provided that, in the event of an actual liquidation, dissolution or winding up of the Corporation, the amount referred to in clause (iii) above shall be calculated by including accrued and unpaid dividends to the actual date of such liquidation, dissolution or winding up, rather than the Dividend Payment Due Date referred to above. (u) "Mandatory Conversion Date" has the meaning set forth in Section 6.8. (v) "Market Price" per Common Share means the arithmetic mean of the closing bid prices of the Common Shares as reported on Nasdaq for the five consecutive Trading Days on which the lowest closing bid prices are reported during any Valuation Period; provided, if such security bid is not listed or admitted to trading on Nasdaq, as reported on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the closing bid price of such security on the over-the-counter market on the day in question as reported by Bloomberg LP, or a similar generally accepted reporting service, for the five consecutive Trading Days on which the five lowest closing bid prices are reported during any Valuation Period. (w) "Nasdaq" means the Nasdaq SmallCap Market. (x) "Optional Redemption Price" has the meaning set forth in Section 6.5. (y) "Outstanding", when used with reference to Common Shares or Capital Shares (collectively, "Shares"), means, on any date of determination, all issued and outstanding Shares, and includes all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that any such Shares directly or indirectly owned or held by or for the account of the Corporation or any Subsidiary of the Corporation shall not be deemed "Outstanding" for purposes hereof. (z) "Person" means an individual, a corporation, a partnership, an association, a limited liability company, an unincorporated business organization, a trust or other entity or organization, and any government or political subdivision or any agency or instrumentality thereof. (aa) "Redemption Date" has the meaning set forth in Section 6.5. (bb) "Registration Rights Agreement" means that certain Registration Rights Agreement to be dated as of June 28, 2000 between the Corporation and The Shaar Fund Ltd. (cc) "SEC" means the United States Securities and Exchange Commission. (dd) "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as in effect at the time. (ee) "Securities Purchase Agreement" means that certain Securities Purchase Agreement to be dated as of June 28, 2000 between the Corporation and The Shaar Fund Ltd. (ff) "Series C Preferred Shares" or "Series C Preferred Stock" means the shares of Series C 8% Convertible Preferred Stock of the Corporation or such other convertible preferred stock of the Corporation as may be exchanged therefor. (gg) "Stated Value" has the meaning set forth in Article 2. (hh) "Subsidiary" means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by the Corporation. (ii) "Trading Day" means any day on which (a) purchases and sales of securities authorized for quotation on Nasdaq are reported thereon, (b) no event which results in a material suspension or limitation of trading of the Common Shares on Nasdaq has occurred and (c) at least one bid for the trading of Common Shares is reported on Nasdaq. (jj) "Valuation Event" has the meaning set forth in Section 6.1. (kk) "Valuation Period" means the period of 20 Trading Days immediately preceding the Conversion Date; provided, however, that if a Valuation Event occurs during a Valuation Period on a date less than 5 Trading Days before the Conversion Date, the Valuation Period shall be extended until the date 5 Trading Days after the occurrence of the Valuation Event. All references to "cash" or "$" herein mean currency of the United States of America. ARTICLE 2 Designation and Amount The designation of this series, which consists of 170,000 shares of Preferred Stock, shall be Series C 8% Convertible Preferred Stock (the "Series C Preferred Stock") and the stated value shall be $10 per share (the "Stated Value"). ARTICLE 3 Rank The Series C Preferred Stock shall rank prior to any other capital stock of the Corporation. ARTICLE 4 Dividends (a) (i) Subject to clause (iv) below, the Holder shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of dividends, dividends at the Dividend Rate on the Stated Value of each share of Series C Preferred Stock on and as of each Dividend Payment Due Date with respect to each Dividend Period. Dividends on the Series C Preferred Stock shall be cumulative from the date of issue, whether or not declared for any reason, including if such declaration is prohibited under any outstanding indebtedness or borrowings of the Corporation or any of its Subsidiaries, or any other contractual provision binding on the Corporation or any of its Subsidiaries, and whether or not there shall be funds legally available for the payment thereof. (ii) Subject to clause (iv) below, each dividend shall be payable in equal semi-annual amounts on each Dividend Payment Due Date, commencing September 30, 2000, to the Holders of record of shares of the Series C Preferred Stock, as they appear on the stock records of the Corporation at the close of business on such record date, not more than 60 days or less than 10 days preceding the payment dates thereof, as shall be fixed by the Board of Directors. Accrued and unpaid dividends for any past Dividend Period may be declared and paid at any time, without reference to any Dividend Payment Due Date, to Holders of record, not more than 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. (iii) At the option of the Corporation, the dividend shall be paid either (x) in cash or (y) through the issuance of duly and validly authorized and issued, fully paid and nonassessable shares of the Common Stock valued at the then applicable Conversion Price calculated in accordance with the provisions of Section 6.1, assuming for this purpose, that the applicable Dividend Payment Date is the applicable Conversion Date and registered for resale in open market transactions on the Registration Statement (as defined in the Registration Rights Agreement), which Registration Statement shall then be effective under the Securities Act; provided, however, that if no funds are legally available for the payment of cash dividends on the Series C Preferred Stock, dividends shall be paid as provided in clause(y) above. (iv) Notwithstanding anything to the contrary in this Certificate, at the option of the Corporation, the Corporation may postpone paying dividends on shares of Series C Preferred Stock until such shares of Series C Preferred Stock are converted. If the Corporation elects to pay dividends according to this clause (iv), such dividends will not be payable on the Dividend Payment Due Date but shall be payable in accordance with Section 6.1. (b) Except as provided in Section 4(d) hereof, the Holder shall not be entitled to any dividends in excess of the cumulative dividends, as herein provided, on the Series C Preferred Stock. (c) So long as any shares of the Series C Preferred Stock are outstanding, no dividends shall be declared or paid or set apart for payment or other distribution declared or made upon any Junior Securities, nor shall any Junior Securities be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of shares of Common Stock made for purposes of an employee incentive or benefit plan (including a stock option plan) of the Corporation or any Subsidiary) for any consideration by the Corporation, directly or indirectly, nor shall any moneys be paid to or made available for a sinking fund for the redemption of any shares of any Junior Securities, unless in each case (i) the full cumulative dividends required to be paid in cash on all outstanding shares of the Series C Preferred Stock shall have been paid or set apart for payment for all past Dividend Periods with respect to the Series C Preferred Stock and (ii) sufficient funds shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series C Preferred Stock. (d) If the Corporation shall at any time or from time to time after the Issue Date declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of stock or other securities or property or rights or warrants to subscribe for securities of the Corporation or any of its Subsidiaries by way of dividend or spin-off) on shares of its Common Stock, then, and in each such case, in addition to the dividend obligation of the Corporation specified in Section 4(a) hereof, the Corporation shall declare, order, pay and make the same dividend or distribution to each Holder of Series C Preferred Stock as would have been made with respect to the number of Common Shares the Holder would have received had it converted all of its Series C Preferred Shares, and exercised the Warrant held by it in full for all the Common Shares then underlying the Warrant, immediately prior to such dividend or distribution. ARTICLE 5 Liquidation Preference; Mergers, Consolidations, etc. (a) If the Corporation shall commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of 30 consecutive days and, on account of any such event, the Corporation shall liquidate, dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve or wind up, no distribution shall be made to the holders of any shares of capital stock of the Corporation upon liquidation, dissolution or winding-up unless prior thereto, the Holders of shares of Series C Preferred Stock, subject to this Article 5, shall have received the Liquidation Preference with respect to each share. (b) In case the Corporation shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another Person (where the Corporation is not the survivor or where there is a change in or distribution with respect to the Common Stock of the Corporation), sell, convey, transfer or otherwise dispose of all or substantially all its property, assets or business to another Person, or effectuate a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of (each, a "Fundamental Corporate Change") and, pursuant to the terms of such Fundamental Corporate Change, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Corporation, then each Holder of Series C Preferred Stock shall have the right thereafter, at its sole option, either (x) to require the Corporation to deem such Fundamental Corporate Change to be a liquidation, dissolution or winding up of the Corporation pursuant to which the Corporation shall be required to distribute, upon consummation of and as a condition to, such Fundamental Corporate Change an amount equal to 100% of the Liquidation Preference with respect to each outstanding share of Series C Preferred Stock, (y) to receive the number of shares of common stock of the successor or acquiring corporation or of the Corporation, if it is the surviving corporation, and Other Property as is receivable upon or as a result of such Fundamental Corporate Change by a holder of the number of shares of Common Stock into which such Series C Preferred Stock may be converted at the Conversion Price applicable immediately prior to such Fundamental Corporate Change or (z) require the Corporation, or such successor, resulting or purchasing corporation, as the case may be, to, without benefit of any additional consideration therefor, to execute and deliver to the Holder shares of its Preferred Stock with substantial identical rights, preferences, privileges, powers, restrictions and other terms as the Series C Preferred Stock equal to the number of shares of Series C Preferred Stock held by such Holder immediately prior to such Fundamental Corporate Change; provided, that all Holders of Series C Preferred Stock shall be deemed to elect the option set forth in clause (x) above if at least a majority in interest of such Holders elect such option. For purposes of this Section 5(b), "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 5(b) shall similarly apply to successive Fundamental Corporate Changes. ARTICLE 6 Conversion of Preferred Stock Section 6.1 Conversion; Conversion Price At the option of the Holder, the shares of Series C Preferred Stock may be converted, either in whole or in part, into Common Shares (calculated as to each such conversion to the nearest 1/100th of a share) at any time and from time to time following the earlier of (i) the date which is 180 days after the Closing Date and (ii) the date on which the registration statement filed pursuant to the Registration Rights Agreement becomes effective, at a Conversion Price per share of Common Stock equal to 90% of the Market Price. The number of shares of Common Stock due upon conversion of Series C Preferred Stock shall be (i) the number of shares of Series C Preferred Stock to be converted, multiplied by (ii) the Stated Value plus accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment), to the extent the Corporation does not at its election pay such accrued and unpaid dividends in cash, and divided by (iii) the applicable Conversion Price. Within two Business Days of the occurrence of a Valuation Event, the Corporation shall send notice thereof to each Holder. Notwithstanding anything to the contrary contained herein, if a Valuation Event occurs during any Valuation Period, the Holder may convert some or all of its Series C Preferred Stock, at its sole option, at a Conversion Price equal to the Current Market Price on any Trading Day during the Valuation Period. For purposes of this Section 6.1, a "Valuation Event" shall mean an event in which the Corporation takes any of the following actions: (a) subdivides or combines its Capital Shares; (b) makes any distribution on its Capital Shares; (c) issues any additional Capital Shares (the "Additional Capital Shares"), otherwise than as provided in the foregoing Sections 6.1(a) and 6.1(b) above, at a price per share less, or for other consideration lower, than the Current Market Price in effect immediately prior to such issuances, or without consideration, except for issuances under employee benefit plans consistent with those presently in effect and issuances under presently outstanding warrants, options or convertible securities; (d) issues any warrants, options or other rights to subscribe for or purchase any Additional Capital Shares if the price per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to such warrants, options or other rights shall be less than the Current Market Price in effect immediately prior to such issuance; (e) issues any securities convertible into or exchangeable or exercisable for Additional Capital Shares if the consideration per share for which Additional Capital Shares may at any time thereafter be issuable pursuant to the terms of such convertible, exchangeable or exercisable securities shall be less than the Current Market Price in effect immediately prior to such issuance; (f) announces or effects a Fundamental Corporate Change; (g) makes any distribution of its assets or evidences of indebtedness to the holders of its Capital Shares as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for the payment of dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of the Corporation's assets (other than under the circumstances provided for in the foregoing Sections 6.1(a) through 6.1(e)); or (h) takes any action affecting the number of Outstanding Capital Shares, other than an action described in any of the foregoing Sections 6.1(a) through 6.1(g) hereof, inclusive, which in the opinion of the Holder, determined in good faith, would have a material adverse effect upon the rights of the Holder at the time of a conversion of the Preferred Stock or is reasonably likely to result in a decrease in the Market Price. Section 6.2 Exercise of Conversion Privilege (a) Conversion of the Series C Preferred Stock may be exercised, in whole or in part, by the Holder by telecopying an executed and completed Conversion Notice to the Corporation. Each date on which a Conversion Notice is telecopied to the Corporation in accordance with the provisions of this Section 6.2 shall constitute a Conversion Date. The Corporation shall convert the Preferred Stock and issue the Common Stock Issued at Conversion, and all voting and other rights associated with the beneficial ownership of the Common Stock Issued at Conversion shall vest with the Holder, effective as of the Conversion Date at the time specified in the Conversion Notice. The Conversion Notice also shall state the name or names (with addresses) of the Persons who are to become the holders of the Common Stock Issued at Conversion in connection with such conversion. The Holder shall deliver the shares of Series C Preferred Stock to the Corporation by express courier within 30 days following the Conversion Date. Upon surrender for conversion, the Preferred Stock shall be accompanied by a proper assignment thereof to the Corporation or be endorsed in blank. As promptly as practicable after the receipt of the Conversion Notice as aforesaid, but in any event not more than five Business Days after the Corporation's receipt of such Conversion Notice, the Corporation shall (i) issue the Common Stock issued at Conversion in accordance with the provisions of this Article 6, and (ii) cause to be mailed for delivery by overnight courier to the Holder (x) a certificate or certificate(s) representing the number of Common Shares to which the Holder is entitled by virtue of such conversion, (y) cash, as provided in Section 6.3, in respect of any fraction of a Common Share issuable upon such conversion and (z) if the Corporation chooses to pay accrued and unpaid dividends in cash, cash in the amount of accrued and unpaid dividends as of the Conversion Date. Such conversion shall be deemed to have been effected at the time at which the Conversion Notice indicates so long as the Series C Preferred Stock shall have been surrendered as aforesaid at such time, and at such time the rights of the Holder of the Series C Preferred Stock, as such, shall cease and the Person or Persons in whose name or names the Common Stock Issued at Conversion shall be issuable shall be deemed to have become the holder or holders of record of the Common Shares represented thereby and all voting and other rights associated with the beneficial ownership of such Common Shares shall at such time vest with such Person or Persons. The Conversion Notice shall constitute a contract between the Holder and the Corporation, whereby the Holder shall be deemed to subscribe for the number of Common Shares which it will be entitled to receive upon such conversion and, in payment and satisfaction of such subscription (and for any cash adjustment to which it is entitled pursuant to Section 6.3), to surrender the Series C Preferred Stock and to release the Corporation from all liability thereon. No cash payment aggregating less than $1.00 shall be required to be given unless specifically requested by the Holder. (b) If, at any time (i) the Corporation challenges, disputes or denies the right of the Holder hereof to effect the conversion of the Series C Preferred Stock into Common Shares or otherwise dishonors or rejects any Conversion Notice delivered in accordance with this Section 6.2 or (ii) any third party commences any lawsuit or proceeding or otherwise asserts any claim before any court or public or governmental authority which seeks to challenge, deny, enjoin, limit, modify, delay or dispute the right of the Holder hereof to effect the conversion of the Series C Preferred Stock into Common Shares, then the Holder shall have the right, by written notice to the Corporation, to require the Corporation promptly to redeem the Series C Preferred Stock for cash at a redemption price equal to 135% of the Stated Value thereof together with all accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) thereon (the "Mandatory Purchase Amount"). Under any of the circumstances set forth above, the Corporation shall be responsible for the payment of all costs and expenses of the Holder, including reasonable legal fees and expenses, as and when incurred in disputing any such action or pursuing its rights hereunder (in addition to any other rights of the Holder). (c) The Holder shall be entitled to exercise its conversion privilege notwithstanding the commencement of any case under 11 U.S.C. (subscript)101 et seq. (the "Bankruptcy Code"). In the event the Corporation is a debtor under the Bankruptcy Code, the Corporation hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. (subscript)362 in respect of the Holder's conversion privilege. The Corporation hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. (subscript)362 in respect of the conversion of the Series C Preferred Stock. The Corporation agrees, without cost or expense to the Holder, to take or consent to any and all action necessary to effectuate relief under 11 U.S.C. (subscript)362. Section 6.3 Fractional Shares No fractional Common Shares or scrip representing fractional Common Shares shall be issued upon conversion of the Series C Preferred Stock. Instead of any fractional Common Shares which otherwise would be issuable upon conversion of the Series C Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction. Section 6.4 Adjustments to Conversion Price For so long as any shares of the Series C Preferred Stock are outstanding, if the Corporation issues and sells pursuant to an exemption from registration under the Securities Act (other than pursuant to presently outstanding warrants, options or convertible securities) (A) Common Shares at a purchase price that is lower than the Conversion Price on the date of issuance of such Common Shares, (B) warrants or options with an exercise price on the date of issuance thereof that is lower than the Conversion Price for the Holder on such date, except for warrants or options issued pursuant to employee stock option agreements or stock incentive agreements of the Corporation, or (C) convertible, exchangeable or exercisable securities with a right to exchange at lower than the Current Market Price on the date of issuance or conversion, as applicable, of such convertible, exchangeable or exercisable securities, except for stock option agreements or stock incentive agreements, then the Conversion Price shall be reduced to equal the lowest of any such purchase price, exercise price or exchange price, and the number of shares of Common Stock into which the Series C Preferred Stock is convertible pursuant to the second paragraph of Section 6.1 shall be correspondingly adjusted. After such reduction, the Conversion Price shall never exceed the Conversion Price as so reduced, in spite of any subsequent increase in the Market Price. Section 6.5 Optional Redemption At any time after the date of issuance of the Series C Preferred Stock until the Mandatory Conversion Date (as defined below), the Corporation, upon notice delivered to the Holder as provided in Section 6.6, may redeem, in cash, the Series C Preferred Stock (but only with respect to such shares as to which the Holder has not theretofore furnished a Conversion Notice in compliance with Section 6.2), at 100% of the Stated Value thereof (the "Optional Redemption Price"), together with all accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) thereon to the date of redemption (the "Redemption Date"); provided, however, that the Corporation may only redeem the Series C Preferred Stock under this Section 6.5 if the Current Market Price is less than the Current Market Price on the Issue Date. Except as set forth in this Section 6.5, the Corporation shall not have the right to redeem the Series C Preferred Stock. Section 6.6 Notice of Redemption Notice of redemption pursuant to Section 6.5 shall be provided by the Corporation to the Holder in writing (by registered mail or overnight courier at the Holder's last address appearing in the Corporation's security registry) not less than 10 nor more than 15 days prior to the Redemption Date, which notice shall specify the Redemption Date and refer to Section 6.5 (including a statement of the Current Market Price per Common Share) and this Section 6.6. Section 6.7 Surrender of Preferred Stock Upon any redemption of the Series C Preferred Stock pursuant to Sections 6.5 and 6.6, the Holder shall either deliver the Series C Preferred Stock by hand to the Corporation at its principal executive offices or surrender the same to the Corporation at such address by express courier within 14 days after the date that the Buyer receives payment therefore. Payment of the Optional Redemption Price shall be made by the Corporation to the Holder by wire transfer of immediately available funds to such account(s) as the Holder shall specify to the Corporation. If payment of such Optional Redemption Price is not made in full by the Redemption Date, the Holder shall again have the right to convert the Series C Preferred Stock as provided in Article 6 hereof. Section 6.8 Mandatory Conversion On the third anniversary of the date of this Certificate of Designation (the "Mandatory Conversion Date"), the Corporation shall convert all Series C Preferred Stock outstanding, at the Conversion Price utilizing the Stated Value (plus accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment)) as the value of each share of Series C Preferred Stock, into shares of Common Stock registered for resale in open market transactions on the Registration Statement (as defined in the Registration Rights Agreement), which Registration Statement shall then be effective under the Securities Act. Section 6.9 Certain Conversion Limitations (a) Notwithstanding anything herein to the contrary, the Holder shall not have the right, and the Corporation shall not have the obligation, to convert all or any portion of the Series C Preferred Stock (and the Corporation shall not have the right to pay dividends on the Series C Preferred Stock in shares of Common Stock) if and to the extent that the issuance to the Holder of shares of Common Stock upon such conversion (or payment of dividends) would result in the Holder being deemed the "beneficial owner" of more than 5% of the then Outstanding shares of Common Stock within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder. If any court of competent jurisdiction shall determine that the foregoing limitation is ineffective to prevent a Holder from being deemed the beneficial owner of more than 5% of the then Outstanding shares of Common Stock, then the Corporation shall redeem so many of such Holder's shares (the "Redemption Shares") of Series C Preferred Stock as are necessary to cause such Holder to be deemed the beneficial owner of not more than 5% of the then Outstanding shares of Common Stock. Upon such determination by a court of competent jurisdiction, the Redemption Shares shall immediately and without further action be deemed returned to the status of authorized but unissued shares of Series C Preferred Stock, and the Holder shall have no interest in or rights under such Redemption Shares. Any and all dividends paid on or prior to the date of such determination shall be deemed dividends paid on the remaining shares of Series C Preferred Stock held by the Holder. Such redemption shall be for cash at a redemption price equal to the sum of (i) 100% of the Stated Value of the Redemption Shares and (ii) any accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) to the date of such redemption. (b) Notwithstanding anything herein to the contrary, if and to the extent that, on any date (the "Section 16 Determination Date"), the holding by the Holder of shares of the Series C Preferred Stock would result in the Holder's becoming subject to the provisions of Section 16(b) of the Exchange Act in virtue of being deemed the "beneficial owner" of more than 10% of the then Outstanding shares of Common Stock, then the Holder shall not have the right, and the Corporation shall not have the obligation, to convert so many of such Holder's shares of Series C Preferred Stock (the "Section 16 Redemption Shares") as shall cause such Holder to be deemed the beneficial owner of more than 10% of the then Outstanding shares of Common Stock during the period ending 60 days after the Section 16 Determination Date. If any court of competent jurisdiction shall determine that the foregoing limitation is ineffective to prevent a Holder from being deemed the beneficial owner of more than 10% of the then Outstanding shares of Common Stock for the purposes of such Section 16(b), then the Corporation shall redeem the Section 16 Redemption Shares. Upon such determination by a court of competent jurisdiction, the Section 16 Redemption Shares shall immediately and without further action be deemed returned to the status of authorized but unissued shares of Series C Preferred Stock, and the Holder shall have no interest in or rights under such Section 16 Redemption Shares. Any and all dividends paid on or prior to the date of such determination shall be deemed dividends paid on the remaining shares of Series C Preferred Stock held by the Holder. Such redemption shall be for cash at a redemption price equal to the sum of (i) 100% of the Stated Value of the Section 16 Redemption Shares and (ii) any declared and unpaid dividends to the date of such redemption. (c) Unless the Corporation shall have obtained the approval of its voting stockholders to such issuance in accordance with the rules of Nasdaq or any other stock market rules with which the Corporation shall be required to comply, but only to the extent required thereby, the Corporation shall not issue shares of Common Stock (i) upon conversion of any shares of Series C Preferred Stock or (ii) as a dividend on the Series C Preferred Stock, if such issuance of Common Stock, when added to the number of shares of Common Stock previously issued by the Corporation (x) upon conversion of shares of the Series C Preferred Stock, (y) upon exercise of the Warrants issued pursuant to the terms of the Securities Purchase Agreement and (z) in payment of dividends on the Series C Preferred Stock, would equal or exceed 20% of the number of shares of the Corporation's Common Stock which were issued and Outstanding on the Issue Date (the "Maximum Issuance Amount"). In the event that a properly executed Conversion Notice is received by the Corporation which would require the Corporation to issue shares of Common Stock equal to or in excess of the Maximum Issuance Amount, the Corporation shall honor such conversion request by (a) converting the number of shares of Series C Preferred Stock stated in the Conversion Notice which is not in excess of the Maximum Issuance Amount and (b) redeeming the remaining number of shares of Series C Preferred Stock stated in the Conversion Notice in cash at a price equal to 100% of the Stated Value thereof, together with all accrued and unpaid dividends (whether or not earned or declared, whether or not there were funds legally available for the payment of dividends and whether or not a Dividend Payment Due Date has occurred since the last dividend payment) on the total number of shares stated in the Conversion Notice. In the event that the Corporation shall elect to pay a dividend in shares of Common Stock which would require the Corporation to issue shares of Common Stock equal to or in excess of the Maximum Issuance Amount, the Corporation shall pay (1) a dividend in a number of shares of Common Stock equal to one less than the Maximum Issuance Amount and (2) the balance of the dividend in cash. ARTICLE 7 Voting Rights The Holders of the Series C Preferred Stock have no voting power, except as otherwise provided by the Business Corporation Law of the State of Massachusetts (the "MBCL"), in this Article 7, and in Article 8 below. Notwithstanding the above, the Corporation shall provide each Holder of Series C Preferred Stock with prior notification of any meeting of the shareholders (and copies of all proxy materials and other information sent to shareholders). In the event of any taking by the Corporation of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed liquidation, dissolution or winding up of the Corporation, the Corporation shall mail a notice thereof to each Holder at least 30 days prior to the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, together with a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. To the extent that under the MBCL the vote of the Holders of the Series C Preferred Stock, voting separately as a class or series as applicable, is required to authorize a given action of the Corporation, the affirmative vote or consent of the Holders of at least a majority of the outstanding shares of Series C Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the outstanding shares of Series C Preferred Stock (except as otherwise may be required under the MBCL) shall constitute the approval of such action by the class. To the extent that under the MBCL Holders of the Series C Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Series C Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of shareholders as the date as of which the Conversion Price is calculated. Holders of the Series C Preferred Stock shall be entitled to notice of all shareholder meetings or written consents (and copies of all proxy materials and other information sent to shareholders) with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws and the MBCL. ARTICLE 8 Protective Provisions So long as shares of Series C Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval (by vote or written consent, as provided in the MBCL) of the Holders of at least a majority of the then outstanding shares of Series C Preferred Stock: (a) alter or change the rights, preferences or privileges of the Series C Preferred Stock; (b) create any new class or series of capital stock having a preference over the Series C Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Corporation ("Senior Securities") or alter or change the rights, preferences or privileges of any Senior Securities so as to affect adversely the Series C Preferred Stock; (c) increase the authorized number of shares of Series C Preferred Stock; or (d) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in taxation of the Holders of shares of the Series C Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code of 1986, as hereafter from time to time amended). In the event Holders of least a majority of the then outstanding shares of Series C Preferred Stock agree to allow the Corporation to alter or change the rights, preferences or privileges of the shares of Series Preferred Stock, pursuant to subsection (a) above, so as to affect the Series C Preferred Stock, then the Corporation will deliver notice of such approved change to the Holders of the Series Preferred Stock that did not agree to such alteration or change (the "Dissenting Holders") and Dissenting Holders shall have the right for a period of 30 days to convert pursuant to the terms of this Certificate of Designation as in effect prior to such alteration or change or to continue to hold their shares of Series C Preferred Stock. Notwithstanding anything to the contrary herein, if at any time the Corporation shall "spin-off" certain of its assets or businesses by transferring, directly or indirectly, such assets or businesses to a Subsidiary of the Corporation ("Spinco") and making a dividend (the "Spin-off Dividend") to the Corporation's stockholders of the shares of capital stock of Spinco, then prior to making the Spin-off Dividend, the Corporation shall cause Spinco to issue to each Holder that number of shares of preferred stock of Spinco with substantially identical rights, preferences, privileges, powers, restrictions and other terms as the Series C Preferred Stock equal to the number of shares of Series C Preferred Shares held by such Holder immediately prior to the Spin-off Dividend. ARTICLE 9 Miscellaneous Section 9.1 Loss, Theft, Destruction of Preferred Stock Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of shares of Series C Preferred Stock and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Corporation, or, in the case of any such mutilation, upon surrender and cancellation of the Series C Preferred Stock, the Corporation shall make, issue and deliver, in lieu of such lost, stolen, destroyed or mutilated shares of Series C Preferred Stock, new shares of Series C Preferred Stock of like tenor. The Series C Preferred Stock shall be held and owned upon the express condition that the provisions of this Section 9.1 are exclusive with respect to the replacement of mutilated, destroyed, lost or stolen shares of Series C Preferred Stock and shall preclude any and all other rights and remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of negotiable instruments or other securities without the surrender thereof. Section 9.2 Who Deemed Absolute Owner The Corporation may deem the Person in whose name the Series C Preferred Stock shall be registered upon the registry books of the Corporation to be, and may treat it as, the absolute owner of the Series C Preferred Stock for the purpose of receiving payment of dividends on the Series C Preferred Stock, for the conversion of the Series C Preferred Stock and for all other purposes, and the Corporation shall not be affected by any notice to the contrary. All such payments and such conversion shall be valid and effectual to satisfy and discharge the liability upon the Series C Preferred Stock to the extent of the sum or sums so paid or the conversion so made. Section 9.3 Fundamental Corporate Change In the case of the occurrence of any Fundamental Corporate Change described in Section 5(b), the Corporation shall cause to be mailed to the Holder of the Series C Preferred Stock at its last address as it appears in the Corporation's security registry, at least 20 days prior to the applicable record, effective or expiration date specified in connection therewith (or, if such 20 days notice is not possible, at the earliest possible date prior to any such record, effective or expiration date), a notice stating (x) the date on which a record is to be taken for the purpose of such corporate action, or if a record is not to be taken, the date as of which the Holders of record of Series C Preferred Stock to be entitled to any dividend, distribution, issuance or granting of rights, options or warrants are to be determined or the date on which such Fundamental Corporate Change is expected to become effective, and (y) the date as of which it is expected that Holders of record of Series C Preferred Stock will be entitled to exchange their shares for securities, cash or other property deliverable upon such Fundamental Corporate Change. Section 9.4 Register The Corporation shall keep at its principal office a register in which the Corporation shall provide for the registration of the Series C Preferred Stock. Upon any transfer of the Series C Preferred Stock in accordance with the provisions hereof, the Corporation shall register such transfer on the register of Series C Preferred Stock. Section 9.5 Withholding To the extent required by applicable law, the Corporation may withhold amounts for or on account of any taxes imposed or levied by or on behalf of any taxing authority in the United States having jurisdiction over the Corporation from any payments made pursuant to the Series C Preferred Stock. Section 9.6 Headings The headings of the Articles and Sections of this Certificate of Designation are inserted for convenience only and do not constitute a part of this Certificate of Designation. Section 9.7 Severability If any provision of this Certificate of Designation, or the application thereof to any person or entity or any circumstance, is invalid or unenforceable, (i) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision, and (ii) the remainder of this Certificate of Designation and the application of such provision to other persons, entities or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. [SIGNATURE PAGE FOLLOWS.] In Witness Whereof, the Corporation has caused this amended and Restated Certificate of Designation to be signed by its duly authorized officers on as of February 14, 2001. PHC, Inc. By: /s/ Paula C. Wurts Name: Paula C. Wurts Title: CFO ANNEX I FORM OF CONVERSION NOTICE To: PHC, Inc. 200 Lake Street, Suite 102 Peabody, MA 01960 Attention: Bruce Shear The undersigned owner of this Series C 8% Convertible Preferred Stock (the "Series C Preferred Stock") issued by PHC, Inc. (the "Corporation") hereby irrevocably exercises its option to convert __________ shares of the Series C Preferred Stock into shares of the common stock, par value $.01 per share ("Common Stock"), of the Corporation in accordance with the terms of the Certificate of Designation. The undersigned hereby instructs the Corporation to convert the number of shares of the Series C Preferred Stock specified above into Shares of Common Stock Issued at Conversion in accordance with the provisions of Article 6 of the Certificate of Designation. The undersigned directs that the Common Stock issuable and certificates therefor deliverable upon conversion and the recertificated Series C Preferred Stock, if any, not being surrendered for conversion hereby, together with any check in payment for fractional Common Stock, be issued in the name of and delivered to the undersigned unless a different name has been indicated below. All capitalized terms used and not defined herein have the respective meanings assigned to them in the Certificate of Designation. So long as the Series C Preferred Stock shall have been surrendered for conversion hereby, the conversion pursuant hereto shall be deemed to have been effected at the date and time specified below, and at such time the rights of the undersigned as a Holder of the Series C Preferred Stock shall cease and the Person or Persons in whose name or names the Common Stock Issued at Conversion shall be issuable shall be deemed to have become the holder or holders of record of the Common Shares represented thereby and all voting and other rights associated with the beneficial ownership of such Common Shares shall at such time vest with such Person or Persons. Date and time: __________________________ Signature Fill in for registration of Series C Preferred Stock: __________________________________________ __________________________________________ __________________________________________ Please print name and address (including zip code number) Written Consent in Lieu of a Special Meeting of the Board of Directors of PHC, Inc. As of January 18, 2001 We, the undersigned, being all of the directors of PHC, Inc., a Massachusetts corporation (the "Corporation"), acting by unanimous written consent in lieu of a special meeting, hereby adopt, approve and confirm the following resolutions: WHEREAS, the Corporation has issued 170,000 shares of Series C 8% Convertible Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock") to The Shaar Fund Ltd. (the "Stockholder") pursuant to (i) that certain Securities Purchase Agreement dated June 28, 2000 between the Stockholder and the Corporation (the "Securities Purchase Agreement"), and (ii) a Certificate of Designation setting forth the rights and preferences of the Series C Preferred Stock, and the limitations or restrictions thereon, which Certificate of Designation, as amended, is included as Schedule I to the Certificate of Vote of Directors Establishing a Class or Series of Stock filed by the Corporation with the Secretary of the Commonwealth of Massachusetts on June 27, 2000 (the "Certificate of Designation"). WHEREAS, the Stockholder has converted the following shares of Series C Preferred Stock into shares of the Corporation's Class A Common Stock (the "Common Stock") as provided in Section 6.1 of the Certificate of Designation: Number of Shares of Series C Preferred Stock Converted Conversion Date _______________________________ _________________ 2,500 as of August 16, 2000 2,500 as of September 7, 2000 WHEREAS, the Stockholder and the Corporation entered into a certain letter agreement dated as of January 5, 2001, a copy of which has been provided to the Board and is attached hereto as Exhibit A (the "Settlement"), which Settlement provided that the Corporation would issue an aggregate 89,041 shares of Common Stock to the Stockholder in connection with the conversion of 1,300 shares of Series C Preferred Stock as of December 18, 2000 and in satisfaction of any and all dividends, additional dividends, interest payments and/or penalty payments otherwise due on the shares of Series C Preferred Stock. WHEREAS, the Corporation has issued all shares of Common Stock to the Stockholder as provided in the Settlement. WHEREAS, the Stockholder has requested the conversion of additional shares of Series C Preferred Stock into shares of Common Stock, and that dividend payments thereon be made in accordance with the new conversion and dividend payment terms set forth in the Agreement, as defined below. WHEREAS, the Corporation desires to enter into an Agreement with the Stockholder (the "Agreement"), a copy of which has been provided to the Board of Directors for its review and is attached hereto, which Agreement provides for certain amendments to the terms of the Securities Purchase Agreement and Certificate of Designation. RESOLVED, that the Board hereby ratifies and approves the Settlement, including any and all shares of Common Stock previously issued as a dividend on shares of Series C Preferred Stock as provided in the Settlement. RESOLVED, FURTHER, that the Board hereby declares dividends on the shares of Series C Preferred Stock to be issued to the Stockholder upon the conversion thereof, as set forth in the table below, which dividends shall be in the amounts as set forth below and payable in cash or in shares of Common Stock as shall be determined by the President of the Corporation in his sole discretion. Number of Shares Dividend of Series C Shares of Dividend (if paid in Preferred Stock Conversion Common (if paid in shares of to be converted: Date Stock cash) Common Stock) _______________________________________________________________________________ 2,000 January 3, 2001 168,350 $840 (1) 7,071 (1) 2,000 January 10, 2001 168,350 $871 (2) 7,332 (2) 2,000 January 15, 2001 168,350 $893 (3) 7,517 (3) 2,000 January 17, 2001 168,350 $902 (4) 7,594 (4) (1) (2) (3) (4) $20,000 x 8% x $20,000 x 8% x $20,000 x 8% x $20,000 x 8% x 189/360 = $840 196 /360 = $871 201 /360 = $893 203/360 = $902 $840/$0.1188 = $871/$0.1188 = 893/$0.1188 = $902/$0.1188 = 7,071 7,332 7,517 7,594 RESOLVED, FURTHER, that the Board approves the Agreement, including, without limitation, that certain Amended and Restated Certificate of Designation which is included as an attachment to the Agreement, the terms of which Amended and Restated Certificate of Designation are incorporated by reference in the Agreement under the terms thereof. RESOLVED, FURTHER, that the appropriate officers of the Corporation are hereby authorized and directed to execute and deliver in the Corporation's name and on its behalf the Agreement, including the Amended and Restated Certificate of Designation, together with any and all other documents, instruments and certificates required to be delivered to effectuate and consummate any and all transactions contemplated thereby, with such changes, additions and modifications therein as they shall approve, such approval to be conclusively evidenced by their execution thereof. RESOLVED, FURTHER, that the appropriate officers of the Corporation are hereby authorized and directed to prepare, execute and file an Amendment to the Corporation's Articles of Organization or such other documents as shall be required to be filed with the Commonwealth of Massachusetts so as to effectuate the terms of the Amended and Restated Certificate of Designation. RESOLVED, FURTHER, that any and all actions taken by the officers of the Corporation with respect to the Settlement and the Agreement, are hereby approved, ratified and adopted. RESOLVED, FURTHER, that in addition to the specific authorizations set forth in any of the foregoing resolutions, the Corporation's officers, or any one of them, are hereby authorized and directed to take, from time to time, any and all actions and to execute and deliver, from time to time, any and all documents in the name and on behalf of the Corporation necessary or desirable to effectuate or consummate any of the foregoing resolutions. APPROVED: /s/ Bruce A. Shear /s/ Howard W. Phillips Bruce A. Shear Howard W. Phillips /s/ Gerald M. Perlow /s/ William F. Grieco Gerald M. Perlow William F. Grieco /s/ Donald E. Robar Donald E. Robar Exhibit A PHC, Inc. 200 Lake Street, Suite 102 Peabody, MA 01960 January 5, 2001 VIA FAX The Shaar Fund Ltd. c/o Levinson Capital Management 2 World Trade Center, Suite 1820 New York, New York 10048 Attention: Mr. Samuel Levinson Dear Sam: This letter is to confirm our agreement that PHC, Inc. (the "Company") will issue 89,041 shares of the Company's Class A Common Stock ("Common Shares") to The Shaar Fund Ltd. ("Shaar") in full payment and satisfaction of (i) the conversion into Common Shares as of December 18, 2000 of $13,000 of shares of the Company's Series C 8% Convertible Preferred Stock (the "Preferred Shares") owned by Shaar and (ii) any and all dividends (the "Dividends") due on such Preferred Shares and on the following, previously converted Preferred Shares (collectively, all such converted Preferred Shares being referred to as the "Converted Preferred Shares"): 1. $25,000 of Preferred Shares converted to Common Shares as of August 16, 2000 2. $25,000 of Preferred Shares converted to Common Shares as of September 7, 2000 The above 89,041 Common Shares shall be deemed to include and satisfy any and all dividends, additional dividends, interest payments and/or penalty payments otherwise due on the Converted Preferred Shares due to the late payment thereof, as provided under that certain Securities Purchase Agreement dated June 28, 2000 between the Company and Shaar, and the Certificate of Designation governing the Preferred Shares. Shaar hereby acknowledges receipt of this letter by signing below and waives any and all claims against the Company with respect to the Converted Preferred Shares and the Dividends thereon. Sincerely, PHC, Inc. By: /s/ Bruce A. Shear Bruce A. Shear, President and Chief Executive Officer Agreed: Date: January __, 2001 The Shaar Fund Ltd. By: __________________ Name: Title: AGREEMENT CONCERNING SERIES C PREFERRED STOCK This Agreement dated as of the [__] day of February, 2001, by and between PHC, Inc., a Massachusetts corporation (the "Corporation"), and The Shaar Fund Ltd. (the "Stockholder"). WHEREAS, the Corporation has issued 170,000 shares of Series C 8% Convertible Preferred Stock, par value $0.01 per share (the "Series C Preferred Stock") to the Stockholder pursuant to (i) that certain Securities Purchase Agreement dated June 28, 2000 between the Stockholder and the Corporation (the "Securities Purchase Agreement"), and (ii) a Certificate of Designation setting forth the rights and preferences of the Series C Preferred Stock, and the limitations or restrictions thereon, which Certificate of Designation, is included as Schedule I to the Certificate of Vote of Directors Establishing a Class or Series of Stock filed by the Corporation with the Secretary of the Commonwealth of Massachusetts on June 27, 2000 (the "Certificate of Designation"). WHEREAS, the Stockholder has converted the following shares of Series C Preferred Stock into shares of class A common stock, par value $0.01 per share, of the Corporation's (the "Common Stock") as provided in Section 6.1 of the Certificate of Designation: Number of Shares of Series C Preferred Stock Converted Conversion Date ___________________________________ ___________________ 2,500 as of August 16, 2000 2,500 as of September 7, 2000 1,300 as of December 18, 2000 WHEREAS, the Stockholder and the Corporation entered into a certain letter agreement dated as of January 5, 2001 which provided that the Corporation would issue an aggregate 89,041 shares of Common Stock to the Stockholder in connection with the conversion of the foregoing 1,300 shares of Series C Preferred Stock and in satisfaction of any and all dividends, additional dividends, interest payments and/or penalty payments otherwise due on the shares of Series C Preferred Stock. WHEREAS, the Stockholder and the Corporation desire to amend the Securities Purchase Agreement and the Certificate of Designation. WHEREAS, the Stockholder has requested the conversion of additional amounts of Series C Preferred Stock into shares of Common Stock, and that dividend payments thereon be made in accordance with the new conversion and dividend payment terms set forth in this Agreement. WHEREAS, the Corporation has requested that the Stockholder limit its conversions of Series C Preferred Stock so that between the date hereof and July 31, 2001 such conversions will not in the aggregate convert into greater than 20% of the outstanding Common Stock of the Corporation. NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Certificate of Designation hereby is amended as set forth in the Amended and Restated Certificate of Designation attached hereto (the "Amended and Restated Certificate of Designation"), all of the terms of which Amended and Restated Certificate of Designation are hereby incorporated herein by reference and made a part hereof. 2. Section V.D of the Securities Purchase Agreement is hereby amended and restated in its entirety as follows: Section 9.8 "D. The Company understands that a delay in the issuance of the shares of Common Stock issuable in lieu of cash dividends on the Preferred Shares (when such dividends are due under the Certificate of Designation (the "Dividend Due Date")) or upon the conversion of the Preferred Shares or exercise of the Warrants beyond the applicable Dividend Due Date (as defined in the Certificate of Designation), Delivery Date or Warrant Delivery Date could result in economic loss to Buyer. As compensation to Buyer for such loss (and not as a penalty), the Company agrees to pay to Buyer for late issuance of Common Stock issuable in lieu of cash dividends on the Preferred Shares or upon conversion of the Preferred Shares or exercise of the Warrants in accordance with the following schedule (where "No. Business Days" is defined as the number of business days beyond seven days from the Dividend Due Date, the Delivery Date or the Warrant Delivery Date, as applicable): Compensation For Each 10 Shares of Preferred Shares Not Converted Timely or 500 Shares of Common Stock Issuable In Payment of Dividends or Upon Exercise of No. Business Days Warrants Not Issued Timely __________________ _______________________________ 1 $ 25 2 50 3 75 4 100 5 125 6 150 7 175 8 200 9 225 10 250 more than 10 $250 + $100 for each Business Day Late beyond 10 days The Company shall pay to Buyer the compensation described above by the transfer of immediately available funds upon Buyer's demand. Nothing herein shall limit Buyer's right to pursue actual damages for the Company's failure to issue and deliver Common Stock to Buyer. In addition to any other remedies which may be available to Buyer, in the event the Company fails for any reason to deliver such shares of Common Stock within seven business days after the relevant Dividend Due Date, Delivery Date or Warrant Delivery Date, as applicable, Buyer shall be entitled to rescind the relevant Notice of Conversion or exercise of Warrants by delivering a notice to such effect to the Company whereupon the Company and Buyer shall each be restored to their respective original positions immediately prior to delivery of such Notice of Conversion on delivery." 3. The parties agree that the Corporation shall issue to the Stockholder the following shares of Common Stock in connection with the conversion of the following shares of Series C Preferred Stock, and that the Corporation, at its option, shall either issue additional shares of Common Stock in the numbers set forth below or else pay the amounts set forth below in cash in full satisfaction of any and all dividends due the Stockholder in connection with the following conversions of shares of Series C Preferred Stock: Number of Shares Dividend of Series C Shares of Dividend (if paid in Preferred Stock Conversion Common (if paid in shares of to be converted: Date Stock cash) Common Stock) _______________________________________________________________________________ 2,000 January 3, 2001 168,350 $840 (1) 7,071 (1) 2,000 January 10, 2001 168,350 $871 (2) 7,332 (2) 2,000 January 15, 2001 168,350 $893 (3) 7,517 (3) 2,000 January 17, 2001 168,350 $902 (4) 7,594 (4) (1) (2) (3) (4) $20,000 x 8% = $20,000 x 8% = $20,000 x 8% = $20,000 x 8% = 189/360 = $840 196/360 = $871 201/360 = $893 203/360 = $902 $840/$0.1188 = $871/$0.1188 = 893/$0.1188 = $902/$0.1188 = 7,071 7,332 7,517 7,594 4. The Stockholder agrees that between the date hereof and July 31, 2001 it will limit its conversions of Series C Preferred Stock so that such conversions will not in the aggregate convert into greater than 20% of the outstanding Common Stock of the Corporation. 5. By its signature hereto, the Stockholder consents to the amendment to the Corporation's Articles of Organization as filed with the Secretary of the Commonwealth of Massachusetts so as to incorporate therein the terms of the Amended and Restated Certificate of Designation, and to the filing of such other documents with the Commonwealth of Massachusetts as the same shall require to effectuate the terms of the Amended and Restated Certificate of Designation In Witness Whereof, the parties hereto have duly executed and delivered this Agreement on the date first above written. PHC, Inc. By: /s/ Paula C. Wurts Name: Paula C. Wurts Title: CFO The Shaar Fund Ltd. By: Shaar Advisory Services, N.V. (the advisor to the Shaar Fund Ltd.) By: _____________________________ Name: Title: EX-4 4 ex10q440.txt WARRANT Exhibit 4.40 THE SECURITIES REPRESENTED BY THIS WARRANT (AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OR ANY STATE SECURITIES STATUTE. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES STATUTE, OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE THEREUNDER. Shares Issuable Upon Exercise: Up to 25,000 shares of the Class A Common Stock, $.01 par value, of PHC, Inc. WARRANT TO PURCHASE 25,000 SHARES OF CLASS A COMMON STOCK Expires March 20, 2006 (5 years) THIS CERTIFIES THAT, for value received, Union Atlantic Capital, LC is entitled to subscribe for and purchase that number of shares (the "Shares") of the fully paid and nonassessable Class A Common Stock, $.01 par value, (the "Class A Common Stock") of PHC, Inc., a Massachusetts corporation (the "Company"), for a price of $0.21 per Share (the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, the term "Shares" shall mean the Company's Class A Common Stock, or any stock into or for which such Class A Common Stock shall have been or may hereafter be converted or exchanged pursuant to the Articles of Incorporation of the Company as from time to time amended as provided by law and in such Articles (hereinafter the "Charter"), and the term "Grant Date" shall mean March 20, 2001. 1. Term. Subject to the provisions of this Warrant, the purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from and after the Grant Date and prior to March 20, 2006. Notwithstanding anything to the contrary contained herein, neither this Warrant nor any rights hereunder may be transferred or assigned except to an Assignee who is an "accredited investor" within the meaning of Regulation D of the General Rules and Regulations of the Securities Act of 1933. 2 (a). Method of Exercise. The purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by either, at the election of this holder, (a) the surrender of the Warrant (with the notice of exercise form attached hereto as Exhibit A-1 duly executed) at the principal office of the Company and by the payment to the Company by certified or bank check or by wire transfer, of an amount equal to the then applicable Warrant Price multiplied by the number of shares then being purchased or (b) if in connection with a registered public offering of the Company's securities (provided that such offering includes the shares), the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-2 duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company and any underwriter, in the case of an underwritten registered public offering, for payment to the Company either by certified or bank check or by wire transfer of from the proceeds of the sale of Shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per Share multiplied by the number of Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing Shares which shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised and the then applicable Warrant Price paid. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within ten (10) days of receipt of such notice and payment of the then applicable Warrant Price and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such ten-day period. 2 (b). In lieu of exercising this Warrant in the manner set forth in sub-paragraph 2(a) above, this Warrant may be exercised without payment of any other consideration, commission or remuneration, by presentation and surrender of this Warrant to the Company, together with a written notice of the Holder of this Warrant of the intention to effect a cashless exercise ("Notice of Cashless Exercise, Exhibit A-3"), duly will be computed using the following formula: X = Y (A-B)/A where; X= the number of shares of Common Stock to be issued to the Holder of this Warrant. Y= the number of shares of Common Stock for which this Warrant is being exercised. A= the Closing Price. The Closing Price means the closing price per share of the Common Stock on the last business day prior to the date of receipt of this Warrant and the Notice of Cashless Exercise, on the principal national securities exchange in the United States on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any such national securities exchange, the average of the highest reported bid and lowest reported asked price, on such day, as furnished by the National Association of Securities Dealers, Inc. ("Nasdaq") through its automated quotation system or a similar organization of Nasdaq is no longer reporting such information. B= the Exercise Price. For purposes of Rule 144, as promulgated under the Securities Act of 1933, as amended (the "Act"), and subsection (d) (3) (iii) of such Rule is intended, that the common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have been acquired at the time this Warrant was issued. Moreover, it is intended, that the holding period for the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have commenced on the date this Warrant was issued. Therefore, shares issued after December 20, 2001 shall not be restricted or legend bearing certificates. 3. Stock Fully Paid; Reservation of Shares. All shares that may be issued upon the exercise of the rights represented by this Warrant will upon issuance, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by the Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of Class A Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of the Warrant Agreement and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: 4.1 Reclassification. In case of any reclassification, change or conversion of the Company's Class A Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), the Company, shall execute a new Warrant Agreement (in form and substance reasonably satisfactory to the Holder) providing that the Holder of this Warrant Agreement shall have the right to exercise such new Warrant Agreement and upon such exercise and payment of the then applicable Warrant Price to receive, in lieu of each Share theretofore issuable upon exercise of this Warrant Agreement, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change by a holder of one share of Class A Common Stock. Such new Warrant Agreement shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4.1. The provisions of this Section 4.1 shall similarly apply to successive reclassifications and changes. 4.2 Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Class A Common Stock, the Warrant Price and the number of Shares issuable upon exercise hereof shall be equitably adjusted. 4.3 Stock Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend payable in shares of Class A Common Stock (except any distribution specifically provided for in the foregoing Sections 4.1 and 4.2), then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (a) the numerator of which shall be the total number of shares of Class A Common Stock outstanding immediately prior to such dividend or distribution, and (b) the denominator of which shall be the total number of shares of Class A Common Stock outstanding immediately after such dividend or distribution and the number of Shares subject to this Warrant shall be appropriately adjusted. 4.4 No Impairment. The Company will not, by amendment of its Charter or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Article 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant Agreement against impairment. 4.5 Notices of Record Date. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed merger or consolidation of the Company with or into any other corporation, or any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail to the holder of this Warrant, at least fifteen (15) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or vote, and the amount and character of such dividend, distribution or vote. 4.6 Adjustment to Number of Shares and Warrant Price Based on Dilutive Issuance If and whenever the Company should issue shares of its Class A Common Stock at a price per share less than the average of the closing of the bid and asked prices for such Class A Common Stock for the last trading day immediately prior to the issuance of such shares (other than shares issued pursuant to an employee benefit plan including Class A Common Stock issued or issuable to the officers or employees or directors of or consultants to the Company and approved by a disinterested majority of the directors of the Company), then the Warrant Price shall be adjusted by dividing (1) the sum of (A) the total number of shares of Class A Common Stock outstanding immediately prior to such issuance multiplied by the then effective Warrant Price and (B) the value of the consideration received by the Company upon such issuances as determined by the Board of Directors by (2) the total number of shares of Class A Common Stock outstanding immediately after such issuance. The holder of the Warrant shall thereafter be entitled to purchase, at the Warrant Price resulting from such adjustment, the number of Shares (calculated to the nearest whole share) obtained by multiplying the Warrant Price in effect immediately prior to such adjustment by the number of shares issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Warrant Price resulting from such adjustment. For the purpose of this paragraph (d) the issuance of securities convertible into or exercisable for the Class A Common Stock shall be deemed the issuance of the number of shares of Class A Common Stock into which such securities are convertible or for which such securities are exercisable, and the consideration received for such securities shall be deemed to include the minimum aggregate amount payable upon conversion or exercise of such securities expire unexercised, the Warrant Price of Shares issuable upon the exercise hereof shall be readjusted accordingly. 5. Notice of Adjustments. Whenever the Warrant Price or number of Shares shall be adjusted pursuant to the provisions hereof, the Company shall within thirty (30) days of such adjustments deliver a certificate signed by its chief financial officer to the registered holder(s) hereof setting forth in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price after giving effect to such adjustment. 6. Fractional Shares. No fractional Shares will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect. 7. Compliance with Securities Act, Disposition of Shares. 7.1 Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, reconfirms the representations made by the Purchaser in a letter agreement with the Company as of the date hereof (the "Letter Agreement") and agrees to the placement of a restrictive transfer legend on this Warrant and the certificates representing the shares. 7.2 Disposition of Warrants and Shares. With respect to any offer, sale or other disposition of this Warrant or any Shares acquired pursuant to the exercise of this Warrant prior to registration of this Warrant or such Shares, the holder hereof and each subsequent holder of this Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company (and, in such case, such counsel and opinion must be reasonably acceptable to the Company), to the effect that such offer, sale or other disposition my be effected without registration or qualification (under the Securities Act of 1933 (the "Act") as then in effect or any federal or state law then in effect) and indicating whether or not under the Act certificates for this Warrant or such Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to insure compliance with the Act. Each certificate representing this Warrant or the Shares thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Act, unless in the aforesaid opinion of counsel for the holder,, such legend is not required in order to ensure compliance with the Act. The Company may issue stop transfer instructions to its transfer agent in connection with the foregoing restrictions. 8. Rights as Shareholders. No holder of the Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Shares or any other securities of the Company which may at any time be issuable on the exercise thereof for any purpose, nor shall anything contained herein, be construed to confer upon the holder of this Warrant, as such any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings (except as otherwise provided in Section 4.5 of this warrant), or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 9. Representations and Warranties. This Warrant is issued and delivered on the basis of the following: 9.1 Authorization and Delivery. This Warrant has been duly authorized and executed by the Company and when delivered will be valid and binding obligation of the Company enforceable in accordance with its terms; and 9.2 Shares. The Shares have been duly authorized and reserved for issuance by the Company and when issued and paid for in accordance with the terms hereof, will be validly issued, fully paid and nonassessable. 10. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 11. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered in the manner set forth in the Letter Agreement. 12. Binding Effect of Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger of consolidation, and all of the obligations of the Company relating to the Shares issuable upon the exercise of this Warrant shall be as set forth in the Letter Agreement, the Company's Charter and the Company's by-laws (each as amended from time to time) and shall survive the exercise and termination of this Warrant and all of the covenants and agreements herein and in such other documents and instruments of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including without limitation, any right to registration of the Shares) to which the holder hereof shall continue to be entitled after such exercise in accordance with this Warrant; provided that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 13. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that upon receipt of evidence reasonable satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificates and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonable satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, or like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 14. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 15. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the Commonwealth of Massachusetts. PHC, INC. By: /s/ Bruce A. Shear President Date: March 20, 2001 Exhibit A-1 Notice of Exercise To: 1. The undersigned hereby elects to purchase _______ Shares of PHC, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such Shares in full. 2. Please issue a certificate or certificates representing the Shares deliverable upon the exercise set forth in paragraph 1 in the name of the undersigned or, subject to compliance with the restrictions on transfer set forth in Section 7 of the Warrant, in such other name or names as are specified below: ------------------------------------ (Name) ------------------------------------- ------------------------------------- ------------------------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has not present intention of distributing or reselling such shares. - ------------------------------- Signature - ----------------- Date Exhibit A-2 Notice of Exercise To: 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement of Form S _______, filed _______, ______ the undersigned hereby elects to purchase Shares of the Company (or such lesser number of Shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant. 2. Please deliver to the custodian for the selling shareholders a certificate representing the Shares being so purchased. 3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $ _________ of, if less, the net proceeds due the undersigned from the sales of Shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such Shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. - ------------------------------- Signature - ----------------- Date warrants.dot Exhibit A-3 Notice of Cashless Exercise To: Pioneer Behavioral Health, Inc. 200 Lake Street Suite 200 Peabody, MA 01960 The undersigned hereby exercises his, her, or its rights to a cashless exercise of shares of Common Stock, par value $0.01 per share ("the Common Stock"), of Pioneer Behavioral Health Inc., a Massachusetts Corporation (the "Company"), covered by the within Warrant in accordance with the provisions of sub-paragraph 1(b) of the within Warrant and requests that certificates for the securities constituting _______ shares of Common Stock be issued in the name of, and delivered to: ---------------------------------------------------------------------- (Print Name, Address, Social Security or Tax ID Number) and, if such number of shares of Common Stock shall not constitute all such shares of Common Stock covered by the within Warrant, that a new Warrant for the balance of the shares of Common Stock covered by the within Warrant shall be registered in the name of, and delivered to, the undersigned at the address stated below. Dated: _____________ Name: ______________________ (Signature) Address: ________________________ ________________________ EX-4 5 ex10q441.txt WARRANT Exhibit 4.41 THE SECURITIES REPRESENTED BY THIS WARRANT (AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OR ANY STATE SECURITIES STATUTE. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES STATUTE, OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE THEREUNDER. Shares Issuable Upon Exercise: Up to 10,000 shares of the Class A Common Stock, $.01 par value, of PHC, Inc. WARRANT TO PURCHASE 10,000 SHARES OF CLASS A COMMON STOCK Expires April 15, 2006 (5 years) THIS CERTIFIES THAT, for value received, Marshall Sterman is entitled to subscribe for and purchase that number of shares (the "Shares") of the fully paid and nonassessable Class A Common Stock, $.01 par value, (the "Class A Common Stock") of PHC, Inc., a Massachusetts corporation (the "Company"), for a price of $0.25 per Share (the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, the term "Shares" shall mean the Company's Class A Common Stock, or any stock into or for which such Class A Common Stock shall have been or may hereafter be converted or exchanged pursuant to the Articles of Incorporation of the Company as from time to time amended as provided by law and in such Articles (hereinafter the "Charter"), and the term "Grant Date" shall mean March 20, 2001. 1. Term. Subject to the provisions of this Warrant, the purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from and after the Grant Date and prior to April 15, 2006. Notwithstanding anything to the contrary contained herein, neither this Warrant nor any rights hereunder may be transferred or assigned except to an Assignee who is an "accredited investor" within the meaning of Regulation D of the General Rules and Regulations of the Securities Act of 1933. 2 (a). Method of Exercise. The purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by either, at the election of this holder, (a) the surrender of the Warrant (with the notice of exercise form attached hereto as Exhibit A-1 duly executed) at the principal office of the Company and by the payment to the Company by certified or bank check or by wire transfer, of an amount equal to the then applicable Warrant Price multiplied by the number of shares then being purchased or (b) if in connection with a registered public offering of the Company's securities (provided that such offering includes the shares), the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-2 duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company and any underwriter, in the case of an underwritten registered public offering, for payment to the Company either by certified or bank check or by wire transfer of from the proceeds of the sale of Shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per Share multiplied by the number of Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing Shares which shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised and the then applicable Warrant Price paid. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within ten (10) days of receipt of such notice and payment of the then applicable Warrant Price and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such ten-day period. 2 (b). In lieu of exercising this Warrant in the manner set forth in sub-paragraph 2(a) above, this Warrant may be exercised without payment of any other consideration, commission or remuneration, by presentation and surrender of this Warrant to the Company, together with a written notice of the Holder of this Warrant of the intention to effect a cashless exercise ("Notice of Cashless Exercise, Exhibit A-3"), duly will be computed using the following formula: X = Y (A-B)/A where; X= the number of shares of Common Stock to be issued to the Holder of this Warrant. Y= the number of shares of Common Stock for which this Warrant is being exercised. A= the Closing Price. The Closing Price means the closing price per share of the Common Stock on the last business day prior to the date of receipt of this Warrant and the Notice of Cashless Exercise, on the principal national securities exchange in the United States on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any such national securities exchange, the average of the highest reported bid and lowest reported asked price, on such day, as furnished by the National Association of Securities Dealers, Inc. ("Nasdaq") through its automated quotation system or a similar organization of Nasdaq is no longer reporting such information. B= the Exercise Price. For purposes of Rule 144, as promulgated under the Securities Act of 1933, as amended (the "Act"), and subsection (d) (3) (iii) of such Rule is intended, that the common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have been acquired at the time this Warrant was issued. Moreover, it is intended, that the holding period for the Common Stock issuable upon exercise of this Warrant in a cashless exercise transaction shall be deemed to have commenced on the date this Warrant was issued. Therefore, shares issued after December 20, 2001 shall not be restricted or legend bearing certificates. 3. Stock Fully Paid; Reservation of Shares. All shares that may be issued upon the exercise of the rights represented by this Warrant will upon issuance, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by the Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issuance upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of Class A Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of the Warrant Agreement and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: 4.1 Reclassification. In case of any reclassification, change or conversion of the Company's Class A Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), the Company, shall execute a new Warrant Agreement (in form and substance reasonably satisfactory to the Holder) providing that the Holder of this Warrant Agreement shall have the right to exercise such new Warrant Agreement and upon such exercise and payment of the then applicable Warrant Price to receive, in lieu of each Share theretofore issuable upon exercise of this Warrant Agreement, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change by a holder of one share of Class A Common Stock. Such new Warrant Agreement shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4.1. The provisions of this Section 4.1 shall similarly apply to successive reclassifications and changes. 4.2 Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Class A Common Stock, the Warrant Price and the number of Shares issuable upon exercise hereof shall be equitably adjusted. 4.3 Stock Dividends. If the Company at any time while this Warrant is outstanding and unexpired shall pay a dividend payable in shares of Class A Common Stock (except any distribution specifically provided for in the foregoing Sections 4.1 and 4.2), then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (a) the numerator of which shall be the total number of shares of Class A Common Stock outstanding immediately prior to such dividend or distribution, and (b) the denominator of which shall be the total number of shares of Class A Common Stock outstanding immediately after such dividend or distribution and the number of Shares subject to this Warrant shall be appropriately adjusted. 4.4 No Impairment. The Company will not, by amendment of its Charter or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Article 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant Agreement against impairment. 4.5 Notices of Record Date. In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed merger or consolidation of the Company with or into any other corporation, or any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail to the holder of this Warrant, at least fifteen (15) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or vote, and the amount and character of such dividend, distribution or vote. 5. Notice of Adjustments. Whenever the Warrant Price or number of Shares shall be adjusted pursuant to the provisions hereof, the Company shall within thirty (30) days of such adjustments deliver a certificate signed by its chief financial officer to the registered holder(s) hereof setting forth in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price after giving effect to such adjustment. 6. Fractional Shares. No fractional Shares will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Warrant Price then in effect. 7. Compliance with Securities Act, Disposition of Shares. 7.1 Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, reconfirms the representations made by the Purchaser in a letter agreement with the Company as of the date hereof (the "Letter Agreement") and agrees to the placement of a restrictive transfer legend on this Warrant and the certificates representing the shares. 7.2 Disposition of Warrants and Shares. With respect to any offer, sale or other disposition of this Warrant or any Shares acquired pursuant to the exercise of this Warrant prior to registration of this Warrant or such Shares, the holder hereof and each subsequent holder of this Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company (and, in such case, such counsel and opinion must be reasonably acceptable to the Company), to the effect that such offer, sale or other disposition my be effected without registration or qualification (under the Securities Act of 1933 (the "Act") as then in effect or any federal or state law then in effect) and indicating whether or not under the Act certificates for this Warrant or such Shares to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to insure compliance with the Act. Each certificate representing this Warrant or the Shares thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Act, unless in the aforesaid opinion of counsel for the holder,, such legend is not required in order to ensure compliance with the Act. The Company may issue stop transfer instructions to its transfer agent in connection with the foregoing restrictions. 8. Rights as Shareholders. No holder of the Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Shares or any other securities of the Company which may at any time be issuable on the exercise thereof for any purpose, nor shall anything contained herein, be construed to confer upon the holder of this Warrant, as such any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings (except as otherwise provided in Section 4.5 of this warrant), or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 9. Representations and Warranties. This Warrant is issued and delivered on the basis of the following: 9.1 Authorization and Delivery. This Warrant has been duly authorized and executed by the Company and when delivered will be valid and binding obligation of the Company enforceable in accordance with its terms; and 9.2 Shares. The Shares have been duly authorized and reserved for issuance by the Company and when issued and paid for in accordance with the terms hereof, will be validly issued, fully paid and nonassessable. 10. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 11. Notices. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered in the manner set forth in the Letter Agreement. 12. Binding Effect of Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger of consolidation, and all of the obligations of the Company relating to the Shares issuable upon the exercise of this Warrant shall be as set forth in the Letter Agreement, the Company's Charter and the Company's by-laws (each as amended from time to time) and shall survive the exercise and termination of this Warrant and all of the covenants and agreements herein and in such other documents and instruments of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including without limitation, any right to registration of the Shares) to which the holder hereof shall continue to be entitled after such exercise in accordance with this Warrant; provided that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 13. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that upon receipt of evidence reasonable satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant or any stock certificates and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonable satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, or like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 14. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 15. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the Commonwealth of Massachusetts. PHC, INC. By: /s/ Bruce A. Shear President Date: April 15, 2001 Exhibit A-1 Notice of Exercise To: 1. The undersigned hereby elects to purchase ______ Shares of PHC, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such Shares in full. 2. Please issue a certificate or certificates representing the Shares deliverable upon the exercise set forth in paragraph 1 in the name of the undersigned or, subject to compliance with the restrictions on transfer set forth in Section 7 of the Warrant, in such other name or names as are specified below: ------------------------------------ (Name) ------------------------------------- ------------------------------------- ------------------------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has not present intention of distributing or reselling such shares. - ------------------------------- Signature - ----------------- Date Exhibit A-2 Notice of Exercise To: 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement of Form S ______, filed ______, ______ the undersigned hereby elects to purchase Shares of the Company (or such lesser number of Shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant. 2. Please deliver to the custodian for the selling shareholders a certificate representing the Shares being so purchased. 3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $ ______ of, if less, the net proceeds due the undersigned from the sales of Shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such Shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. - ------------------------------- Signature - ----------------- Date warrants.dot Exhibit A-3 Notice of Cashless Exercise To: Pioneer Behavioral Health, Inc. 200 Lake Street Suite 200 Peabody, MA 01960 The undersigned hereby exercises his, her, or its rights to a cashless exercise of shares of Common Stock, par value $0.01 per share ("the Common Stock"), of Pioneer Behavioral Health Inc., a Massachusetts Corporation (the "Company"), covered by the within Warrant in accordance with the provisions of sub-paragraph 1(b) of the within Warrant and requests that certificates for the securities constituting _______ shares of Common Stock be issued in the name of, and delivered to: ---------------------------------------------------------------------- (Print Name, Address, Social Security or Tax ID Number) and, if such number of shares of Common Stock shall not constitute all such shares of Common Stock covered by the within Warrant, that a new Warrant for the balance of the shares of Common Stock covered by the within Warrant shall be registered in the name of, and delivered to, the undersigned at the address stated below. _____________ Name: ______________________ Address: _______________________ ______________________________ ________________________ (Signature) EX-10 6 e10q1053.txt RESTATED MORTGAGE Exhibit 10.53 CONSOLIDATED RESTATED MORTGAGE THIS INSTRUMENT (the "Consolidated Mortgage") WITNESSES: That PHC OF MICHIGAN, INC., a Massachusetts corporation having its principal place of business at 200 Lake Street, Suite 102, Peabody, Massachusetts 01960, as a or", and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation having its principal office at 2 Wisconsin Circle, 4" Floor, Chevy Chase, Maryland 20815, as "Mortgagee". RECITALS WHEREAS, the following mortgages (all of such mortgages collectively, the "Existing, Mortgages") were previously made by Mortgagor in favor of Mortgagee or an entity to which Mortgagee is, directly or indirectly, the successor-in-interest: a. That certain first priority Mortgage made by Mortgagor in favor of HealthCare Financial Partners Funding II, L.P. ("HCFPII") dated March 12, 1997, and recorded in the official records of the Macomb County, Michigan registrar of deeds (the "Macomb County Records") at Liber 07442 Page 175 on May 5, 1997 (as it may be amended from time to time, the "Original Mortgage"), which Original Mortgage has been assigned by HCFPII to Mortgagee pursuant to that certain Assignment of Mortgage dated as of February 20, 2001 (the "HCFP Funding, II Assignment"), which HCFP Funding Assignment is to be submitted promptly for recording in the Macomb County Records. The Original Term Mortgage secures the obligations of Mortgagor under that certain Secured Note in the original principal amount of One Million One Hundred Thousand and No/ 100 Dollars ($ 1,1 00,000.00) made by Mortgagor in favor of HCFPII and dated March 12, 1997 (as it may be amended from time to time, the "March 1997 Term Note"), under which March 1997 Term Note $779,166.55 remains outstanding as of the date hereof. The March 1997 Term Note was previously assigned: i. By HCFPII to HCFP Funding II pursuant to that certain Allonge to Note dated as of September 19, 1997; ii. By HCFP Funding II to Wisconsin Circle 11 Funding Corporation ("Circle II Funding") pursuant to that certain Allonge to Note dated as of September 19, 1997; iii By Circle 11 Funding to U.S. Bank National Association ("U.S. Bank") pursuant to that certain Allonge to Note dated as of September 19, 1997; and iv. By U.S. Bank to Mortgagee pursuant to that certain Allonge to Note dated as of December 1, 1999. b. That certain third priority Mortgage made by Mortgagor in favor of HCFP Funding, Inc. ("HCFP Funding") dated March 12, 1997, and recorded in the Macomb County Records at Liber 07442 Page 186 on May 5, 1997 (as it may be amended from time to time, the "Revolver Mortgage"), which Revolver Mortgage has been assigned by HCFP Funding to Mortgagee pursuant to that certain Assignment of Mortgage dated as of February 20, 2001 (the "Revolver Mortgage Assignment"), which Revolver Mortgage Assignment is to be submitted promptly for recording in the Macomb County Records. c:\window\temp\consolcorrectedmortgagev2.doc The Revolver Mortgage secures the obligations of Mortgagor, PHC of Utah, Inc. ("PHCU"), PHC of Virginia, Inc. ("PHCVA"), PHC of Rhode Island, Inc. ("PHCRI") and Pioneer Counseling of Virginia, Inc. ("Pioneer" and, collectively with Mortgagor, PHCU, PHCVA and PHCRI, the "Revolver Borrowers") under that certain Revolving Credit Note in the original principal amount of Four Million and No/100 Dollars ($4,000,000.00) made by the Revolver Borrowers in favor of HCFP Funding and dated February 20, 1998 (as it may be amended from time to time, the "February 1998 Revolving Credit Note"). The February 1998 Revolving Credit Note was amended February 17, 2000 to decrease the maximum loan amount to Two Million Five Hundred Thousand and No/ 100 Dollars ($2,500,000.00). The February 1998 Revolving Credit Note has been assigned by HCFP Funding to Mortgagee pursuant to that certain Allonge to Note dated as of February 20, 2001. c. That certain Mortgage made by Mortgagor in favor of HCFP Funding II dated December 9, 1997, and recorded in the Macomb County Records at Liber 07804 Page 73 on January 9, 1998 (as it may be amended from time to time, the "December 1997 Mortgage"), which December 1997 Term Mortgage has been assigned by HCFP Funding II to Mortgagee pursuant to that certain Assignment of Mortgage dated as of February 20, 2001 (the "December 1997 Term Mortgage Assignment"), which December 1997 Term Mortgage Assignment is to be submitted promptly for recording in the Macomb County Records. The December 1997 Mortgage secures the obligations of Mortgagor under that certain Secured Term Note in the original principal amount of Five Hundred Thousand and No/100 Dollars ($500,000.00) made by Mortgagor in favor of HCFP Funding II and dated December 9, 1997 (the "December 1997 Term Note'), under which December 1997 Term Note approximately $387,500.00 remains outstanding as of the date hereof. The December 1997 Term Note has been assigned by HCFP Funding II to Mortgagee pursuant to that certain Allonge to Note dated as of February 20, 2001 (the "December 1997 Allonge"). d. That certain Restated Mortgage made by Mortgagor in favor of Mortgagee dated November 22, 1999 (the "November 1999 Restated Term Mortgage'). The November 1999 Restated Mortgage was intended (i) to restate the Original Mortgage and (ii) in addition to securing Mortgagor's obligations under the March 1997 Term Note, to further secure Mortgagor's obligations under that certain Secured Term Note in the original principal amount of One Million and No/100 Dollars ($1,000,000.00) made by Mortgagor in favor of Mortgagee and dated November 23, 1999 (the "November 1999 Term Note"), under which November 1999 Term Note approximately $ 970,000.00 remains outstanding as of the date hereof. e. That certain Restated Mortgage made by Mortgagor in favor of Mortgagee dated May 26, 2000 (the "May 2000 Restated Term Mortgage"), which May 2000 Restated Term Mortgage was previously presented for recording in the Macomb County Records. The May 2000 Restated Term Mortgage was intended (1) to restate the Original Term Mortgage, as amended by the November 1999 Restated Term Mortgage and (ii) in addition to securing Mortgagor's obligations under the March 1997 Term Note and the November 1999 Term Note, to further secure Mortgagor's obligations under that certain Secured Term Note in the original principal amount of Five Hundred Thousand and No/1000 Dollars ($500,000.00) made by Mortgagor in favor of Mortgagee and dated May 26, 2000 (the "May 2000 Term Note"), under which May 2000 Term Note $500,000.00 remains outstanding as of the date hereof. Further, the May 2000 Restated Term Mortgage incorrectly indicated that the November 1999 Restated Term Mortgage was presented for recording in the Macomb County Records, as Mortgagee did not actually present the November 1999 Restated Mortgage for recording. c:\window\temp\consolcorrectedmortgagev2.doc WHEREAS, the Mortgagor and the Mortgagee desire to consolidate all of the described Mortgages into this single Consolidated Mortgage so that Mortgagee may be fully secured hereby to the full extent of its aggregate commitments to Mortgagor under the March 1997 Term Note, the February 1998 Revolving Credit Note, the December 1997 Term Note, the November 1999 Term Note and the May 2000 Term Note, and so that any deficiencies or errors with respect to any of the Existing Mortgages may be corrected to the extent that this Consolidated Mortgage amends and restates, and this Consolidated Mortgage is intended to so amend and restate, each and every one of the Existing Mortgages. NOW, THEREFORE, for value received, Mortgagor mortgages and warrants to Mortgagee the property situated in the City of New Baltimore, County of Macomb, and State of Michigan, with a street address of 35031 23 Mile Road, New Baltimore, Michigan 48047, and legally described as shown on the attached Exhibit A; together with the easements, rights-of-way, licenses, privileges, hereditaments, and appurtenances belonging to the property, and all the rents, issues, leases, and profits, the interest of Mortgagor in the property, either at law or in equity, all buildings, structures, and improvements, and all fixtures located in, on, or affixed to the property, and used or usable in connection with the operation of the property (all of the above-stated property are collectively referred to in this Consolidated Mortgage as the "premises"). This Consolidated Mortgage is given to secure the following: a. payment of the indebtedness evidenced by the March 1997 Term Note; b. payment of the indebtedness evidenced by the February 1998 Revolving Credit Note; c. payment of the indebtedness evidenced by the December 1997 Term Note; d. payment of the indebtedness evidenced by the November 1999 Term Note; e. payment of the indebtedness evidenced by the May 2000 Term Note; f. payment by Mortgagor to Mortgagee of all sums expended or advanced by Mortgagee pursuant to any or provision of this Consolidated Mortgage; g. performance of the covenants, conditions, and agreements contained in this Consolidated Mortgage and in any other documents securing the indebtedness evidenced by the notes described in (a) - (e) above (collectively, the "Notes"); and h. all other indebtedness and obligations of Mortgagor currently or subsequently owing to Mortgagee, including but not limited to all future advances under this Consolidated Mortgage or on the Notes, any loan agreements, security agreements, pledge agreements, assignments, mortgages, leases, guarantees, and any other agreements, instruments, or documents previously or subsequently signed by Mortgagor, whether the indebtedness or obligations are direct or indirect, absolute or contingent, primary or secondary, or related or unrelated to the premises or the transaction of which this Mortgage is a part, and any and all partial or full extensions or renewals of this indebtedness or other indebtedness and obligations (all of the foregoing are collectively referred to as the "indebtedness"). Mortgagor hereby warrants, covenants, and agrees that: c:\window\temp\consolcorrectedmortgagev2.doc 1. Title. Mortgagor is seized of the premises, in fee simple. Mortgagor had the right and power to mortgage and warrant the premises as set forth in this Mortgage. The premises are free from all liens and encumbrances except easements and restrictions of record disclosed in Lawyers Title Insurance Policy, Schedule B, Policy No. 13 5-01-844628, dated May 6, 1997, relating to the premises. Mortgagor will defend the premises against all claims and demands. 2. Payment of Indebtedness. Mortgagor will pay all indebtedness when due, including the principal and interest, as provided in the Term Notes. 3. Taxes and Assessments. Until the indebtedness is fully satisfied, Mortgagor will pay all taxes, assessments, and other similar charges and encumbrances levied on the premises before they become delinquent, and will promptly deliver to Mortgagee, without demand, receipts showing the payment. 4. Tax and Insurance Escrow. On request, at the option of Mortgagee, Mortgagor will pay to Mortgagee monthly, in addition to each monthly payment required by this Mortgage or under the Notes, a sum equivalent to one-twelfth of the amount estimated by Mortgagee to be sufficient to enable Mortgagee to pay, at least thirty (30) days before they become due, all taxes, assessments, and other similar charges levied against the premises, and all insurance premiums on any policy or policies of insurance required by this Mortgage. The additional payments may be commingled with the general funds of Mortgagee, and no interest shall be payable on those payments. On demand by Mortgagee, Mortgagor will deliver and pay over to Mortgagee any additional sums necessary to make up any deficiency in the amount necessary to enable Mortgagee to fully pay when due any of the preceding items. In the event of any default by Mortgagor in performing any of the terms of this Mortgage, Mortgagee may apply against the indebtedness, in the manner that Mortgagee may de ine, any funds of Mortgagor then held by Mortgagee under this paragraph. 5. Change of Law. If, after the date of this Mortgage, any statute or ordinance is passed that changes in any way the laws now in force for the taxation of mortgages or mortgaged debts or the manner in which those taxes are collected, so as to affect this Mortgage or the interest of Mortgagee, the whole of the principal sum secured by this Mortgage, with all interest and charges, if any, at the option of Mortgagee, shall become due and payable. 6. Insurance. Mortgagor will procure, deliver to, and maintain for the benefit of Mortgagee during the term of this Consolidated Mortgage: a. a policy of hazard insurance, providing an all-risk extended coverage endorsement, in an amount equal to the highest replacement value of the premises; b. a policy of comprehensive public liability insurance insuring against bodily injury, with a coverage limit of at least $1,000,000 per occurrence (and $3,000,000 in the aggregate), and against property damage, with a coverage limit of at least $3,000,000, from any accident or occurrence with respect to the premises. All policies of insurance required by this paragraph shall be in a form, with companies, and in amounts acceptable to Mortgagee, and shall contain a mortgagee endorsement clause acceptable to Mortgagee, with loss payable to Mortgagee. Mortgagor will pay when due the premiums on any policy of insurance required by Mortgagee, and will deliver to Mortgagee renewals of all policies at least ten (10) days before their expiration date(s). Duplicates of all policies shall be delivered to Mortgagee. In the event of any loss or damage to the premises, Mortgagor will give immediate written notice to Mortgagee, and Mortgagee may then make proof of the loss or damage, if it is not promptly made by Mortgagor. All proceeds of insurance shall be payable to Mortgagee, and any affected insurance company is authorized and directed to make payment c:\window\temp\consolcorrectedmortgagev2.doc directly to Mortgagee. Mortgagee is authorized to settle, adjust or compromise any claims for loss, damage, or destruction under any policy of insurance. 7. Maintenance and Repair. Mortgagor will not cause or permit the commission of waste on the premises and will keep the premises in good condition and repair. No building or other improvement on the premises shall be removed, demolished, or materially altered without the prior written consent of Mortgagee. Mortgagor will comply with all laws, ordinances, regulations, and orders of all public authorities having jurisdiction over the premises. If the premises, in the sole judgment of Mortgagee, require inspection or repair, Mortgagee may enter upon the premises and inspect and/or repair the premises as Mortgagee may deem advisable, and may take other action as Mortgagee may deem appropriate to preserve the premises. Mortgagor will pay when due all charges for utilities or services contracted for by Mortgagor. 8. Environmental Matters. No use, exposure, release, generation, manufacture, storage, treatment, transportation or disposal of Hazardous Material (as defined) has occurred or is occurring on or from the property. All Hazardous Material used, treated, stored, transported to or from, generated or handled on the property has been disposed of on or off the property by or on behalf of Borrower in a lawful manner. There are no underground storage tanks present on or under the property. No other environmental, public health or safety hazards exist with respect to the property. "Hazardous Material" means any substances defined or designated as hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance, or similar term, by any environmental statute, rule or regulation or any federal, state or local governmental authority. 9. Waste. The failure of Mortgagor to meet its maintenance obligations or to pay any taxes assessed against the premises or any insurance premium on policies covering any property located on the premises shall constitute waste as provided by MCLA 600.2927, MSA 27A.2927, and shall entitle Mortgagee to appoint a receiver of the property for the purpose of preventing the waste. The receiver may collect the rents and income from the premises. 10. Condemnation. If the premises, or any part, are taken under the power of eminent domain, the entire award, to the full extent of the indebtedness, shall be paid to Mortgagee. Mortgagee is empowered in the name of Mortgagor to receive and give acquittance for any award, whether it is joint or several. However, Mortgagee shall not be held responsible for failing to collect any award. 11. Mortgagee Expenses. If Mortgagor fails to meet any of its obligations under this Consolidated Mortgage, Mortgagee shall have the right, but not the obligation, to perform in the place of Mortgagor. If Mortgagee incurs or expends any sums, including reasonable attorney fees, whether or not in connection with any action or proceeding, to (a) sustain the lien of this Consolidated Mortgage or its priority, (b) protect or enforce any of Mortgagee's rights, (c) recover any part of the indebtedness, (d) meet an obligation of Mortgagor under this mortgage, or (e) collect insurance or condemnation proceeds, then those sums shall become immediately due and payable by Mortgagor with interest at the highest of the default rates set forth in the Notes from the date of Mortgagee's payment until paid by Mortgagor. The sums expended in this manner by Mortgagee shall be secured by this Consolidated Mortgage and be a lien on the premises prior to any right, title, or interest on the premises attaching or accruing subsequent to the lien of this Consolidated Mortgage. c:\window\temp\consolcorrectedmortgagev2.doc Assignment of Contracts and Licenses. Mortgagor assigns to Mortgagee, as further security for payment of the indebtedness, Mortgagor's interest in all agreements, contracts (including any contracts for the lease or sale of the premises), licenses, and permits affecting the premises. The assignment shall not be construed as a consent by Mortgagee to. any agreement, contract, license or permit so assigned, or to impose any obligations on Mortgagee. Mortgagor shall not cancel, amend, permit, or cause a default or termination of any of the agreements, contracts, licenses, and permits used in conjunction with the operation of the premises without the written approval of Mortgagee. 13. Assignment of Rents and Leases. As additional security for the payment of the indebtedness, Mortgagor assigns and transfers to Mortgagee, pursuant to 1953 PA 210, as amended by 1966 PA 151 (MCLA 554.231 et seq., MSA 26.1137(l) et seq.), all the rents, profits, and income under all leases, occupancy agreements, or arrangements upon or affecting the premises (including any extensions or amendments) now in existence or coming into existence during the period this Consolidated Mortgage is in effect. This assignment shall nm with the land and be good and valid as against Mortgagor and those claiming under or through Mortgagor. This assignment shall continue to be operative during foreclosure or any other proceedings to enforce this Consolidated Mortgage. If a foreclosure sale results in a deficiency, this assignment shall stand as security during the redemption period for the payment of the deficiency. This assignment is given only as collateral security and shall not be construed as obligating Mortgagee to perform any of the covenants or undertakings required to be performed by Mortgagor in any leases. In the event of default in any of the s or covenants of this Consolidated Mortgage, Mortgagee shall be entitled to all of the rights and benefits of MCLA 554.231B.233, MSA 26.1137(1)B(3) and 1966 PA 151, and Mortgagee shall be entitled to collect the rents and income from the premises, to rent or lease the premises on the s that it may deem best, and to maintain proceedings to recover rents or possession of the premises from any tenant or trespasser. Mortgagee shall be entitled to enter the premises for the purpose of delivering notices or other communications to the tenants and occupants. Mortgagee shall have no liability to Mortgagor as a result of those acts. Mortgagee may deliver all of the notices and communications by ordinary first-class U.S. mail. If Mortgagor obstructs Mortgagee in its efforts to collect the rents and income from the premises or unreasonably refuses or neglects to assist Mortgagee in collecting the rent and income, Mortgagee shall be entitled to appoint a receiver for the premises and the income, rents, and profits, with powers that the court making the appointment may confer. Mortgagor shall at no time collect advance rent in excess of one month under any lease pertaining to the premises, and Mortgagee shall not be bound by any rent prepayment made or received in violation of this paragraph. Mortgagee shall not have any obligation to collect rent or to enforce any other obligations of any tenant or occupant of the premises to Mortgagor. No action taken by Mortgagee under this paragraph shall cause Mortgagee to become a "mortgagee in possession." 14. Performance of Leases. Mortgagor shall observe and perform all obligations contained in any lease affecting the premises. Mortgagor shall not default in performing any of the obligations imposed on Mortgagor by any lease if such a default gives the lessee the right to terminate or cancel the lease or offset against rentals. Upon request, Mortgagor shall furnish to Mortgagee a statement, in any reasonable detail that Mortgagee may request, of all leases relating to the premises and executed counterparts of any and all leases. c:\window\temp\consolcorrectedmortgagev2.doc 15. Records. With respect to the premises and its operations, Mortgagor shall keep proper books in accordance with generally accepted accounting principles consistently applied. Mortgagee shall have the right to examine the books at reasonable times as Mortgagee may elect. Upon request, Mortgagor shall furnish to Mortgagee within sixty (60) days after the end of each calendar year, a financial statement of Mortgagor for the calendar year, in reasonable detail and stating in comparative form the figures as of the end of the previous calendar year, including statements of income and expense relating to operations of the premises, certified by an independent certified public accountant acceptable to Mortgagee. In addition, Mortgagor shall furnish to Mortgagee, in a form acceptable to Mortgagee, interim financial statements that Mortgagee may request, certified by Mortgagor. 16. Waiver. If Mortgagee (a) grants any extension of time with respect to the payment of any part of the indebtedness, (b) takes other or additional security for the payment of the indebtedness, (c) waives or fails to exercise any right granted by this Consolidated Mortgage or the Notes, (d) grants any release on any part of the security held for the payment of the indebtedness, or (e) amends any of the s or provisions of this Consolidated Mortgage or the Notes, such act, taking, waiver, omission, or amendment, as the case may be, shall not release Mortgagor under any covenant of this Consolidated Mortgage or the Notes, nor preclude Mortgagee from exercising any right or power granted, nor impair the lien or priority of this Consolidated Mortgage. 17. Use of Premises. Mortgagor shall not make, or permit, without the prior written consent of Mortgagee, (a) any use of the premises for any purpose other than that for which they are now used; (b) any alterations of the buildings, improvements, and fixtures located on the premises; (c) any purchase, lease of, or agreement for any fixtures to be placed on the premises under which title is reserved in the vendor. Mortgagor shall execute and deliver documents that may be requested by Mortgagee to confirm the lien of this Consolidated Mortgage on any fixtures, machinery, and equipment. 18. Events of Default. The occurrences listed below shall be deemed events of default and shall entitle Mortgagee, at its option and without notice except as required by law, to exercise any one or any combination of remedies under this Consolidated Mortgage or permitted by law: a. the failure by Mortgagor to (i) make any payment when due under the Notes, or (ii) to perform any of the other s, covenants, or conditions of this Consolidated Mortgage within a period of ten (10) days after written notice from Mortgagee of Mortgagor's failure; b. the institution of foreclosure or other proceedings to enforce any junior lien or encumbrance on the premises; c. the appointment by a court of a receiver or trustee of Mortgagor or for any property of Mortgagor; d. a decree by a court adjudicating Mortgagor a bankrupt or insolvent, or for the sequestration of any of Mortgager's property; e. the filing of a petition in bankruptcy by or against Mortgagor under the federal Bankruptcy Code or any similar statute that is in effect; f. an assignment by Mortgagor for the benefit of creditors or a written admission by Mortgagor of the inability to pay debts generally as they become due; g. the failure to comply with all of the s and covenants of any leases or other agreements, documents, or restrictions that now encumber, affect, or pertain to the premises; h. Mortgagor, without the written consent of Mortgagee, sells, conveys, or transfers the premises, any interest in the premises, or any rents or profits from the premises, or causes or allows any mortgage, lien, or other encumbrance, or any writ of attachment, garnishment, execution, or other legal process to be placed on the premises, or any part of the premises is transferred by operation of law; i. all or any part of the premises is damaged or destroyed by fire or other casualty, regardless of whether such damages or destruction is covered, in whole or in part, by a policy or policies of insurance, or all or any part of the premises is taken by power of eminent domain. 19. Default Remedies. Upon the occurrence of any event of default of this Consolidated Mortgage, Mortgagee shall have the option, in addition to and not in lieu of all other rights and remedies provided by law, to do any or all of the following: a. Without notice, except as expressly required by law, to declare the principal sum secured by the Consolidated Mortgage, together with all interest and all other sums secured by this mortgage, to be immediately due and payable; to demand any installment payment due or to accelerate the Notes; and to institute any proceedings that Mortgagee deems necessary to collect and otherwise to enforce the indebtedness and obligations secured by this Mortgage and to protect the lien of this Consolidated Mortgage. b. Commence foreclosure proceedings against the premises pursuant to applicable laws. Mortgagee's commencement of a foreclosure shall be deemed an exercise by Mortgagee of its option to accelerate the due date of all sums secured by this Consolidated Mortgage. Mortgagor grants to Mortgagee, in the event of the occurrence of an event of default, the power to sell the premises at public auction by advertisement, without notice or hearing, except as required by Michigan statutes. c. To enter into peaceful possession of the premises and/or to receive the rent, income, and profits, and to apply those in accordance with paragraph 13. Mortgagor acknowledges having been advised that Mortgagee believes that the value of the security covered by this Consolidated Mortgage is inextricably intertwined with the effectiveness of the management, maintenance, and general operation of the premises, and that Mortgagee would not make the loan secured by this Consolidated Mortgage unless it could be assured that it would have the right to take possession of the premises in order to manage, control management, and enjoy the income, rents, and profits, immediately upon default by Mortgagor, notwithstanding that foreclosure proceedings may not have been instituted, or are pending, or that the redemption period may not have expired. Accordingly, Mortgagor knowingly and voluntarily waives all right to possession of the premises from and after the date of default, upon demand for possession by Mortgagee. 20. Sale of Premises as a Whole or in Parcels. Upon any foreclosure sale of the premises, the premises may be sold either as a whole or in parcels, as Mortgagee may elect and if in parcels, to be divided as Mortgagee may elect, or, at the election of Mortgagee, the premises may be offered first in parcels and then as a whole, with the offer producing the highest price for the entire property to prevail. 21. Assignment. Mortgagor shall not make a conveyance of any interest in the premises. A "conveyance" of Mortgagor's interest in the premises shall include without limitation any voluntary or involuntary disposition or dilution of legal or beneficial title to the premises by any means. If ownership of the premises, or any part, becomes vested in a person other than Mortgagor (with or without Mortgagee's consent), Mortgagee may, without notice to Mortgagor, deal with the successors in interest with reference to this Consolidated Mortgage or the Notes without in any way releasing or otherwise affecting Mortgagor's liability under the Notes and this Consolidated Mortgage. 22. Application of Proceeds. In the event of the payment to Mortgagee, pursuant to this Consolidated Mortgage, of any rents or profits, or proceeds of any insurance or condemnation award, or proceeds from the sale of the premises upon foreclosure, Mortgagee shall have the right to apply the rents, profits, or proceeds, in amounts and proportions that Mortgagee shall, in its sole discretion, de ine, against the cost and expenses incurred by Mortgagee in exercising its rights under this mortgage, payment of the interest and principal due under the Notes, payment of any other portion of the indebtedness, and payment of expenses incurred in preserving the premises. Application by Mortgagee of any proceeds toward the last maturing installments of principal and interest to become due or then due under the Notes shall not excuse Mortgagor from making the regularly scheduled payments due under the Notes and this Consolidated Mortgage, nor shall the application reduce the amount of the payments. In the event of the payment of proceeds as a result of an insurance or condemnation award, Mortgagee shall have the right, but not the obligation, to require all or part of the proceeds of any insurance or condemnation award to be used to restore any part of the premises damaged or taken by reason of the occurrence which gave rise to the payment of the proceeds. CAUTION: PARAGRAPH 23 CONTAINS A WAIVER OF IMPORTANT LEGAL RIGHTS 23. Waiver of Rights. This Consolidated Mortgage contains a power of sale which permits Mortgagee to cause the premises to be sold in the event of a default. Mortgagee may elect to cause the premises to be sold by advertisement rather than pursuant to court action, and Mortgagor voluntarily and knowingly waives any right Mortgagor may have by virtue of any applicable constitutional provision or statute to any notice or court hearing prior to the exercise ofthe power of sale, except as may be expressly required by the Michigan statute governing foreclosures by advertisement. In addition, Mortgagor knowingly and voluntarily waives any right Mortgagor may have to remain in possession of the premises or to collect any rents or income therefrom during the pendency of any foreclosure proceedings and during any applicable redemption period. Also, paragraphs 18 and 21 above entitle Mortgagee to require immediate payment of the balance of the indebtedness in full if the premises are sold or otherwise transferred. By execution of this mortgage, Mortgagor represents and acknowledges that the meaning and consequences of these paragraphs have been discussed as fully as desired by Mortgagor with Mortgagor's legal counsel. 24. Environmental Matters. Mortgagor agrees to indemnify Mortgagee against, and hold it harmless from, all obligations and liabilities relating to the premises arising out of claims made or suits brought for investigation, study, remedial work, monitoring, or other costs and expenses arising from or associated with response to any environmental matters, including but not limited to any (a) water pollution, air pollution, noise, odor, spills, leaks, or inadvertent discharges, emissions, or releases, or the generation, transportation, storage, treatment, or disposal of solid waste, including hazardous waste, hazardous substances, pollutants and contaminants; (b) injury, sickness, disease, or death of any person; or (c) damage to any property, regardless of whether the cause of the injury or damage occurred before or after the date of this Consolidated Mortgage. Mortgagor further agrees that Mortgagee shall have no liability for any environmental contamination associated with Mortgagor's business or the premises, and that any involvement of Mortgagee with Mortgagor's business to protect its security interest in the premises shall not constitute Mortgagor as an "owner or operator, of Mortgagor's business for purposes of determining environmental liability. In any event, if Mortgagee becomes obligated, by judicial or administrative judgment or settlement of a claim, to pay any amounts for response to any environmental contamination associated or connected with Mortgagor's business or the premises, any payment by Mortgagee shall be deemed additional indebtedness secured by the hen of this mortgage, shall be immediately due and payable to Mortgagee, and shall bear interest until paid at the highest of the default interest rates specified in the Notes. 25. Covenants Run with Land. All of the terms and covenants of this Consolidated Mortgage shall run with the land and shall be binding on and inure to the benefit of the respective legal representatives and successors of the parties. c:\window\temp\consolcorrectedmortgagev2.doc 26. Release of Consolidated Mortgage. If Mortgagor pays to Mortgagee the money required by the Notes, in the manner and at the times provided in the Notes, and all other sums of the indebtedness payable by Mortgagor to Mortgagee, and keeps and performs the s, covenants, and agreements of Mortgagor with Mortgagee, then this Consolidated Mortgage shall be satisfied, and Mortgagee shall release this Consolidated Mortgage. 27. Notice. All notices, demands, and requests required or permitted to be given to Mortgagor or by law shall be deemed delivered when deposited in the United States mail, with postage prepaid, addressed to Mortgagor or Mortgagee at their last known addresses. 28. Severability. If any provision of this Consolidated Mortgage is in conflict with any statute or rule of law of the State of Michigan or is otherwise unenforceable for any reason, then that provision shall be deemed null and void to the extent of the conflict or unenforceability, but shall be deemed separable from and shall not invalidate any other provision of this Consolidated Mortgage. 29. Venue and Jurisdiction. All provisions of this Consolidated Mortgage shall be governed by and construed in accordance with the laws of the State of Michigan. Venue shall be in Macomb County, Michigan for any action brought with regard to this Mortgage. Mortgagor consents to personal jurisdiction over it by any Michigan courts to the extent that personal jurisdiction may be necessary to enforce any of the provisions of this Consolidated Mortgage. [SIGNATURES FOLLOW] c:\window\temp\consolcorrectedmortgagev2.doc Signed on the date set forth above. MORTGAGOR: WITNESSES: PHC OF MICHIGAN, INC., a Massachusetts corporation /s/ Paula C. Wurts By: /s/ Bruce A. Shear Name: Paula C. Wurts Bruce A. Shear President /s/ Erica Cashell Name: Erica Cashell Name: ACKNOWLEDGMENT STATE OF MASSACHUSETTS ) COUNTY OF ESSEX ) The foregoing instrument was acknowledged before me on March 9, 2001, by Bruce A. Shear, the President of PHC of Michigan, Inc., a Mass, on behalf of the corporation. /s/ Janet Esterkes Notary Public, Essex County My commission expires June 5, 2003 c:\window\temp\consolcorrectedmortgagev2.doc Exhibit "A" Legal Description Lots 32 and 33 of ASSESSOR'S CRICKLEWOOD PLAT, excepting therefrom that portion which lies Southerly of a line which is 50 feet Northerly of (as measured at right angles) and parallel to the Southerly line of fractional Section 13, Town 3 North, Range 14 East, City of New Baltimore, Macomb County, Michigan. Plat recorded in Liber 35 of Plats, Page 12, Macomb County Records. ALSO EXCEPTING a portion of Lot 32 of "Assessor's Cricklewood Plat", described as follows: Commencing at the original Southeast comer of said Lot 32 of said "Assessor's Cricklewood Plat'; thence North 01 degrees 41 minutes West 17.00 feet to the point of beginning, said point being on the Northerly right-of-way line of 23 Mile Road (50 feet wide); thence North 89 degrees 19 minutes West along said right-of-way 5.36 feet; thence leaving said right-of-way line North 00 degrees 59 minutes 17 seconds West, 576.95 feet to the Northerly line of said Lot 32; thence North 88 degrees 04 minutes East along said North line 8.43 feet to the Northeast comer of said Lot 32; thence South 00 degrees 41 minutes East along the Easterly line of said Lot 32, 577.25 feet back to the point of beginning. c:\window\temp\consolcorrectedmortgagev2.doc SECOND AMENDED AND RESTATED CROSS-COLLATERALIZATION AND CROSS-DEFAULT AGREEMENT BY AND AMONG PHC, INC. PHC OF MICHIGAN, INC. PHC OF UTAH, INC. PHC OF VIRGINIA, INC. (collectively, "Borrower") AND HELLER HEALTHCARE FINANCE, INC. ("Lender") March _____, 2001 Prepared by and after recording, return to: Katherine R. Lofft, Esq. Heller Healthcare Finance, Inc. 2 Wisconsin Circle, 4' Floor Chevy Chase, Maryland 20815 H:\WP\LEGAL\CLIENTS\PHCMICH\FEB2001\CROSSCOLLATAMENDRESTS.DOC SECOND AMENDED AND RESTATED CROSS-COLLATERALIZATION AND CROSS-DEFAULT AGREEMENT THIS SECOND AMENDED AND RESTATED CROSS-COLLATERALIZATION AND CROSS-DEFAULT AGREEMENT made as of the day of March 2001, is executed by and among PHC, INC., a Massachusetts corporation ("PHC"), PHC OF MICHIGAN, INC., a Massachusetts corporation having its principal place of business at 200 Lake Street, Suite 102, Peabody, Massachusetts 01960 ("PHCM"), PHC OF UTAH, INC., a Massachusetts corporation ("PHCU'), PHC OF VIRGINIA, INC., a Massachusetts corporation ("PHCVA" and collectively with PHC, PHCM and PHCU, the "Borrower '), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation having its principal office at 2 Wisconsin Circle, 4' Floor, Chevy Chase, Maryland 20815 ("HHF", f/k/a HCFP Funding II, Inc. ("HCFP Funding"), the assignee of HealthCare Financial Partners-Funding II, L.P. ("HCFPII")) (collectively, the "Lender"). RECITALS WHEREAS, Borrower, together with PHC of Rhode Island, Inc. ("PHCRI") and Pioneer Counseling of Virginia, Inc. ("Pioneer and, collectively with Borrower and PHCRI, the "Original Borrower"), and HCFP Funding, Inc. ("HCFP Funding"), HCFP Funding II and U.S. Bank National Association entered into that certain Cross-Collateralization and Cross-Default Agreement (the "Agreement") dated as of July 13, 1998, and recorded in the official records of the Macomb County, Michigan registrar of deeds (the "Macomb County Records") at Liber 09402 Page 208 on March 7, 2000, pursuant to which Original Borrower agreed, among other things, to cross-collateralize the Loans (as defined herein) with one another and to provide for the cross-default of the Loans with one another (as amended and restated by that certain Amended and Restated Cross-Collateralization and Cross-Default Agreement dated as of May 26, 2000 by and among the Original Borrower and HHF, as amended and restated hereby and as it may be further amended, restated, supplemented or modified from time to time, the "Agreement"). WHEREAS, Borrower is currently indebted to Lender pursuant to the following existing loans (collectively, the "Existing Loans"): a. A revolving credit loan (the "February 1998 Revolving Loan") from Lender to the Original Borrower in the original maximum aggregate principal sum of Four Million and No/ 100 Dollars ($4,000,000.00), which February 1998 Revolving Loan is evidenced by that certain Loan and Security Agreement dated as of February 20, 1998 by and among the Original Borrowers and HCFP Funding and that certain Revolving Credit Note dated as of February 20, 1998 made by Original Borrowers in favor of HCFP Funding, and which loan is secured by that certain third priority Mortgage made by PHCM in favor of HCFP Funding dated March 12, 1997, and recorded on May 5, 1997 in the Macomb County Records at Liber 07442 Page 186 (as it may be amended from time to time, the "Revolver Mortgage"); b. A loan (the "March 1997 Loan") from HCFPII to PHCM in the original principal sum of One Million One Hundred Thousand and No/100 Dollars ($1,100,000.00), which March 1997 Term Loan is evidenced by that certain Secured Note dated as of March 12,1997 made by PHCM payable to HCFPII, and which March 1997 Term Loan is secured by that certain first priority Mortgage made by PHCM in favor of HCFPII dated March 12, 1997, and recorded on May 5, 1997 in the Macomb County Records at Liber 07442 Page 175 (the "Original Term Mortgage"); c. A second term loan (the "December 1997 Term Loan") from HCFP Funding II to PHCM in the original principal sum of Five Hundred Thousand and No/100 Dollars ($500,000.00), which December 1997 Term Loan is evidenced by that certain Secured Term Note dated December 9, 1997 made by PHCM payable to HCFP Funding II, and which H:\WP\LEGAL\CLIENTS\PHCMICH\FEB2001\CROSSCOLLATAMENDRESTS.DOC December 1997 Term Loan is secured by that certain Mortgage made by PHCM in favor of HCFP Funding II dated December 9, 1997, and recorded on January 9, 1998 in the Macomb County Records at Liber 07804 Page 73 (the "December 1997 Term Mortgage"); d. A third term loan (the "November 1999 Term Loan") from HHF to PHCM in the original principal sum of One Million and No/100 Dollars ($1,000,000.00), which November 1999 Term Loan is evidenced by that certain Secured Term Note dated November 22,1999 made by PHCM payable to HHF, and which November 1999 Term Loan is secured by the Original Mortgage as amended by that certain Restated Mortgage made by PHCM in favor of HHF dated November 22, 1999 (the "November 1999 Restated Mortgage and e. A fourth term loan (the "May 2000 Term Loan) from HHF to PHCM in the original principal sum of Five Hundred Thousand and No/100 Dollars ($500,000.00), which May 26, 2000 Term Loan is evidenced by that certain Secured Term Note dated May 26, 2000 made by PHCM payable to HHF, and which May 2000 Term Loan is secured by the Original Mortgage, as amended by the November 1999 Restated Term Mortgage and as further amended by that certain Restated Mortgage made by PHCM in favor of HHF dated May 26, 2000 (the "May 2000 Restated Term Mortgage"). WHEREAS, to consolidate the various security documents previously executed in connection with the Existing Loans (certain of which documents were not properly recorded or presented for recording, as the case may be, in the Macomb County Records) and to secure all of the Existing Loans, PHCM and HHF have entered into that certain Consolidated Restated Mortgage dated of even date herewith (the "Consolidated Mortgage"), which Consolidated Mortgage, among other things, combines and consolidates each of the Revolver Mortgage, the Original Term Mortgage, the December 1997 Term Mortgage, the November 1999 Restated Mortgage and the May 2000 Restated Term Mortgage, and further secures all of the Existing Loans with a lien on the PHCM property described therein; WHEREAS, Lender has agreed to maintain the Existing Loans, provided that each of the entities comprising Borrower agrees to execute this Agreement providing for, among other things, the cross-collateralization and cross-defaulting of all of the Existing Loans, and that each of the entities comprising Borrower further agrees that this Agreement shall be submitted promptly for recording in the Macomb County Records together with the Consolidated Mortgage; and WHEREAS, the entities comprising Borrower are all affiliated entities under common control and ownership (except that PHC is a public company) and will receive direct and indirect benefits from the continuance of the Existing Loans and of the financing arrangements represented thereby, which benefits, among others, provide adequate consideration for them to enter into this Agreement. NOW, THEREFORE, in consideration of the foregoing Recitals, to induce Lender to continue the Existing Loans and the financing arrangements represented thereby and by the other Loan Documents (as defined below) and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower agrees with Lender and Lender agrees with Borrower, as follows: 1. Loan Documents. As used in this Agreement, the term "Loan Documents" shall mean any and all loan documents evidencing or securing any or all of the February 1998 Revolving Loan, the March 1997 Term Loan, the December 1997 Term Loan, the November 1999 Term Loan and the May 2000 Term Loan. 2. Cross-Collateralization. Each of the Existing Loans is hereby cross-collateralized with each of the other Existing Loans, and Borrower agrees that the collateral described in the Loan Documents with respect to any Existing Loan shall, in addition to securing such Existing Loan as described in such Loan Documents, secure H:\WP\LEGAL\CLIENTS\PHCMICH\FEB2001\CROSSCOLLATAMENDRESTS.DOC the obligations of any or all of the entities comprising Borrower, as the case may be, under all of the other Existing Loans and the respective Loan Documents relating thereto, including without limitation: (a) the obligation of any Borrower or its Affiliates to pay the principal and interest on any or all of the Existing Loans, as the case may be, as the same may hereafter be renewed, modified, amended or extended, and to pay all other indebtedness or other fees, expenses or other charges with respect thereto, and to perform all of the s and conditions under the Loan Documents in respect of any or all of the Existing Loans, and (b) the obligation of PHC with respect to the real property encumbered by the Consolidated Mortgage that secures all of the Existing Loans as set forth above. 3. Cross-Default. Each of the Existing Loans is hereby cross-defaulted with each of the other Existing Loans, and Borrower agrees that the occurrence of an Event of Default as defined in, and pursuant to any of the Loan Documents with respect to any Existing Loan, which Event of Default is not cured within the applicable period as set forth therein, shall constitute an immediate Event of Default (without need of notice or the expiration of any additional cure period other than as specified in such Loan Documents) under all of the other Existing Loans and the respective Loan Documents relating thereto. 4. Severability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, such provision shall be deemed to have been modified to the extent necessary to make it valid, legal and enforceable. The validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 5. No Modification Except in Writing. None of the terms of this Agreement may be waived, altered, amended or otherwise changed except by an instrument in writing duly executed by all of the parties hereto. 6. Further Assurances. Each entity comprising Borrower shall execute and deliver such further instruments and perform such further acts as may be requested by Lender from time to time to confirm the provisions of this Agreement and the Loan Documents, to carry out more effectively the purposes of this Agreement and the Loan Documents, or to confirm the priority of any lien created by any of the Loan Documents. 7. Enforceability. Each entity comprising Borrower represents and warrants to Lender that this Agreement and the Loan Documents are the legal, valid and binding obligations of each entity constituting Borrower, jointly and severally, and are enforceable against each such entity in accordance with their respective terms. 8. Recording: Binding Effect. (a) This Agreement will be recorded in the Macomb County Records and the official records of the City of Salem, Virginia. In connection with the recordation of this Agreement, all necessary recording, intangible, or documentary stamp taxes will be duly paid by the Borrower. THIS AGREEMENT IS BEING GIVEN AS ADDITIONAL COLLATERAL TO SECURE THE OBLIGATIONS OF THE RESPECTIVE ENTITIES COMPRISING BORROWER UNDER THEIR RESPECTIVE LOAN DOCUMENTS. (b) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, administrators, successors and assigns. 9. Controlling Law. This Agreement shall be governed by the laws of the State of Maryland without regard to any otherwise applicable conflicts of law principles thereof. H:\WP\LEGAL\CLIENTS\PHCMICH\FEB2001\CROSSCOLLATAMENDRESTS.DOC 10. Release. Except for Lender's obligations, if any, to Borrower under the Loan Documents, each entity comprising Borrower, on behalf of itself and its partners, affiliates, successors and assigns (collectively, the "Releasing Parties"), hereby releases and forever discharges Lender and each of its parents, subsidiaries and affiliated corporations and partnerships (including the partners therein and thereof), and the partners, partners of partners, subsidiaries, divisions, affiliates, officers, directors, shareholders, trustees, employees, agents, attorneys and advisors of each of the foregoing, and each of their respective heirs, successors and assigns (collectively, the "Released Parties", all of whom are intended to be the beneficiaries of this release) from any and all claims and causes of action of whatever kind and nature based upon acts or omissions by any of them, whether such claims, causes of action, acts or omissions are or were known or unknown, suspected or unsuspected, which the Releasing Parties or any of them may have or have had, in whole or in part, prior to the date of this Agreement. 11. WAIVER OF JURY TRIAL. EACH ENTITY COMPRISING BORROWER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE EXISTING LOANS, OR (B) IN ANY WAY CONNECTED WITH OR PERT OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF ANY PARTY'S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. EACH ENTITY COMPRISING BORROWER AGREES THAT LENDER MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF BORROWER IRREVOCABLY TO WAIVE THEIR RIGHTS TO TRIAL BY JURY, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. [SIGNATURES ON FOLLOWING PAGE] H:\WP\LEGAL\CLIENTS\PHCMICH\FEB2001\CROSSCOLLATAMENDRESTS.DOC IN WITNESS WHEREOF, each party hereto has caused this Agreement to be properly executed on the date of the respective notarial acknowledgment set forth below. BORROWER: WITNESSES: PHC, INC., a Massachusetts corporation /s/ Paula C. Wurts By: /s/ Bruce A. Shear Name: Paula C. Wurts Bruce A. Shear President /s/ Erica Cashell Name: Erica Cashell WITNESSES: PHC OF MICHIGAN, INC., a Massachusetts corporation /s/ Paula C. Wurts By: /s/ Bruce A. Shear Name: Paula C. Wurts Bruce A. Shear President /s/ Erica Cashell Name: Erica Cashell WITNESSES: PHC OF UTAH, INC., a Massachusetts corporation /s/ Paula C. Wurts By: /s/ Bruce A. Shear Name: Paula C. Wurts Bruce A. Shear President /s/ Erica Cashell Name: Erica Cashell [SIGNATURES CONTINUED ON NEXT PAGE] H:\WP\LEGAL\CLIENTS\PHCMICH\FEB2001\CROSSCOLLATAMENDRESTS.DOC WITNESSES: PHC OF VIRGINIA, INC., a Massachusetts corporation /s/ Paula C. Wurts By: /s/ Bruce A. Shear Name: Paula C. Wurts Bruce A. Shear President /s/ Erica Cashell Name: Erica Cashell LENDER: HELLER HEALTHCARE FINANCE, INC. a Delaware corporation (f/k/a HCPF Funding, Inc., the assignee of HealthCare Financial Partners-Funding II, L.P.) WITNESS: ____________________________________ By: _________________________________ Name Name: Title: - ------------------------------------ Name H:\WP\LEGAL\CLIENTS\PHCMICH\FEB2001\CROSSCOLLATAMENDRESTS.DOC NOTARY ACKNOWLEDGMENT STATE OF MASSACHUSETTS ) COUNTY OF ESSEX ) Before me, a Notary Public in and for said County and State, on this day personally appeared Bruce A. Shear, known to me (or proved to me on the oath of ___________) to be the person whose name is subscribed to the foregoing instrument and known to me to be the managing member of PHC, INC., a Massachusetts corporation and acknowledged to me that he executed said instrument for the purposes and consideration therein expressed, as the act of said corporation. Given under my hand and seal this 9th day of March 2001: . /s/ Janet Esterkes Notary Public, Essex County My commission expires June 5, 2003 This instrument prepared by, and upon recording should be returned to: Katherine R. Lofft, Esq. Heller Healthcare Finance, Inc. 2 Wisconsin Circle, 4th Floor Chevy Chase, Maryland 20815 H:\WP\LEGAL\CLIENTS\PHCMICH\FEB2001\CROSSCOLLATAMENDRESTS.DOC EX-10 7 e10q1054.txt AMENDMENT TO SECURED NOTE Exhibit 10.54 AMENDMENT NO. 1 TO SECURED TERM NOTE THIS AMENDMENT NO. 1 TO SECURED TERM NOTE (the "Amendment") is hereby entered into as of the 19th day of March, 2001, between PHC OF MICHIGAN, INC., a Massachusetts corporation ("Borrower"), and HELLER HEALTHCARE FINANCE, INC. (f/k/a HEALTHCARE FINANCIAL PARTNERS - FUNDING II, L.P.), a Delaware limited partnership ("Lender"). WHEREAS, Borrower has executed that certain Secured Term Note (the "Note" dated March 12, 1997 in the principal sum of One Million One Hundred and 00/100 Dollars($110,000.00) in favor of Lender. WHEREAS, Borrower and Lender desire to amend the Note pursuant to the terms and conditions of this Amendment. NOW, THEREFORE, the parties agree as follows: 1. Capitalized terms used and not otherwise defined in this Amendment shall have the meanings given to them in the Note. 2. Borrower and Lender affirm that, as of the date of this Amendment, the outstanding principal balance under the Note is Seven Hundred Seventy Nine Thousand One Hundred Sixty Six and 65/100 Dollars ($779,166.65). 3. Section 2 of the Note is hereby amended and restated in its entirety to read as follows: "2. Principal and Interest. Borrower promises to pay to Lender interest on the Principal Sum at a fluctuating rate per annum (on the basis of the actual number of days elapsed over a year of 360 days) equal to the Prime Rate plus five percent (Prime plus 5.00%) (the "Base Rate"), provided that after an Event of Default such rate shall be equal to the Base Rate plus five percent (5%). For purposes of the foregoing, the term "Prime Rate" means that rate of interest designated as such by Fleet National Bank of Connecticut, N.A., or any successor thereto, as the same may from time to time fluctuate. On April 30, 2001, and on the last Business Day of each month thereafter through and including June 30, 2001, Borrower will make one of three (3) equal monthly installment payments of principal, each of which is equal to Ten Thousand and 00/100 Dollars ($10,000.00) per installment, together with accrued interest on each such installment calculated at the Base Rate. On July 31, 2001, and on the last Business Day of each month thereafter through and including February 28, 2003, Borrower will make one of twenty (20) equal monthly C:\WINDOWS\TEMP\AmendedSecuredTermNotev0.doc installment payments of principal, each of which is equal to Twenty Thousand and 00/100 Dollars ($20,000.00) per installment, together with accrued interest on each such installment calculated at the Base Rate. On March 12, 2003 (the "Maturity Date") Borrower shall make a balloon principal installment of the then remaining principal of Three Hundred Forty-Nine Thousand One Hundred Sixty-Six and 65/100 Dollars ($349,166.65), together with all accrued and unpaid interest. After the Maturity Date and until the entire Principal Sum shall be paid in full, the amount of the Principal Sum then outstanding shall bear interest, payable on demand, at the Base Rate plus five percent (5%), but in no event to exceed the maximum lawful rate." 4. Borrower hereby (a) confirms that all of the representations and warranties set forth in Section 10 of the Note ("Representations") are true and correct with respect to such Borrower, and (b) specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity. 5. Borrower hereby confirms that no Event of Default exists as are defined in Section 12 of the Note ("Events of Default"). - 6. This Amendment may be executed in several counterparts, and each copy so executed shall be deemed an original. 7. Except as expressly stated in this Amendment, the terms, conditions, and provisions of the Note, as amended by this Amendment, shall remain in full force and effect and shall not be modified or otherwise effected by the execution of this Amendment. 8. This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland. [SIGNATURES FOLLOWS) C:\WINDOWS\TEUT\AmendedSecuredTermNotev0.doc IN WITNESS WHEREOF, the parties have executed or caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. BORROWER: Attest: PHC OF MICHIGAN, INC. (Seal) a Massachusetts corporation By: /s/ Paula C. Wurts By: /s/ Bruce A. Shear Name Paula C. Wurts Name: Bruce A. Shear Title: Chief Financial officer Title: President C:\WINDOWS\TEUT\AmendedSecuredTermNotev0.doc -----END PRIVACY-ENHANCED MESSAGE-----