-----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, VVXiAWeZ8EMl2kgtIOxN90851JERHzOjgpDlCIWuQLEiNgjcrD1MUp/C8zJc4Ja2 YIAykP9NAyFj0ghtcNe4Tw== 0000915127-04-000034.txt : 20040513 0000915127-04-000034.hdr.sgml : 20040513 20040513160331 ACCESSION NUMBER: 0000915127-04-000034 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20040513 ITEM INFORMATION: Acquisition or disposition of assets FILED AS OF DATE: 20040513 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22916 FILM NUMBER: 04803073 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 8-K 1 k8pivotal.txt 8K - PIVOTAL SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): April 30, 2004 PHC, Inc. (Exact Name of Registrant as Specified in its Charter) Massachusetts (State of Incorporation or Organization) 0-22916 04-2601571 (Commission File Number) (I.R.S. Employer Identification No.) 200 Lake Street, Suite 102, Peabody, Massachusetts 01960 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (978) 536-2777 -- 1 -- Item 2. Acquisition of Assets On April 30, 2004, the Company closed on the acquisition of Phoenix-based Pivotal Research Centers, LLC, ("Pivotal") significantly expanding the Company's clinical research capabilities and geographic presence. The Company purchased 100% of the membership interest in Pivotal Research Centers, LLC, from the former owners, Louis Kirby, Carol Colombo and Anthony Bonacci. In addition to its currently enrolling research contracts, the acquisition brings with it the expertise and reputation of Pivotal's founder, Louis Kirby, MD and its CEO, Michael Colombo. Pivotal performs all phases of clinical research for Phase I-IV drugs under development through two dedicated research sites, including one of the largest single psychiatric sites in the country. Pivotal currently has approximately 22 enrolling studies and an additional 31 ongoing studies with approximately 75-80 percent of Pivotal's research activity in central nervous system (CNS) research, With a current client base including AstraZeneca, Bristol Meyers Squibb, Cephalon, Forest, GlaxoSmithKline, Lilly, Merck, Mylan, Novartis, Organon, Sepracor and Wyeth, the Company currently has protocols in Alzheimer's disease, ADHD, Diabetes Type II, Generalized Anxiety Disorder, Insomnia, Major Depressive Disorder, Obesity, Pain, Parkinson's Disease, and Shift Work Sleep Disorder. The Company paid $1.5 million in cash and $500,000 in PHC, Inc. Class A common stock based on the closing market price of $1.17. Additionally, the Company agreed to three performance-based notes which are staged during the next five years based on future profitability and secured by all the assets of Pivotal as well as by PHC, Inc.'s ownership interest in Pivotal. Note A is a secured promissory note with a face value of $1,000,000, with an annual interest rate of 6%, a maturity date of December 31, 2008 and payments due in quarterly installments beginning January 2005. The outstanding principal will be adjusted in the first and second years of the note based on adjusted EBITDA as defined in the agreement of $780,000. Adjusted EBITDA of greater than $780,000 for each period increases the note value by the difference and adjusted EBITDA of less than $780,000 will decrease the note value by the difference. Quarterly payments are then made based on the adjusted value of the note. Note B is a secured promissory note with a face value of $500,000, with an annual interest rate of 6%, a maturity date of December 31, 2008 and payments due in quarterly installments beginning January 2007. The outstanding principal will be adjusted on February 1, 2006 based on annual adjusted EBITDA as defined in the agreement of $780,000 for the adjustment period of January 1, 2005 through December 31, 2006. Adjusted EBITDA greater than $780,000 for the adjustment period increases the note value by the difference and adjusted EBITDA of less than $780,000 for the adjustment period will decrease the note value by the difference. Quarterly payments are then made based on the adjusted value of the note Note C is a secured promissory note with a face value of $1,000,000, with an annual interest rate of 6%, a maturity date of March 31, 2009 and annual payments commencing on March 31, 2005. Note payment amounts will be determined based on the adjusted EBITDA as defined in the agreement of the non-Pivotal Research business for each payment period beginning at the effective date of the agreement and ending on December 31, of 2004 and each year thereafter multiplied by .35. In addition, this note provides for the issuance of up to $200,000 in -- 2 -- PHC, Inc. Class A common stock, should the total of the five note payments be less than the $1,000,000 face value of the note. In addition to the usual representations and warranties made in agreements such as this, the Membership Purchase agreement also includes a sellers' covenant to the buyers not to compete or interfere with the business and a buyers' covenant regarding the timely collection and transfer of the accounts receivable of the seller and the public registration of the closing stock. In addition, the sellers also provided an indemnification to the buyer from and against any and all losses including, but not limited to, any litigation whether or not disclosed resulting from a pre-closing event, facts, circumstances or conditions whether or not asserted prior to the closing date. In conjunction with the Membership Purchase Agreement, the Company also executed, employment and non-compete agreements with Dr. Louis C. Kirby and Michael J. Colombo. Dr. Kirby's employment agreement extends from April 30, 2004 through December 31, 2006 and calls for an annual base salary of $200,000, subject to adjustment from time to time at the discretion of the Board of Directors, and incentive compensation of $30,000 if the adjusted EBITDA as defined in the Membership Purchase agreement is greater than $780,000. Mr. Colombo's employment agreement extends from April 30, 2004 through December 31, 2006 and calls for an annual base salary of $150,000, subject to adjustment from time to time at the discretion of the Board of Directors, and incentive compensation of $15,000 if the adjusted EBITDA as defined in the Membership Purchase agreement is greater then $730,000 but less than $800,000 or $25,000 if the adjusted EBITDA as defined in the Membership Purchase agreement is greater than $800,000. Additional incentive compensation will be provided to Mr. Colombo based on combined adjusted EBITDA of all clinical research business in excess of $800,000, with incremental increases for amounts over $800,000. The loan adjustment periods and payment dates in the notes and the employment agreement were amended to reflect the closing date of April 30, 2004, as agreed to by Sellers and Buyers pursuant to Section 2.6(a) of the Purchase Agreement The Company determined that it would be in the best interest of the shareholders to finance this transaction entirely through equity, since debt with favorable terms was not available. Therefore, the Company offered 2,800,000 shares of Class A Common Stock at $1.10 per share in a private placement. The private placement also included 25% warrant coverage at an exercise price of $1.10 per share with a three-year term and standard anti-dilution features. This offering was completed in two stages. As a result of the first stage of the offering, in March 2004, the Company issued 684,999 shares of Class A Common Stock for $753,500 and warrants to purchase 171,248 additional shares of Class A Common Stock. As a result of second stage of this offering, in April 2004, the Company issued 1,918,196 shares of Class A Common Stock for $2,110,016 and warrants to purchase 479,549 additional shares of Class A Common Stock. The private placement facilitated the closing of the acquisition without incurring any additional bank debt, and also provides the necessary working capital for Pivotal to execute its business plan. -- 3 -- Item 7. Financial Statements and Exhibits It is impractical to provide the required financial information for this acquisition at this time as the Seller has not yet provided the Company with the necessary financial statements. Appropriate financial information will be provided within 60 days. ( c ) Exhibits 4.22 Form of Subscription Agreement and warrant 10.27 Membership Purchase Agreement between PHC, Inc and Pivotal Research Centers, LLC and its Sellers Louis C. Kirby, Carol A. Colombo and Anthony A. Bonacci dated April 30, 2004. 10.28 Pledge Agreement entered into April 30, 2004 by and between PHC, Inc. and Louis Kirby, Carol Colombo and Anthony Bonacci. 10.29 Security Agreement entered into April 30, 2004 by and between PHC, Inc. and Louis Kirby, Carol Colombo and Anthony Bonacci. 10.30 Secured Promissory Note dated April 30, 2004 in the amount of $1,000,000 by PHC, Inc. in favor of Louis C. Kirby, Carol Colombo and Anthony Bonacci. (Note A) 10.31 Secured Promissory Note dated April 30, 2004 in the amount of $500,000 by PHC, Inc. in favor of Louis C. Kirby, Carol Colombo and Anthony Bonacci. (Note B) 10.32 Secured Promissory Note dated April 30, 2004 in the amount of $1,000,000 by PHC, Inc. in favor of Louis C. Kirby, Carol Colombo and Anthony Bonacci. (Note C) 10.33 Kirby employment and Non-Compete Agreement. 10.34 Colombo employment and Non-Compete Agreement. 10.35 First Amendment to Membership Purchase Agreement and Colombo employment agreement and Note C. -- 4 -- SIGNATURE Pursuant to the requirements of the securities exchange act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PHC, INC. Date: May 13, 2004 By: /s/ Bruce A. Shear _____________________ Bruce A. Shear President -- 5 -- EX-4 2 exh4_22.txt FORM OF SUBSCRIPTION AGREEMENT Exhibit 4.22 FORM OF SUBSCRIPTION AGREEMENT PHC, Inc. 200 Lake Street, Suite 102 Peabody, MA 01960 Gentlemen: The purpose of this Subscription Agreement is to memorialize your agreement to subscribe for and purchase from PHC, Inc., a Massachusetts corporation (the "Company") shares of the Company's Class A Common Stock and warrants to purchase shares of the Class A Common Stock, as set forth on Exhibit A attached hereto, on the following terms and conditions. Section 1. Shares The Company is offering for sale an aggregate of up to _______ of its Class A Common Stock and a warrant to purchase up to _______ shares of its Class A Common Stock (collectively, the "Aggregate Securities") for the sum of up to ________. Of the Aggregate Securities, the Company is offering for sale to you ________ shares of its Class A Common Stock (the "Shares") and a warrant to purchase ________ shares of its Class A Common Stock (the "Warrant," and collectively with the Shares, the "Securities"). In exchange, you will pay to the Company the sum of $__________. The Warrants will be entitled to the rights described in the Warrant Agreement attached as Exhibit B. THE SHARES AND WARRANTS ACQUIRED PURSUANT TO THIS SUBSCRIPTION AGREEMENT ARE BEING ACQUIRED IN A TRANSACTION NOT INVOLVING ANY PUBLIC OFFERING AND, ACCORDINGLY, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR THE SECURITIES LAWS OF ANY STATE. THE SHARES, THE WARRANTS, AND THE SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. -- 6 -- Section 2. Acceptance and Rejection of Subscriptions The undersigned hereby agrees to purchase the Securities set forth in Section 1. The subscription offer shall not entitle the undersigned to purchase any Securities unless and until it has been accepted in writing by the Company. The undersigned understands that this Subscription Agreement may not be terminated or withdrawn and that closing on this subscription shall take place as soon all the purchasers of the Aggregate Securities, including the undersigned, deposit by wire transfer payment of the subscription price with Arent Fox Kintner Plotkin & Kahn, PLLC (the "Escrow Agent"). The undersigned understands that the Company may accept or reject this subscription offer in whole or in part in its sole discretion at any time. If this subscription offer or any part hereof is rejected for any reason, the subscription payment will be refunded promptly, without interest or deduction. Section 3. Closing; Issuance of Interests and Warrants Closing on this subscription shall take place at the Company's offices at the time specified in the notice issued by the Company, upon the deposit by all the purchasers of the Aggregate Securities, including the undersigned, of payment of the subscription price by wire transfer with the Escrow Agent. The Company shall file a registration statement for the Securities and the shares issuable upon exercise of the Warrants as soon as practically possible following the closing of the acquisition of the Pivotal Research Centers, LLC, pursuant to the Membership Purchase Agreement by and between the Company, Louis Kirby, Carol Colombo, and Anthony Bonacci (the "Pivotal Transaction") but no later than 90 days after the closing of the Pivotal Transaction. The Securities shall not be deemed issued to, or owned by, the undersigned until closing and tender to the Company of immediately available funds by wire transfer in payment of the subscription price. Section 4. Subscriber's Representations and Warranties (a) The undersigned represents, warrants and agrees with the Company that: (i) The undersigned has received copies of the Company's 10-K Annual Report for the year ending June 30, 2003, 10-Q Quarterly report for the quarter ending September 30, 2003, annual report to the stockholders, proxy statements, and other reports, which include a description of the Company's business, operations, risk factors, litigation and other matters, and acknowledges that the undersigned was provided with the opportunity to meet with and ask questions of and receive answers from representatives of the Company concerning the business, operations and prospects of the Company and its financial position and to obtain any additional information which the undersigned deemed necessary in connection with making an investment decision regarding this subscription. The undersigned acknowledges that he or she has read and understands the material provided to him or her and the risks associated with an investment in the Securities. The undersigned acknowledges that an investment in the Securities involves a high degree of risk. -- 7 -- (ii) The undersigned has reached the age of majority (if a natural person) in the state in which the undersigned resides, has adequate means of providing for the undersigned's current needs and personal contingencies, is able to bear the substantial economic risks of an investment in the Securities, including the risk that the entire investment could be lost, has no need for liquidity in such investment, and could afford a complete loss of such investment. (iii) The undersigned is: (A) an individual who either (1) has a net worth or, together with the undersigned's spouse, a joint net worth (i.e., total assets in excess of total liabilities) in excess of $1,000,000 or (2) has had in each of the two most recent years, and reasonably expects to have during the current year, an individual income in excess of $200,000 (1 is footnote) or, together with undersigned's spouse, a joint income in excess of $300,000 in each of those years and reasonably expects to have such joint income during the current year; or (B) an organization which is (l) an institutional investor as defined in Securities Act Rule 501(a)(1), (2) a private business development company defined in Section 202(a)(22) of the Investment Advisers Act of 1940, or (3) a corporation, business trust or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000 or a trust with total assets exceeding $5,000,000, not formed for the purpose of acquiring the securities offered, whose purchases are directed by a sophisticated person as defined in Rule 506(b)(2)(ii); or (C) an entity in which all of the equity owners are Accredited Investors. (iv) The undersigned has such knowledge and experience in financial and business matters that the undersigned is capable of evaluating the merits and risks of the investment in the Securities. _____________________________________________ Footnote 1 For this purpose, a person's income is the amount of his individual adjusted gross income (as reported on a Federal income tax return) increased by the following amounts: (a) any deduction for a portion of long term capital gains (Section 1202 of the Internal Revenue Code (the "Code")); (b) any deduction for depletion (Section 611 et seq. of the Code); (c) any exclusion for interest on tax-exempt municipal obligations (Section 103 of the Code); and (d) any losses of a partnership allocated on the individual limited partner (as reported on Schedule E of Form 1040). -- 8 -- (v) The undersigned is purchasing the Securities for the undersigned's own account for investment and not with a view to, or for sale in connection with, any distribution, and does not have any present plan to sell or otherwise dispose of the Securities or the shares issuable upon exercise of the Warrants; the undersigned will not sell, transfer or otherwise dispose of the Securities or the shares issuable upon exercise of the Warrants, or any interest therein, except in accordance with the Securities Act and the applicable rules and regulations promulgated thereunder, as then in force, and any applicable law, rule or regulation of any state or other jurisdiction ("State Laws"). (b) The undersigned further understands and agrees that: (i) The Securities and the shares issuable upon exercise of the Warrants have not been registered under the Securities Act or the State Laws and, consequently, the Securities and the shares issuable upon exercise of the Warrants must be held indefinitely unless subsequently registered thereunder or an exemption from such registration is available. The undersigned shall register the Securities and the shares issuable upon exercise of the Warrants as soon as practically possible following the closing of the Pivotal Transaction but no later than 90 days after the closing of the Pivotal Transaction so that the Securities and the shares underlying the Warrant may be publicly offered. (ii) The Securities and the shares issuable upon exercise of the Warrants have not been registered under the Securities Act on the basis that the issuance thereof is exempt under Section 3(b) or 4(2) of the Securities Act and by Rule 505 or 506 of Regulation D ("Regulation D") under the Securities Act and that the Company's reliance on such exemption is predicated in part on the undersigned's representations and warranties as set forth in this Subscription Agreement. The Securities and the shares issuable upon exercise of the Warrants have not been registered under certain State Laws in reliance on specific exemptions from registration thereunder and no securities administrator or any state or the Federal government has made any finding or determination relating to the fairness for investment of the Securities or the shares issuable upon exercise of the Warrants and no securities administrator or the Federal government has recommended or endorsed the offering of the Securities or the shares issuable upon exercise of the Warrants. (iii)The Company is relying on the undersigned's representations, warranties, understandings and agreements set forth in this Subscription Agreement in consummating the transactions contemplated herein. (c) The undersigned, if executing this Subscription Agreement in a representative or fiduciary capacity, has full power and authority to execute and deliver this Subscription Agreement in such capacity and on behalf of the subscribing individual, partnership, limited liability company, trust, estate, corporation or other entity for whom -- 9 -- the undersigned is executing this Subscription Agreement, and such individual, partnership, limited liability company, trust, estate, corporation or other entity has full right and power to perform pursuant to this Subscription Agreement. The undersigned will, upon request, furnish to the Company a true and correct copy of, (i) if the undersigned is a trust, the trust agreement, (ii) if the undersigned is a corporation, the Articles of Incorporation and By-laws and a copy (certified by the secretary or other authorized officer) of appropriate corporate resolutions authorizing the specific investment, and (iii) if the undersigned is a partnership or limited liability company, the partnership or limited liability company agreement. (d) If the undersigned is a partnership or a limited liability company, the person who has signed on behalf of the partnership or limited liability company identified as the investor is authorized to so sign; if the undersigned is a trust, the trustee (or co-trustee) of the trust is authorized by the trust agreement; and if the undersigned is a corporation, the corporate officer so signing is authorized to sign on behalf of the corporation. (e) If the undersigned is purchasing the Securities subscribed for herein in a representative or fiduciary capacity, the above representations and warranties shall be deemed to have been made on behalf of the person or persons for whom the undersigned is so purchasing. (f) All representations and warranties set forth above or in any other written statement or document delivered by the undersigned in connection with the transactions contemplated hereby shall be true and correct in all respects on and as of the date of the closing of the offering as if made on and as of the date of such closing and shall survive such closing. (g) The undersigned understands the meanings and legal consequences of the representations and warranties contained in this Section 4 and agrees to indemnify and hold harmless the Company from and against any and all loss, damage or liability due to or arising out of a breach of any representation or warranty of the undersigned contained in this Subscription Agreement. Notwithstanding any of the representations, warranties, acknowledgements or agreements made herein by the undersigned, the undersigned does not thereby or in any other manner waive any rights granted to the undersigned under Federal or state securities laws. Section 5. Irrevocability The undersigned hereby acknowledges and agrees that, except as required by law, this subscription offer is irrevocable and that the undersigned is not entitled to cancel, terminate or revoke this Subscription Agreement or any agreements of the undersigned hereunder and that this Subscription Agreement and such agreements shall survive the death or disability of the undersigned. Section 6. Binding Effect This Subscription Agreement shall be binding upon and inure to the benefit of the undersigned and the undersigned's successors but shall not be assignable -- 10 -- by the undersigned without the prior written consent of the Company, which consent may be withheld by the Company for any reason. Section 7. Applicable Law This Subscription Agreement and all rights hereunder shall be governed by, and interpreted in accordance with, the laws of the State of Massachusetts without reference to any conflict of laws. -- 11 -- IN WITNESS WHEREOF, the undersigned has executed this Subscription Agreement to purchase the number of Shares provided on Exhibit A on this day of _____, 2004. (Signature of Subscriber) Taxpayer ID/Social Security No. Name: of Subscriber (Signature of Joint Taxpayer ID/Social Security No. Subscriber, if any) of Joint Subscriber Name ______________________________ Address of Subscriber Address of Joint Subscriber, if any ACCEPTANCE The foregoing offer is hereby accepted this day of , 2004. PHC, Inc. By: ____________________________ Title: _________________________ -- 12 -- EXHIBIT A Subscription Information for the purchase of _____________ shares of Class A Common Stock Please indicate with your initials in the space provided the manner in which the Shares are to be held. The Securities are to be held as follows: ____________ Community Property ____________ S Corporation ____________ Joint Tenancy ____________ Partnership ____________ Tenancy in Common ____________ Limited Liability Company ____________ Separate Property ____________ Trust ____________ Individual Ownership ____________ Corporation ____________ Other (please indicate) Please supply the following information, if a natural person. Subscriber: Joint Subscriber: _____________________________________ _____________________________________ Place and date of birth Place and date of birth US citizen: Yes _____ No _____ US citizen: Yes _____ No _____ _____________________________________ _____________________________________ Subscriber Sign Here Joint Subscriber Sign Here Name _________________________ Name _________________________ -- 13 -- EXHIBIT B 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 ________ shares of the Class A Common Stock, $.01 par value, of PHC, Inc. WARRANT TO PURCHASE ______ SHARES OF CLASS A COMMON STOCK Expires February ___, 2007 (3 years) THIS CERTIFIES THAT, for value received, _____________ 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 $1.10 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 __________________. 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 February ___, 2007. 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 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 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 wire transfer, of an amount equal to the Warrant Price 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 Warrant Price paid. In the event of any exercise of the rights -- 14 -- 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 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. 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 -- 15 -- 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 therefore 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 subscription agreement with the Company as of the date hereof (the "Subscription Agreement") and agrees to the placement of a restrictive transfer legend on this Warrant and the certificates representing the shares. -- 16 -- 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. -- 17 -- 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 Subscription 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 Subscription 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 ____________________________ Bruce A. Shear, President Date: -- 18 -- 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 -- 19 -- EX-10 3 ex10_27.txt MEMBERSHIP PURCHASE AGREEMENT Exhibit 10.27 MEMBERSHIP PURCHASE AGREEMENT BETWEEN PHC, INC. AND PIVOTAL RESEARCH CENTERS, LLC AND ITS SELLERS LOUIS C. KIRBY, CAROL A. COLOMBO, AND ANTHONY A. BONACCI Dated April 30, 2004 -- 20 -- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.....................................................8 1.1 Certain Defined Terms...........................................8 1.2 Other Defined Terms............................................16 1.3 Construction...................................................17 ARTICLE II THE TRANSACTION................................................18 2.1 Purchase and Sale..............................................18 2.2 Prior to Closing...............................................18 2.3 Purchase Price.................................................19 2.4 Purchase Price Adjustment......................................19 2.5 Allocations of Purchase Price..................................20 2.6 Closing........................................................20 ARTICLE III COVENANTS OF BUYER.............................................20 3.1 Collection of Accounts Receivable of Buyer.....................20 3.2 Public Registration of Closing Stock...........................20 3.3 Security for Payment of Notes..................................21 3.4 Buyer's Working Capital Commitment.............................21 3.5 Buyer's Working Capital Commitment.............................21 3.6 Kirby Guaranty Leasehold Agreements............................21 3.7 Compliance with Pharmaceutical Contracts.......................22 3.8 Continuing Legal Status of Pivotal.............................22 3.9 Compliance with Leasehold Agreements...........................22 3.10 No Corporate Overhead Charges..................................22 3.11 Prohibition on Assignments, Transfers..........................22 3.12 Prohibition on Material Indebtedness...........................23 ARTICLE IV COVENANTS OF SEller.............................................23 4.1 Covenant Not to Compete or Interfere With Business.............23 4.2 Termination of Covenant........................................24 ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLERS......................24 5.1 Pivotal Organization...........................................24 5.2 Power and Authority............................................24 5.3 Capitalization.................................................25 5.4 Subsidiaries...................................................25 5.5 No Conflict....................................................25 5.6 Licenses.......................................................25 5.7 Contracts......................................................26 5.8 Equipment and Other Property...................................27 5.9 Real Property..................................................27 5.10 Intellectual Property Rights...................................28 5.11 Employee Benefit Matters.......................................28 5.12 Labor Matters..................................................30 5.13 Tax Matters....................................................30 5.14 Environmental Matters..........................................32 5.15 Insurance......................................................33 5.16 Customers, Distributors and Suppliers..........................33 5.17 Affiliate Transactions.........................................33 5.18 Liability......................................................33 5.19 Full Disclosure................................................34 5.20 Financial Statements...........................................34 5.21 No Changes.....................................................34 5.22 Contracts......................................................36 5.23 Litigation and Legal Proceedings...............................36 5.24 Approvals; Consents............................................36 5.25 Compliance with Law............................................37 5.26 Title to Transferred Interest..................................37 5.27 Finders........................................................37 5.28 Securities Disclosure..........................................37 5.30 Disclosure.....................................................37 -- 21 -- ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER......................37 6.1 Organization.................................................37 6.2 Power and Authority..........................................38 6.3 Authorized Closing Stock.....................................38 6.4 Finders......................................................38 6.5 Approvals; Consents..........................................38 6.6 Compliance with Other Instruments; Law.......................38 6.7 Investment Representations...................................38 6.8 SEC Filings..................................................39 ARTICLE VII CONDITIONS TO CLOSING........................................39 7.1 Conditions to Obligations of the Sellers.....................39 7.2 Conditions to Obligations of the Buyer.......................40 7.3 Concurrent Conditions........................................40 ARTICLE VIII SURVIVAL AND INDEMNIFICATION.................................41 8.1 Survival.....................................................41 8.2 Indemnification..............................................41 8.3 Limitation of Liability and Termination of Indemnification...42 8.4 Adjustment of Purchase Price.................................43 8.5 Claims Resulting from Breach of Representation or Warranty...43 8.6 Mitigation...................................................43 ARTICLE IX TAX COVENANTS AND RELATED MATTERS............................43 9.1 Returns......................................................43 9.2 Cooperation..................................................43 9.3 Allocation of Taxes..........................................43 ARTICLE X MISCELLANEOUS................................................43 10.1 Right of Set-Off.............................................43 10.2 Breach or Failure to Perform.................................44 10.3 Entire Agreement; No Third-Party Beneficiaries...............44 10.4 Public Announcement..........................................44 10.5 Expenses.....................................................44 10.6 Notices......................................................44 10.7 Waivers and Amendments.......................................45 10.8 Governing Law; Severability..................................45 10.9 Headings.....................................................45 10.10 Assignment...................................................45 10.11 Binding Effect...............................................45 10.12 Arbitration of Disputes......................................46 10.13 Counterparts.................................................46 10.14 Termination of Certain Agreements............................46 -- 22 -- EXHIBITS EXHIBIT Recital B - Seller's Membership Interests EXHIBIT 1.1A - Colombo Employment Agreement EXHIBIT 1.1B - Kirby Employment Agreement EXHIBIT 1.1C - Pivotal LLC Agreement EXHIBIT 2.2(a) - Closing Certificate EXHIBIT 2.3(d)(i) - Note A EXHIBIT 2.3(d)(ii) - Note B EXHIBIT 2.3(d)(iii) - Note C EXHIBIT 2.4(b) - PTO Policy EXHIBIT 2.6(b) - Assignment Agreement EXHIBIT 3.11 - Form of Guaranty EXHIBIT 7.1(b) - Buyer's Opinion of Counsel EXHIBIT 7.1(h) - Pledge Agreement EXHIBIT 7.1(i) - Security Agreement EXHIBIT 7.1(j) - Financing Statement EXHIBIT 7.2(b) - Sellers' Opinion of Counsel SCHEDULES SCHEDULE 1.1A - Key Employee SCHEDULE 2.2(a) - Reserve Account SCHEDULE 2.5 - Fixed Assets SCHEDULE 3.6 - Kirby Guaranty Leasehold Agreement SCHEDULE 3.9 - Leasehold Agreements SCHEDULE 3.10 - Charges for Legal and Accounting Expenses SCHEDULE 5.20(c) - Encumbrances on Accounts and Notes Receivables (Interim Financial Statements) SCHEDULE 5.21(b) - Changes to Employee Compensation and Benefits SCHEDULE 5.21(c) - Encumbrances on Assets SCHEDULE 5.22 - Pharmaceutical Contracts SCHEDULE 5.28 - Securities Disclosures SCHEDULE 6.6 - Defaults or Violation Resulting from Transaction Documents DISCLOSURE SCHEDULE Section 2.1 - Membership Interests Section 2.2(b) - Bank Accounts Section 2.2(c) - Accounts Receivable Section 5.3 - Members of Pivotal Section 5.5 - Conflicts Section 5.6 - Licenses Section 5.7 - Material Contracts Section 5.8 - Equipment Section 5.9(a) - Leased Real Property Section 5.9(b) - Improvements Not in Good Condition Section 5.9(c) - Insufficient Utilities and Services on Leased Real Property Section 5.10 - Intellectual Property Section 5.11(a) - Employee Plans Section 5.11(c)(iv) - Termination for Cause Section 5.12 - Labor Agreements Section 5.13 - Taxes Section 5.14 - Environmental Matters Section 5.15(a) - Insurance Policies Section 5.15(b) - Invalid Insurance Policies Section 5.15(c) - Cancelled Pharmaceutical Companies and Suppliers Section 5.17 - Affiliate Insurance Policies -- 23 -- Section 5.16 - 10 Largest Customer Transactions Section 5.16 - 10 Largest Customer Transactions Section 5.16 - 10 Largest Customer Transactions Section 5.20(a) - Financial Statements Section 5.20(b) - GAAP Liabilities Section 5.22 - Pharmaceutical Contract Violations Section 5.23 - Litigation Section 5.24 - Consents and Approvals Section 5.25 - Non-Compliance with Laws Section 5.29 - Pre-Closing Conditions Section 6.7 - Investment Representations -- 24 -- MEMBERSHIP PURCHASE AGREEMENT February ___, 2003 The parties to this Membership Purchase Agreement (the "Agreement") are PHC, Inc., a Massachusetts corporation ("PHC" or "Buyer"), Pivotal Research Centers, L.L.C., an Arizona limited liability company ("Pivotal"), Louis C. Kirby ("Kirby"), Anthony A. Bonacci ("Bonacci"), and Carol A. Colombo ("Colombo") (Kirby, Bonacci and Colombo may be collectively referred to herein as the "Sellers" and Kirby and Michael J. Colombo may be collectively referred to herein as the "Executives" or individually, as the case may be, as an "Executive"). RECITALS A. WHEREAS, Pivotal is in the business of providing clinical research services to Pharmaceutical Companies (as defined below) and their designated contract research organizations. Pivotal's offices and research facilities are located at 13128 N. 94th Drive, Suite 200, Peoria, Arizona (the "Peoria Location"), and 1220 S. Alma School Road, Suite 206, Mesa, Arizona; (the "Mesa Location," and together with the Peoria Location, and any Successor Location (as defined below) the "Locations"); B. WHEREAS, as of the date hereof, each of the Sellers is a Member of Pivotal and owns of record and beneficially a Membership Interest in Pivotal set forth next to such Seller's name on Exhibit Recital B hereto; C. WHEREAS, subject to such terms and conditions as are specified herein, each of the Sellers desires to sell all of such Seller's Membership Interest; D. WHEREAS, neither party hereto would enter into this Agreement without the Executives and the Buyer entering into the Employment Agreements (defined below) and as such those agreements constitute material inducements to all parties to enter into this Agreement; and E. WHEREAS, subject to the terms and conditions as are specified herein Buyer desires to purchase the Membership Interests. AGREEMENT Now, therefore, with reference to the foregoing recitals, all of which are incorporated herein by this reference, in consideration of the premises and of the mutual agreements and covenants hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: -- 25 -- ARTICLE I DEFINITIONS 1.1 Certain Defined Terms. As used in this Agreement, the following terms have the following meanings: "Accredited Investor" means a natural person whose Net Worth, or joint Net Worth with such natural person's spouse, exceeds $1,000,000 as of the date of this Agreement. "Act" means the Arizona limited liability company act. "Action" means any claim, action, suit, arbitration or proceeding by or before any Governmental Authority or arbitrator. "Acquisition Financing" means the financing obtained by Buyer to pay the Closing Cash Consideration of this Agreement. "Affiliate" means, when used with respect to a specified Person, another Person that, either directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a specified Person. "Assets" mean all of Pivotal's right, title and interest in and to all properties, assets and rights of any kind, whether tangible or intangible, real or personal, owned by Pivotal, or in which Pivotal has any interest whatsoever. "Audited Financial Statements" means the audited balance sheet of Pivotal for the twelve month periods ending June 30, 2002 and June 30, 2003, and the related audited statements of income, cash flow and Members' capital for the twelve months ended June 30, 2002 and June 30, 2003, respectively, together with the notes thereto and the report of Pivotal's independent auditors thereon. "Benefit Arrangement" means any employment, consulting, severance or other similar contract, arrangement or policy (written or oral) and each plan, arrangement, program, agreement or commitment (written or oral) providing for insurance coverage (including, without limitation, any self insurance arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health or accident benefits (including, without limitation, any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Internal Revenue Code providing for the same or other benefits) or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (i) is not a Welfare Plan, Pension Plan or Multi-employer Plan, (ii) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by Pivotal or any ERISA Affiliate or under which Pivotal or any ERISA Affiliate may incur any liability, and (ii) covers any employee or former employee of Pivotal or any ERISA Affiliate (with respect to their relationship with any such entity). "Board of Directors" means the board of managers of Pivotal as constituted pursuant to the Pivotal LLC Agreement. "Books and Records" means all books of account and other financial records pertaining to Pivotal. -- 26 -- "Business Day" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in Washington, DC. "Capitalized Lease Liabilities" means, without duplication, all monetary obligations of Pivotal under any leasing or similar arrangement which, in accordance with GAAP, would be classified as a capitalized lease, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Clinical Research Services" means clinical research services and clinical research operations including, but not limited to, any such activities conducted by any of Buyer, Pivotal, PPR or any Subsidiary or Affiliate of any of the foregoing. "Closing Stock Price" means the lower of a number equal to the closing price of PHC Stock as reported by the NASDAQ Bulletin Board on the day (i) immediately preceding the Closing Date, or (ii) immediately preceding the Buyer's authorized release of a public statement describing the Buyer' acquisition of Pivotal. "Colombo Employment Agreement" means the employment agreement between Pivotal and Michael J. Colombo in the form attached hereto as Exhibit 1.1A. "Contract" means any agreement, contract, lease, note, loan, evidence of Liabilities, purchase order, letter of credit, franchise agreement, undertaking, covenant not to compete, employment agreement, license, instrument, obligation, commitment, purchase and sale order, quotation or other executory commitment, including, but not limited to, Pharmaceutical Contracts, to which Pivotal is a party or which related to Pivotal's businesses or any of its assets or properties, whether oral or written, express or implied, and which pursuant to its terms has not expired, terminated or been fully performed by the parties thereto. "Disclosure Schedule" means the disclosure schedule attached hereto. "Discounted Closing Stock Price" means the Closing Stock Price multiplied by .75. "Employee Plans" means all Benefit Arrangements, Multi-employer Plans, Pension Plans and Welfare Plans. "Employment Agreements" means the Colombo Employment Agreement and the Kirby Employment Agreement, collectively. "Encumbrance" means any claim, lien, pledge, option, charge, easement, security interest, deed of trust, mortgage, right-of-way, encroachment, building or use restriction, encumbrance or other right of third parties, whether voluntarily incurred or arising by operation of law, and includes, without limitation, any agreement to give any of the foregoing in the future, and any contingent or conditional sale agreement or other title retention agreement or lease in the nature thereof. "Equity Securities" of any Person means (i) shares of capital stock, limited liability company interests or other equity securities of such Person, including, with respect to Pivotal, the Membership Interests, (ii) subscriptions, calls, warrants, options or commitments of any kind or character relating to, or entitling any Person to purchase or otherwise acquire, any capital stock, limited liability company interests or other equity securities of such Person, (iii) securities convertible into or exercisable or exchangeable -- 27 -- for shares of capital stock, limited liability company interests or other equity securities of such Person, and (iv) equity equivalents, interests in the ownership, or earnings of, or equity appreciation, phantom stock or other similar rights of, or with respect to, such Person. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any entity which is (or at any relevant time was) a member of a "controlled group of corporations" with, under "common control" with, or a member of a "affiliated service group" with, or otherwise required to be aggregated with, the company or any of its subsidiaries as set forth in Section 414(b), (c), (m) or (o) of the Internal Revenue Code. "Facility" means any real property or facility owned, leased, operated or used at any time by Pivotal or any of their respective Affiliates or by a predecessor of Pivotal or any of such predecessor's respective Affiliates including, but not limited to, the Locations. "Financing Statement" means a financing statement filed in accordance with the Uniform Commercial Code as enacted in the State of Arizona in the form attached hereto as Exhibit 7.1(j). "Fixed Assets" has the meaning set forth in Section 2.5 and Schedule 2.5. "GAAP" means United States generally accepted accounting principles in effect from time to time applied consistently throughout the period involved. "Governmental Authority" means any government, any governmental entity, department, commission, board, agency or instrumentality, and any court, tribunal, or judicial or arbitral body, whether federal, state, local or foreign. "Governmental Order" means any order, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority. "Handling of Substances" means the production, use, generation, storage, treatment, recycling, disposal, discharge, release or other handling or disposition of Substances. "Improvements" means any buildings, facilities, other structures and improvements, building systems and fixtures located on or under any real property owned or leased by Pivotal. "Intellectual Property Rights" means all (i) domestic and foreign registrations of trademarks, service marks, logos, corporate names, protected models, designs, created works, trade names or other trade rights of Pivotal, (ii) pending applications by for any such registrations, (iii) rights in or to patents, copyrights and pending applications therefore of Pivotal, (iv) of Pivotal's rights to other trademarks; service marks, logos, corporate names, protected models, designs, created works, trade names and other trade rights and all other trade secrets, designs, plans, specifications, technology, know-how, methods, designs, concepts and other proprietary rights, whether or not registered, (v) rights under any licenses of Pivotal to use any of the foregoing, (vi) standard operating procedures developed by Pivotal and existing prior to the Closing which constitute trade secrets, including, but not limited to, those standard operating procedures set forth in Pivotal's "Standard Operating Procedures Manual," and (vii) databases constituting proprietary information or trade secrets developed by Pivotal, including, but not limited to, Pivotal's patient database in existence as of the Closing.. -- 28 -- "Interim Financial Statements" means the unaudited financial statements of Pivotal as of July 30, 2003, August 30, 2003, September 30, 2003, October 30, 2003, November 30, 2003, and December 30, 2003 and the related unaudited statements of income, cash flows and Members' capital of Pivotal for the one month periods then ended. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended. "IRS" means the United States Internal Revenue Service. "Key Employee" means the Pivotal employees named in the attached Schedule 1.1A. "Kirby Employment Agreement" means the employment between Pivotal and Kirby in the form attached hereto as Exhibit 1.1B. "Law" means any federal, state, local or foreign statute, law, ordinance, regulation, rule, code, order or rule of common law. "Liabilities" means (i) indebtedness of Pivotal for borrowed money to any Person, (ii) obligations of Pivotal evidenced by bonds, notes, debentures, or similar instruments, (iii) obligations of Pivotal under capitalized leases, (iv) obligations of Pivotal under conditional sale, title retention or similar agreements or arrangements creating an obligation of Pivotal with respect to the deferred purchase price of property (other than customary trade credit), (v) interest rate and currency obligation swaps, hedges or similar arrangements (other than interest rate caps, the cost of which have been paid in full prior to the date hereof) (vi) accrued benefits of Pivotal employees as of Closing including, but not limited to, accrued vacation, pre-paid benefits and expenses for which adequate provisions have not been made pursuant to the Reserve Account requirements set forth in Section 2.2(a) of this Agreement which shall not include PTO which is subject to the provisions of Section 2.4(b), and (vii) all obligations of Pivotal to guarantee any of the foregoing types of obligations on behalf of any Person other than Pivotal. "Licenses" means all of the licenses, permits and other governmental authorizations required for the operation of the business of Pivotal and including, without limitation, any and all activities of Pivotal in connection with, related, or pertaining thereto. "Line of Credit" means the line of credit financing provided by Buyer's lender to Pivotal in an amount not less than $1,000,000. "Loan Document" means a document evidencing Acquisition Financing or the Line of Credit. "Loss Contract" means any Contract for which Pivotal has accrued a loss on its financial statements or which Pivotal reasonably expects, based on Pivotal's knowledge as of the date hereof and the Closing Date (as applicable), will result in a loss. "Losses" of a Person means any and all losses, liabilities, damages, claims, awards, judgments, and expenses (including, without limitation, the costs of reasonable investigation, remediation and attorneys' fees) suffered or incurred by such Person, provided, however, in the case of Pivotal any such Losses shall be net of insurance proceeds actually collected with respect to such Losses. -- 29 -- "Material Adverse Effect" or "Material Adverse Change" means, with respect to any Person, any material adverse effect on or material adverse change with respect to the business, operations, assets, liabilities, condition (financial or otherwise), or results of operations of such Person and its Subsidiaries, taken as a whole. "Members" means all of the members of Pivotal, collectively. "Membership Interest" means an interest in the capital and profits of Pivotal, together with all property rights and all other rights accorded to the record and/or beneficial holder of such interest, whether pursuant to the Pivotal LLC Agreement, applicable Law (including the Act) or otherwise. "Multi-employer Plan" means any "multi-employer plan," as defined in Section 4001(a)(3) or 3(37) of ERISA, which (i) Pivotal or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, after September 25, 1980, maintained, administered, contributed to or was required to contribute to, or under which Pivotal or any ERISA Affiliate may incur any liability and (ii) covers any employee or former employee of Pivotal, its Subsidiaries or any ERISA Affiliate (with respect to their relationship with any such entity). "Net Debt" means (x) the Liabilities of Pivotal as of the Closing Date, minus (y) the aggregate cash and cash equivalents of Pivotal as of the Closing Date. "Net Worth" means the excess of total assets of fair market value, including home, home furnishings and automobiles, over total liabilities. A principal residence shall be valued either at (A) cost (including the cost of improvements, net of current Encumbrances on the property) or (B) appraised value as determined by a written appraisal used by an institutional lender making a loan secured by such property, including the cost of subsequent improvements, net of current Encumbrances on such property. "Non-Pivotal Business" means Post-Closing, the Clinical Research Services business of Buyer other than the Pivotal Business. "Note A" means a promissory note in the form attached hereto as Exhibit 2.3(d)(i) in the original principal amount of $1,000,000 executed by PHC as maker and the Sellers as holders. "Note B" means a promissory note in the form attached hereto as Exhibit 2.3(d) (ii) in the original principal amount of $500,000 executed by PHC as maker and the Sellers as holders. "Note C" means a promissory note in the form attached hereto as Exhibit 2.3 (d)(iii) in the original principal amount of $1,000,000 executed by PHC as maker and the Sellers as holders. "Note Consideration" means, the Note A Consideration, the Note B Consideration, and the Note C Consideration, collectively. "Note C Shares" means a number of shares of PHC stock which may be issued to Sellers pursuant to the terms of Note C. "Notes" means Note A, Note B, and Note C, collectively. "PBGC" shall mean the Pension Benefit Guaranty Corporation. -- 30 -- "Pension Plan" shall mean any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multi-employer Plan) (i) which Pivotal or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the five years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which Pivotal or any ERISA Affiliate may incur any liability (including, without limitation, any contingent liability) and (ii) which covers any employee or former employee of Pivotal or any ERISA Affiliate (with respect to their relationship with any such entity). "Percentage Interest" means, with respect to any Membership Interest, the relative Percentage Interest in the capital and profits of Pivotal represented by such Membership Interest. "Person" means any natural person, corporation, limited partnership, general partnership, limited liability company, joint stock company, joint venture, association, company, trust or other organization, or any Governmental Authority. "PHC Stock" means capital stock of PHC. "Pharmaceutical Company" means a Person engaged in research and development, manufacture, distribution, sale, or promotion of pharmaceuticals or related products or services. "Pharmaceutical Contract" means a Contract between Pivotal and a Pharmaceutical Company. "Pivotal Business" means the business of providing Clinical Research Services to Pharmaceutical Companies and their respective designated contract research organizations conducted primarily at the Locations. "Pivotal LLC Agreement" means the agreement between the Members with respect to the governance of their Membership Interests in Pivotal attached hereto as Exhibit 1.1 C. "Pledge Agreement" means that certain Pledge Agreement, in the form attached hereto as Exhibit 7.1(h), of even date herewith by Buyer as pledgor and Sellers as pledgees. "Post-Closing" means any period or portion thereof that begins after the Closing Date. "PPR" means Pioneer Pharmaceutical Research, Inc., a wholly owned subsidiary of PHC, with facilities located in Michigan, Utah, and Nevada. "Pre-Closing" means any period or portion thereof that ends before the Closing Date. "Prospective Customer" means any Person with which any employee, consultant or other party affiliated with Pivotal or the Buyer has engaged in discussions with concerning Clinical Research Services offered by Pivotal or the Buyer within the immediately preceding 12 month period of the later of the sale of all of such Sellers' Membership Interest or the termination of such Seller's employment with the Buyer, if applicable. "Purchase Price" means, subject to adjustment as provided herein, (w) the aggregate Closing Cash Consideration, plus (x) the Closing Stock, plus (y) the Note Consideration. -- 31 -- "Representative" means, with respect to any Seller, such other Person who has been duly authorized to act on such Seller's behalf through the grant of a power of attorney to the Representative with respect to the transactions contemplated hereby and by the Transaction Documents, which power of attorney shall be in writing, shall be notarized, shall expressly authorize such Representative to execute on behalf of such Seller this Agreement, any Transaction Documents to which such Seller is a party and any other instrument, certificate or agreement with respect to the transactions contemplated hereby or thereby and to execute on such Seller 's behalf a Membership Interest Assignment Agreement with respect to such Seller's Membership Interest, and shall otherwise be in form and substance satisfactory to Buyer and its counsel in its sole and absolute discretion. "Return" or "Returns" means all reports, returns, declarations, claims for refund or statements of any kind or nature relating to Taxes, and any schedule or attachment thereto and any amendment thereof. "Securities Act" means the Securities Act of 1933, as amended. "Security Agreement" means that certain Security Agreement, in the form attached hereto as Exhibit 7.1(i), of even date herewith. "Subsidiary" of any Person means any other Person (i) of which such first Person (either alone or through or together with any other Subsidiary) owns, directly or indirectly, more than 50% of the stock or other Equity Securities, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such other Person or (ii) the operations of which are consolidated with such first Person, pursuant to GAAP, for financial reporting purposes. "Substances" means any toxic, hazardous, or other regulated wastes, substances, products, pollutants or materials, including, without limitation, radioactive materials, asbestos, polychlorinated biphenyls, radon gas, petroleum and petroleum products. "Successor Location" means any Facility located in greater Phoenix, Arizona metropolitan area, other than a Location, at which Clinical Research Services are conducted Post-Closing. "Tax" or "Taxes" means any federal, state, local or foreign net or gross income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium (including taxes under Internal Revenue Code Sec. 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, offer, registration, value added, alternative or add on minimum, estimated or other tax, governmental fee or like assessment or charge of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not, imposed by any Governmental Authority or arising under any Tax Law or agreement, including, without limitation, any joint venture or partnership agreement. "Tax Return" means any return, declaration, report, claim for refund, or information or return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendments thereof. "Transaction Documents" means: (i) this Agreement, (ii) the Assignment Agreement, (iii) the Colombo Employment Agreement, (iv) the Kirby Employment Agreement, (v) the Security Agreement, (vi), the Financing Statements, (vii) the Pledge Agreement, (viii) Note A, (ix) Note B, (ix) Note C, and (xi) such other documents that now or in the future may be executed by the parties in connection with the transaction evidenced therein, together with any renewals and modifications thereof. -- 32 -- "Treasury Regulations" means the regulations issued pursuant to the Internal Revenue Code. "Welfare Plan" means any "employee welfare benefit plan" as defined in Section 3(1) of ERISA, (a) which Pivotal, or any ERISA Affiliate, maintains, administers, contributes to or is required to contribute to, or under which Pivotal, or any ERISA Affiliate, may incur any liability and (b) which covers any employee or former employee of Pivotal or any ERISA Affiliate (with respect to their relationship with any such entity). 1.2 Other Defined Terms. The following terms have the meaning for such terms in the sections set forth below: Term Section _________________________________________________________ AAA 10.12(a) Accounts Receivable 2.2 (c) Adjusted Accounts Receivable 2.2 (c) Arbitration Notice 10.12(a) Assignment Agreement 2.6 (b) CERCLA 5.14(b) Claim 8.2 (d) Claim Notice 8.2 (d) Closing 2.6 (a) Closing Cash Consideration 2.3 (b) Closing Certificate 2.2 (a) Closing Date 2.6 (a) Closing Stock 2.3 (c) Closing Stock Consideration 2.3 (c) Concurrent Transaction 7.3 Cure Period 10.2 Employment Laws 5.12 Environmental Laws 5.14(a) Equipment 5.8 Escrow Agent 10.1 Escrow Agreement 10.1 Exchange Act 6.8 Indemnifying Party 8.2 (d) Leased Real Property 5.9 (a) Locations Recital A Material Contracts 5.7 (a) Mesa Location Recital A Note A Consideratin 2.3 (d)(i) Note B Consideraton 2.3 (d)(ii) Note C Consideration 2.3 (d)(iii) Peoria Location Recital A Pivotal Operating Expenses 2.2 (a) Pre-Closing Partial Period 5.13(b) PTO 2.4 (b) PTO Policy 2.4 (b) Receivable Expiration Dae 3.1 Related Party Transactin 5.17 Reserve Account 2.2 (a) SEC 6.8 SEC Reports 6.8 Set-Off Notice 10.1 Third Party Notice 8.2 (d) -- 33 -- (a) References to agreements and other documents shall be deemed to include all subsequent amendments and other modifications thereto. (b) References to statutes shall include all regulations pr omulgated thereunder and references to statutes or regulations shall be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation. The Language Construction. (c) Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively, (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement; (iv) the terms "Article" or "Section" refer to the specified Article or Section of this Agreement; (v) the word "including" shall mean "including, without limitation" and (vi) the word "or" shall be disjunctive but not exclusive. (d) used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent and no rule of strict construction shall be applied against any party. (e) The annexes, schedules and exhibits to this Agreement are a material part hereof and shall be treated as if fully incorporated into the body of the Agreement. (f) Wherever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. (g) meanings given to them and shall be construed in accordance with under GAAP. ARTICLE II THE TRANSACTION 2.1 Purchase and Sale. Upon the terms and subject to the conditions set forth in this Agreement, each of the Sellers jointly and severally agree to sell to Buyer, and Buyer agrees to purchase from each of the Sellers, the Membership Interests held by such Seller. Section 2.1 of the Disclosure Schedule sets forth the aggregate Membership Interests to be sold to and purchased by Buyer which represent all of the Membership Interests of Pivotal. Except as limited by Section 8.2(e) with respect to Bonacci, all obligations of Sellers hereunder shall be joint and several obligations of each of them. All amounts to be paid to Sellers hereunder shall be paid pro rata in accordance with their respective Percentage Interest. 2.2 Prior to Closing. Immediately prior to Closing, Pivotal shall take the following actions: (a) Pre-Closing Adjustments. All operating expenses of Pivotal incurred or accrued prior to the Closing Date (the "Pivotal Operating Expenses"), including but not limited to rent, phone, insurance, equipment leases, utilities, regular semi-monthly salary expenses and unreimbursable advertising and travel expenses, shall be pro-rated as of the Closing Date, and all -- 34 -- Closing related expenses, including, but not limited to, legal and accounting fees and costs incurred by Pivotal shall be paid in full prior to the Closing Date. Prior to the Closing, Sellers shall deliver to Buyer a certificate signed by the chief financial officer of Pivotal ("Closing Certificate") setting forth, in detail, the Pivotal Operating Expenses and the amounts to be pro-rated as of the Closing Date. The Closing Certificate is attached hereto as Exhibit 2.2(a). Immediately prior to Closing, Pivotal shall pay all operating expenses that are then due and payable, and shall deposit into the reserve account described in Schedule 2.2(a) (the "Reserve Account") an amount sufficient to cover all operating expenses incurred or to be incurred by Pivotal on or prior to the Closing Date that are not yet due and payable, offset by the amount of any pro-rated Pivotal Operating Expenses pertaining to a period Post-Closing which are paid in advance of Closing by Pivotal, plus the amount of any security deposits under any Contracts including, but not limited to, leases. In addition, Sellers shall deposit into the Reserve Account that portion of projected employee bonuses that have accrued up to the Closing Date. Non-cash items such as depreciation shall not be deemed to be operating expenses for purposes of this Section 2.2(a). (b) Cash in Accounts. After making deposits into the Reserve Account in accordance with Section 2.2(a), prior to Closing Pivotal shall distribute pro-rata to Sellers one hundred percent (100%) of all cash in any bank account maintained by Pivotal, including, but not limited to, those bank accounts listed in attached Section 2.2(b) of the Disclosure Schedule containing the name and address of the financial institution at which such account is maintained, the applicable account number of each such account, and the balance of each such account prior to any such distribution. (c) Accounts Receivable. (i) Pivotal shall distribute to Sellers, pro rata in accordance with their respective Percentage Interests, the Accounts Receivable (as defined below); (ii) Post-Closing, Pivotal shall remit to Sellers, in accordance with their respective Percentage Interests, the proceeds of all of Pivotal's accounts receivable existing or created prior to the Closing Date including, but not limited to those accounts receivable set forth on Section 2.2(c) of the Disclosure Schedule (the "Accounts Receivable"), which accounts shall be collected and remitted to Sellers in accordance with Section 3.1. The parties acknowledge that, due to the nature of the Pivotal Business as conducted on the date hereof, the number of Pivotal's accounts receivable created during any given month may not be determined until the succeeding month when Pivotal reconciles its accounting records with operations records to determine the actual number of accounts receivable created during the previous month. Not later than thirty (30) days following the Closing, the parties shall, upon examination of Pivotal's Books and Records, review Pivotal's Books and Records in order to determine whether the Accounts Receivable constitute the actual number of Pivotal accounts receivable existing or created prior to the Closing Date and shall prepare a written list of such Accounts Receivable mutually agreeable to both Buyer and Sellers ("Adjusted Accounts Receivable"). In the event the Accounts Receivable differ from the Adjusted Accounts Receivable, then Buyer shall remit to Sellers the proceeds of the Adjusted Accounts Receivable in the manner described in Section 3.1. -- 35 -- 2.3 Purchase Price. (a) Generally. In consideration for the sale by each Seller of the Membership Interests being sold to Buyer pursuant to this Agreement, Buyer shall pay, in the aggregate, to each Seller such Seller's allocable share of the Purchase Price as adjusted in accordance with Section 2.4. (b) Closing Cash Consideration. At the Closing, Buyer shall, in the aggregate, pay to each Seller, by wire transfer in immediately available funds to an account or accounts designated at least two Business Days prior to the Closing by such Seller in a written notice to Buyer, an amount in cash (such amount, the "Closing Cash Consideration") equal to $1,500,000 multiplied by such Seller's Percentage Interest. (c) PHC Closing Stock. At Closing, Buyer shall deliver to each Seller a number of shares (the "Closing Stock") of PHC Stock (the "Closing Stock Consideration") equal to (w) $500,000 (U.S.) multiplied by such Seller's Percentage Interest, divided by (x) the Closing Stock Price. (d) Note Consideration. (i) Promissory Note A. At Closing, Buyer shall deliver to Sellers Note A ("Note A Consideration"). (ii) Promissory Note B. At Closing, Buyer shall deliver to Sellers Note B ("Note B Consideration"). (iii) Promissory Note C. At Closing, Buyer shall deliver to Sellers Note C ("Note C Consideration"). 2.4 Purchase Price Adjustment. (a) Note Consideration Adjustment. The Note Consideration shall be subject to adjustment as set forth in the Notes in accordance with their terms. In the event of a conflict between any of the defined terms of any Note and the defined terms referred to in this Agreement, the defined terms of this Agreement shall govern. Upon any such adjustment, the Purchase Price hereunder shall be deemed adjusted accordingly, provided however, that all such adjustments to the Purchase Price shall be deemed to be an adjustment to the portion thereof allocated to "goodwill" according to Section 2.5 hereof, and that no adjustment shall be made to any other category of allocation. (b) PTO Adjustment. Prior to the Closing Date, Pivotal maintained a policy whereby employees of Pivotal were entitled to personal time off ("PTO"). PTO accrued according to such policy, and any unused time, was transferred to the employee's "Serious Health Condition" account to be used in the event of an extended illness or other approved leave of absence. Buyer intends to maintain the PTO Policy (defined below) Post-Closing. However, the parties acknowledge and agree that certain changes to the PTO Policy may be necessary in the future due to changing business conditions. -- 36 -- A copy of the existing policy relating to PTO (the "PTO Policy") is attached as Exhibit 2.4(b). If any Pivotal employee terminates their employment between the Closing Date and December 31, 2003, any funds for PTO actually paid to such employee upon termination shall be paid by Sellers within five days of such termination. Such amounts shall be deemed Liabilities of Pivotal occurring prior to the Closing Date and, at Buyer's option, Buyer may, upon thirty days prior written notice to Sellers, set off any such amounts payable by Sellers against the Note Consideration. Prior to the expiration of such thirty-day period Sellers may pay any sums due hereunder directly to Buyer. Notwithstanding the foregoing, the existence or payment of such amounts shall not independently result in or cause a breach of Sellers' representations or warranties regarding Liabilities. 2.5 Allocation of Purchase Price. The Purchase Price shall be allocated as follows: (a) $85,361 (U.S.) to fixed assets listed in Schedule 2.5, (the "Fixed Assets") (b) $350,000 (U.S.) to the Closing Stock, and (c) the remainder to goodwill. 2.6 Closing. (a) The closing of the purchase and sale of the Membership Interests (the "Closing") shall take place on February __, 2004 at such place or time, or on such other date, as the Buyer and the Sellers shall agree (the "Closing Date"). (b) At the Closing, each Seller (or his or its duly authorized Representative) shall deliver or cause to be delivered to Buyer: (i) a duly authorized, executed and delivered Assignment Agreement in the form attached as Exhibit 2.6(b) (each an "Assignment Agreement") evidencing the assignment and transfer by such Seller of the Membership Interests being sold by such Seller pursuant to this Agreement to Buyer; and (ii) the certificate and other documents required to be delivered by such Seller pursuant to Section 7.2. ARTICLE III COVENANTS of Buyer Buyer covenants to the Sellers as follows: 3.1 Collection of Accounts Receivable of Buyer. Buyer will use reasonable commercial efforts to collect the Adjusted Accounts Receivable and, except as otherwise provided in Section 10.1, concerning Buyer's right of setoff, shall remit all amounts collected to Sellers' account no less frequently than monthly. Buyer shall periodically provide Sellers with a report of all collection activities relating to the Adjusted Accounts Receivable in accordance with Buyer's normal collection reporting practices. Sellers shall take no action, directly or indirectly, with respect to collection of an Adjusted Account Receivable prior to a date which is 180 days subsequent to the -- 37 -- creation of such Adjusted Account Receivable (each a "Receivable Expiration Date") without Buyer's prior written consent or unless so directed by Buyer in such Seller's capacity as an employee of Pivotal. With respect to any given Adjusted Account Receivable, Sellers shall have no recourse against Buyer for Buyer's failure or inability to collect such Adjusted Account Receivable prior to the applicable Receivable Expiration Date. At any time subsequent to the Receivable Expiration Date of an Adjusted Account Receivable, Sellers may, with ten (10) days prior written notice to Buyer, initiate collection activities related to such Adjusted Account(s) Receivable on their own behalf. Upon Sellers' written notice to Buyer following the occurrence of any Receivable Expiration Date, Buyer will provide such information concerning such Adjusted Account Receivable to Sellers as is reasonably necessary for Sellers to undertake such collection activities. In the case of a Debtor to whom Pivotal provides products or services subsequent to the Closing Date, or incurs any liability to Pivotal, any payments received by Pivotal from such Debtor shall be applied first to any Adjusted Account Receivable with respect to such Debtor then, the remainder, if any, shall be retained by Pivotal unless such Debtor identifies, in writing, that such payments are being made with reference to particular products or services provided by Pivotal at a particular time (e.g., "for clinical research services performed in April 2004") in which case such payment will be applied to the particular account receivable so referenced. Public Registration of Closing Stock. Buyer will file with the SEC and any other necessary regulatory body a registration statement and any other documents required to publicly register the Closing Stock, which shall be filed within ninety (90) days after the Closing Date. Buyer will use its good faith and diligent efforts to secure the approval of such registration statement so that the Closing Stock issued to Sellers shall be publicly registered and freely tradable and not subject to any trading restrictions. If the SEC shall refuse to approve such registration statement within 180 days after the Close Date, despite Buyer's good faith and diligent efforts to secure such approval, then Sellers shall have the right to instruct Buyer, in writing, to discontinue such efforts and deliver to each Seller a number of shares of PHC Stock equal to (w) $500,000 multiplied by such Seller's Percentage Interest, divided by (x) the Discounted Closing Stock Price, following Sellers' surrender to Buyer of the Closing Stock issued to Sellers on the Closing Date. 3.2 Security for Payment of Notes. The obligations evidenced by the Notes shall be secured by the Membership Interests and the Assets of the Pivotal Business. Such security shall be evidenced by (i) a first priority security interest in all of the Membership Interests, and (ii) a security interest in all of the Assets of the Pivotal Business (including without limitation rights to all trade names, trademarks, and all goodwill associated therewith, all employment contracts with employees employed by Pivotal), subject only to the priority of the Acquisition Financing and the Line of Credit. Sellers will receive the Pledge Agreement, the Security Agreement, and the Financing Statements and whatever other collateral assignments and other documents or instruments related thereto are reasonably necessary to secure payment under each of the Notes. Buyer will take reasonable measures to ensure that the Acquisition Financing and the Line of Credit will be maintained separate and apart from other credit facilities of Buyer so that, for such time as any amount remains outstanding under the Notes, only the Acquisition Financing and the Line of Credit are in a security position senior to the Notes and only to the extent such a -- 38 -- senior position has, in fact, been validly created. Sellers agree to execute any and all documents reasonably necessary to evidence the senior position of the Acquisition Financing and the Line of Credit including, but not limited to, the execution of a subordination agreement in a form reasonably acceptable to Sellers. Except as otherwise provided herein, until such time as all of the Notes have been paid in full, Buyer will keep the Assets of the Pivotal Business segregated from Buyer's assets to ensure Sellers' ability to perfect their security interest in the Membership Interests and the Assets of the Pivotal Business. 3.3 Buyer's Clinical Research Operations. Buyer understands that Seller's ability to receive payments under the Notes bears a direct relation to Michael J. Colombo and Kirby's input in the decision making process regarding Buyer's Clinical Research Services since Sellers may receive more, or less, Note consideration based on the performance of Michael J. Colombo and Kirby with respect to the Pivotal Business and the Non-Pivotal Business. Except as otherwise provided in this Agreement, Buyer agrees that if (a) Buyer terminates the employment of Kirby or Michael J. Colombo other than for "Cause", as defined in the Employment Agreements, or (b) either Michael J. Colombo or Kirby terminate their Employment Agreements for "Good Reason," as defined in the Employment Agreements, then Sellers shall, subject to Sellers' continuing compliance with the terms of the Transaction Documents, be entitled to freeze the Remaining Principal (as defined in the Notes) of Notes A and B according to the terms thereof and such Notes shall no longer be subject to adjustment and payments will thereafter continue to be made to Sellers in accordance with the schedule for payments set forth in each such Note as of the date of the termination of Kirby's or Michael J. Colombo's employment. Notwithstanding the foregoing, Seller's rights to freeze the Remaining Principal of Notes A and B under this Section 3.4 shall terminate in the event that any one or more of them breaches Article IV or V of this Agreement. 3.4 Buyer's Working Capital Commitment. Buyer covenants to obtain the Line of Credit to fund the working capital requirements of the Pivotal Business. The Line of Credit shall be available to be drawn down immediately after Closing in such increments as may be reasonably necessary to fund such working capital requirements, shall remain available until the second anniversary of the Closing, and shall be used solely to fund operations at the Locations. 3.5 Kirby Guaranty Leasehold Agreements. Buyer further covenants to take all reasonably necessary actions and execute any reasonably necessary documents that may be required to remove Louis C. Kirby as a personal guarantor of the leasehold obligations identified in the lease described in Schedule 3.6 and shall in all events indemnify Kirby from any and all claims or expenses of any nature whatsoever resulting from any breach of any of such leasehold obligations that occur after the Closing Date. 3.6 Compliance with Pharmaceutical Contracts. Buyer covenants that it shall not engage in any conduct in breach of a Pharmaceutical Contract that would have a Material Adverse Effect on Pivotal or the Pivotal Business. 3.7 Continuing Legal Status of Pivotal. Buyer covenants to maintain the legal existence of Pivotal in good standing from and after the Closing Date until such time as Buyer is reasonably certain that it has obtained all of the necessary authorities and consents to assign Pivotal's obligations under all then current Pharmaceutical Contracts. Buyer understands that the Pharmaceutical Contracts entered into by -- 39 -- Pivotal typically include indemnification rights that run to the benefit of Pivotal and most such contracts contain assignment restrictions that prohibit the assignment of such contracts to third parties without the express written consent of the Pharmaceutical Company. 3.8 Compliance with Leasehold Agreements. Buyer covenants that it shall not engage in any conduct in breach of any of the leasehold agreements identified in Schedule 3.9 that would have a Material Adverse Effect on Pivotal. 3.9 No Corporate Overhead Charges. Buyer hereby covenants that it will not impose any overhead charges or administrative expenses upon the Pivotal Business from the date of Closing and for a period of 5 years thereafter except for accounting and legal charges and costs and other expenses actually incurred by Buyer on behalf of or relating to the Pivotal Business, which charges and expenses for legal and accounting expenses shall not exceed the amounts set forth on Schedule 3.10. In addition, Buyer understands and acknowledges that Pivotal may assume certain responsibilities for the Non-Pivotal Business that, prior to the Closing Date, was handled by Buyer's staff and that Buyer's clinical research sites may have historically been charged corporate level overheard fee by Buyer. To the extent that Pivotal assumes such responsibilities, Buyer agrees that it will not assess to the Non-Pivotal Business an overheard charge for such service. This provision is not intended to restrict or prohibit Buyer from passing through to the Pivotal Business actual costs and expenses of the Pivotal Business that are originally incurred and paid by Buyer at the corporate level, including but not limited to Pivotal employee travel on behalf of the Pivotal Business, and legal expenses incurred to defend claims arising out of the Pivotal Business. 3.10 Prohibition on Assignments, Transfers. Buyer will not assign, sell, transfer or convey any Assets of the Pivotal Business or the Membership Interests except in accordance with the terms of the Security Agreement or the Pledge Agreement, as applicable; provided, however, that the Buyer may, assign such Assets and Membership Interests in whole or in part without the prior written consent of any other party hereto (i) to a Subsidiary or Affiliate of Buyer as part of a restructuring or reorganization of PHC or its business, provided that contemporaneous with such assignment, such Subsidiary or Affiliate shall execute in favor of Sellers documents substantially similar in form to the Security Agreement and the Pledge Agreement and pursuant to which such Subsidiary or Affiliate provides to Sellers a security interest in all of the assets and capital stock of such Subsidiary or Affiliate, and provided further that Buyer shall guaranty such Subsidiary's or Affiliate's payment and performance under the Transaction Documents, which guaranty must be in the form set forth in attached Exhibit 3.11, (ii) to a lender as security in a manner consistent with Buyer's obligations under the Transaction Documents, and (iii) to any Person who acquires all or substantially all of the Equity Securities or assets of Buyer (by merger, recapitalization, sale or otherwise) provided that Sellers' security interest in the Assets of the Pivotal Business and the Membership Interests is maintained. If Buyer desires to sell or transfer its interest in the Pivotal Business, and if such sale or transfer is not part of a transaction involving the acquisition of all or substantially all of the Equity Securities or assets of Buyer, as contemplated under subsection (iii) above, then Buyer shall either (a) if such transaction is to be consummated within eighteen months of the expiration of the Notes, obtain Seller's prior written consent to such sale or transfer, (provided that contemporaneous with such sale or -- 40 -- transfer, the acquiring entity shall execute in favor of Sellers documents substantially similar in form to the Security Agreement and the Pledge Agreement and pursuant to which such acquiring entity provides to Sellers a security interest in all of the assets and capital stock of the Pivotal Business), or (b) pay to Sellers the remaining Purchase Price prior to effecting such sale or transfer, including but not limited to all Remaining Principal and interest under the Notes, or (c) freeze the Remaining Note Principal on all of the Notes and provide Sellers with a written guaranty of payment under the Notes, which guaranty is in the form set forth in attached Exhibit 3.11 (provided that contemporaneous with such sale or transfer, the acquiring entity shall execute in favor of Sellers documents substantially similar in form to the Security Agreement and the Pledge Agreement and pursuant to which such acquiring entity provides to Sellers a security interest in all of the assets and capital stock of the Pivotal Business). 3.11 Prohibition on Material Indebtedness. Buyer will not incur material indebtedness on behalf of the Pivotal Business other than the Line of Credit without the written consent of Sellers. ARTICLE IV COVENANTS OF SELLER 4.1 Covenant Not to Compete or Interfere With Business. Each Seller agrees that they will not compete with Pivotal or Buyer in Clinical Research Services for a period of (i) five (5) years after the Closing Date, or (ii) three (3) years after the termination of each Seller's employment with the Buyer or Pivotal, whichever is later, and that for a period of (i) five years after the Closing Date, or (ii) three (3) years after the termination of such Seller's employment with the Buyer or Pivotal, whichever is later, they will not, directly or indirectly, individually or as a non-public shareholder, director or officer of any corporation, a partner of any partnership, a member of a limited liability company, an owner of any entity or as an employee, agent, consultant or advisor of any entity, (a) recruit or hire any employee of the Buyer or Pivotal, or otherwise attempt to solicit or induce any employee to leave the employment of the Buyer or Pivotal; (b) solicit any customer or Prospective Customer of the Buyer or Pivotal for the performance of Clinical Research Services or otherwise interfere with the business relationships between the Buyer or Pivotal, or their respective customers, suppliers and others with whom Buyer or Pivotal conducts any Clinical Research Services business; provided, however, that, in the event Kirby solicits any customer or Prospective Customer of the Buyer or Pivotal for products or services other than Clinical Research Services during the five-year period following the Closing Date, Kirby shall provide written notice of the same to Buyer; (c) individually or through any entity perform any services for any customer or Prospective Customer of the Buyer or Pivotal which are directly competitive with the Buyer's or Pivotal's Clinical Research Services which the Buyer or Pivotal may perform for such customers and Prospective Customers, regardless of whether or not the Buyer or Pivotal has or is now providing such Clinical Research Services; or (d) accept employment by any customer or Prospective Customer of the Buyer or Pivotal unless the business of such customer or Prospective Customer of the Buyer or Pivotal does not directly compete with the Clinical Research Services business of the Buyer or Pivotal. -- 41 -- (a) Each Seller acknowledges that the protections of the Buyer and Pivotal set forth in this Article IV of this Agreement are of vital concern to the Buyer and Pivotal, that monetary damages for any violation thereof would not adequately compensate the Buyer and Pivotal and that the Buyer and Pivotal are each engaged in a highly competitive business. Accordingly, each Seller agrees that the restrictions set forth in this Article IV may be enforced by injunction proceedings (without the necessity of posting bond) whether or not such Seller's employment with the Buyer has terminated. (b) If any term or condition of this Agreement shall be invalid or unenforceable to any extent or in any application, including, but not limited to the non-competition covenants in this Article IV, then the remainder of this Agreement, and such term or condition, except to such extent or in such application, shall not be affected thereby, and each and every term and condition of this Agreement shall be valid and enforced to the fullest extent and in the broadest application permitted by law. (c) The Sellers agree and acknowledge that the restrictions set forth in this Article IV are fair, reasonable and necessary to protect the legitimate business interests of the Buyer and Pivotal, that adequate consideration has been received by the Sellers for such obligations, that these obligations will not prevent the Sellers from earning a livelihood, and that these obligations will survive the termination of this Agreement and the termination of such Seller's employment with the Buyer and Pivotal. (d) Any breach of any covenant or obligation under this Article IV will result in irremediable and/or incalculable damage to Buyer and/or Pivotal, as applicable. It is therefore agreed that Buyer either on its own accord or on Pivotal's behalf, be entitled to (a) obtain injunctive relief without the necessity of posting a bond and/or (b) cause Sellers to specifically perform their obligations hereunder. Any action to enjoin a breach or threatened breach of this Article IV may be brought in an action at law or in equity (without the necessity of posting bond) and shall be in addition to any other remedies available to such party. (e) Notwithstanding anything in this Section 4.1 to the contrary, Bonacci's obligations under this Section 4.1 shall terminate two years after the Closing Date. Bonacci shall be entitled to participate, as an owner, advisor, board member or in any other capacity, in the clinical psychiatry business conducted by his brother, Carl Bonacci, as currently conducted provided that Bonacci's participation in that business does not violate his obligations under Section 4.1. 4.2 Termination of Covenant. Sellers' obligations under Section 4.1 above will terminate in the event Buyer breaches any one of the Notes by failing or refusing to make payments under such Notes when due for a period of six months, in the aggregate, during the terms of the Notes. -- 42 -- ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLERS Except as set forth in the Disclosure Schedule, the Sellers, subject to the limitations set forth herein, jointly and severally represent and warrant to Buyer as follows as of the Closing Date unless otherwise specified: 5.1 Pivotal Organization. Pivotal is a limited liability company; duly organized, validly existing and in good standing under the laws of the State of Arizona and has the requisite limited liability company power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on its business as currently conducted by Pivotal. Pivotal is duly qualified to conduct business as a foreign limited liability company and is in good standing in each jurisdiction where the character of its properties owned, operated or leased or the nature of its activities makes such qualification necessary except where failure to do so would not have a Material Adverse Effect. True and complete copies of the Pivotal articles of organization and Pivotal LLC Agreement (in each case, as amended to the date of this Agreement) have been made available by Pivotal for review by the Buyer. 5.2 Power and Authority. (a) Pivotal has all necessary and requisite limited liability company power and authority to execute and deliver this Agreement and the Transaction Documents and to perform fully its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of the Transaction Documents and the performance by Pivotal of its obligations thereunder and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary action on the part of Pivotal and Pivotal's Board of Directors. Each of the Transaction Documents is a valid and binding obligation of Pivotal enforceable against Pivotal in accordance with its terms, except to the extent such enforceability (a) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors generally, or (b) is subject to general principles of equity. (b) Each Seller has all requisite power and authority to execute and deliver, and to perform all of its obligations under, all Transaction Documents to which such Seller is a party. Such Seller has taken all necessary action required to authorize the execution, delivery and performance of this Agreement and all instruments and other documents to be executed and delivered by such Seller in connection herewith, including each Transaction Document to which such Seller is a party, and the consummation of the transactions contemplated hereby and thereby to be consummated by it. This Agreement has been, and each Transaction Document to which such Seller is a party will be, duly and validly executed and delivered by such Seller and constitutes a legal, valid and binding obligation of such Seller enforceable against such Seller in accordance with its terms, except to the extent such enforceability (a) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally, or (b) is subject to general principles of equity. -- 43 -- 5.3 Capitalization. Section 5.3 of the Disclosure Schedule sets forth a true and correct list of each of the Members of Pivotal, and with respect to each such Member, such Member's Percentage Interest in Pivotal. The Members listed on Section 5.3 of the Disclosure Schedule are the record and, beneficial holders of one hundred percent (100%) of the issued and outstanding Membership Interests in Pivotal and the Members own those Membership Interests free and clear of any and all claims, liens and encumbrances of any nature whatsoever. Other than the Membership Interests set forth on Section 5.3 of the Disclosure Schedule, no other Person owns or holds any Equity Securities of Pivotal, any interest in the profits or losses of Pivotal, any rights to affect the management of Pivotal (other than the right of the Board of Managers to manage Pivotal under the terms of the Pivotal LLC Agreement) or any rights to receive distributions from Pivotal. Except for the Pivotal LLC Agreement and the Transaction Documents, there are no contracts to which Pivotal, or any Member, is a party relating to the issuance, sale, or transfer of any Equity Securities of Pivotal. Except for the Pivotal LLC Agreement, (i) there are no outstanding subscriptions, calls, commitments, warrants or options for the purchase of Membership Interests in, or other Equity Securities of, Pivotal, or (ii) there are no other commitments of any kind for the granting or issuance of additional Membership Interests or other Equity Securities by Pivotal or the repurchase, redemption or other acquisition by Pivotal of any Membership Interests currently outstanding. Each of the Membership Interests that are issued and outstanding are duly authorized, validly issued, fully paid and non-assessable and except as set forth in the Pivotal LLC Agreement are free of any preemptive or other similar rights. None of the existing Membership Interests was issued in violation of the Securities Act or any other applicable Law. Except for the Pivotal LLC Agreement, there are no equity holder agreements, voting trusts, proxies or other agreements or understandings with respect to or concerning the purchase, sale or voting of the Membership Interests to which Pivotal or, to the knowledge of Pivotal, any other Person is a party or by which Pivotal or, to the knowledge of Pivotal, any other Person is bound. 5.4 Subsidiaries. Pivotal has no Subsidiaries. 5.5 No Conflict. The execution, delivery and performance of this Agreement by Pivotal and each of the Sellers and the consummation of the transactions contemplated hereby do not and will not (a) violate or conflict with the Pivotal LLC Agreement, (b) conflict with or violate in any material respect any Law or Governmental Order applicable to Pivotal or the Sellers, (c) except as set forth in Section 5.5 of the Disclosure Schedule, violate, conflict with, result in any material breach of, or constitute a material default (or event which with the giving of notice or lapse of time, or both, would become a material default) under, or result in or give to others any rights of termination, amendment, acceleration or cancellation under, or result in of any Encumbrance on the Membership Interests or on any of the assets or properties of Pivotal pursuant to, any Material Contract or material License to which Pivotal or any Seller is a party or by which any of their assets or properties is bound, (d) conflict with or result in a material violation or breach of any term of provision of any Law or Governmental Order applicable to such Seller, or any of its assets or properties, or (e) except as -- 44 -- set forth in Section 5.5 of the Disclosure Schedule (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, or (iii) require such Seller to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, any contract (other than consents required in connection with the Pivotal LLC Agreement) to which such Seller is a party or by which any of its assets or properties is bound. 5.6 Licenses. Section 5.6 of the Disclosure Schedule sets forth a true correct list of each of the Licenses held by Pivotal or issued by any Governmental Authority. Such Licenses constitute all of the Licenses required for the conduct of the business of Pivotal as presently conducted and any and all other activities related or pertaining thereto. Each such License is valid, binding and in full force and effect, and Pivotal is not in default (or with the giving of notice or lapse of time or both, would be in default) under any such License. There are no proceedings pending, or threatened, that seek the revocation, cancellation, suspension or adverse modification of any such License. Except as set forth on Section 5.6 of the Disclosure Schedule, all required filings with respect to such Licenses have been timely made and all required applications for renewal thereof have been timely filed, except for such failure to do any of the foregoing as would not lead to the revocation, cancellation, suspension or adverse modification of any such License. No such License will terminate or be subject to termination or revocation as a result of the transactions contemplated by this Agreement. 5.7 Contracts. (a) Section 5.7 of the Disclosure Schedule lists the following Contracts to which Pivotal is a party or by which its assets may be bound (collectively, the "Material Contracts") in effect as of the date of this Agreement: (i) any Contract or series of Contracts that Pivotal reasonably anticipates will, in accordance with its terms, involve aggregate payments by or to Pivotal; (ii) any lease of real property or any lease of personal property involving any annual expense; (iii) any Contract containing covenants materially limiting the freedom of Pivotal to engage in any line of business or compete with any Person; (iv) any material distribution, franchise, license, sales, commission, consulting agency or advertising Contracts; (v) all Contracts evidencing Liabilities; (vi) all Contracts relating to the sale or disposition of properties or Assets of Pivotal (other than the sale of inventory in the ordinary course of business); -- 45 -- (vii) each Contract to which any Key Employee of Pivotal is bound which in any manner purports to (A) restrict such employee's freedom to engage in any line of business or to compete with any other Person, or (B) assign to any other Person rights to any material invention, improvement, or discovery related to Clinical Research Services; (viii) all Contracts relating to Intellectual Property Rights; (ix) each joint venture Contract, partnership agreement, limited liability company or other Contract (however named) involving a sharing of profits, losses, costs, or liabilities by Pivotal with any other Person; (x) each Contract providing for payments to or by any Person or entity based on sales, purchases or profits, other than direct payments for goods; (xi) each Contract providing for capital expenditures after the date hereof; (xii) each written warranty, guaranty or other similar undertaking with respect to contractual performance extended by Pivotal other than in the ordinary course of business; and (xiii) each Loss Contract. Except as set forth in Section 5.7 of the Disclosure Schedules, Pivotal has delivered or made available to the Buyer true, correct and complete copies of all of the Material Contracts listed on Section 5.7 of the Disclosure Schedule, including all amendments and supplements thereto. (b) Except as set forth in Section 5.7 of the Disclosure Schedules, Pivotal is not (and Pivotal has received no notice, nor has any knowledge that any other party to any Material Contract is), in breach or violation of, or default under, any of the Material Contracts which, individually, involves claims, damages or Liabilities in excess of $5,000. Except as set forth in Section 5.7 of the Disclosure Schedule, each Material Contract is in full force and effect (and will remain in full force and effect upon consummation of the actions contemplated hereby) and is a valid agreement, arrangement or commitment of Pivotal, enforceable against Pivotal in accordance with its terms and is a valid agreement, arrangement or commitment of each other party thereto, enforceable against such party in accordance with its terms, except in each case where enforceability may be limited by bankruptcy, insolvency or other similar laws affecting creditors' rights generally and except where enforceability is subject to the application of equitable principles or remedies. 5.8 Equipment and Other Property. Except as set forth in Section 5.8 of the Disclosure Schedule, Pivotal owns and has good and marketable title to the equipment and other tangible items used in the operations -- 46 -- of the Pivotal Business reflected on the books of Pivotal as owned by Pivotal (the "Equipment"), free and clear of all Encumbrances. The Equipment, taken as a whole, is in good operating condition and repair (subject to normal wear and tear) and is suitable for the purposes for which it is presently or has historically been used. Except as otherwise contemplated by this Agreement, Pivotal owns, or, in the case of leases and licenses, has valid and subsisting leasehold interests or licenses in, all of the material properties and assets of whatever kind (whether real or personal, tangible or intangible and including, without limitation, all material intellectual property) used in its business, in each case free and clear of Encumbrances. 5.9 Real Property. (a) Pivotal owns no real property. Section 5.9(a) of the Disclosure Schedule describes and lists the name of the record owner of all real property now leased or licensed for use by Pivotal (such leasehold or licensed interest, the "Leased Real Property"). Except as set forth on Section 5.9(a) of the Disclosure Schedule, Pivotal has a valid leasehold interest in, and enjoys peaceful and undisturbed possession (consistent with historical use) of, all Leased Real Property free and clear of all Encumbrances. Except as set forth on Section 5.9(a) of the Disclosure Schedule, Sellers have no knowledge of any leases, subleases, licenses, occupancy agreements, options, rights, concessions or other agreements or arrangements, written or oral, granting to any Person the right to purchase the Leased Real Property, or the right to use or occupy any of the Leased Real Property. Except as set forth on Section 5.9(a) of the Disclosure Schedule, the Leased Real Property is all of the real property used in the business of Pivotal as currently conducted. (b) Except as disclosed in Section 5.9(b) of the Disclosure Schedule, all Improvements owned, leased, or used by Pivotal on the Leased Real Property appear to be in good condition and repair in all material respects (normal wear and tear excepted). To the extent applicable to a tenant of Leased Real Property, Pivotal has obtained Licenses from any Governmental Authority having jurisdiction over any of the Leased Real Property, or other right from any other Person, necessary to permit the lawful use and operation of the Improvements. (c) The Leased Real Property and the Improvements appear to be sufficiently supplied in all material respects with utilities and other services as necessary for the operation of such Leased Real Property and Improvements as currently operated including adequate water, storm and sanitary sewer, gas, electric, and telephone facilities, except as set forth on Section 5.9(c) of the Disclosure Schedule. (d) Pivotal has not received written notice of any special assessment individually or in the aggregate, relating to any Leased Real Property or any portion thereof and no such special assessment is -- 47 -- pending or threatened. There are no pending or threatened condemnation proceedings with respect to any of the Leased Real Property. (e) On or prior to the date hereof, Pivotal has delivered to Buyer true and correct copies of the most current title reports, title policies and surveys currently in the possession of Pivotal with respect to any of the Leased Real Property. 5.10 Intellectual Property Rights. Section 5.10 of the Disclosure Schedule lists all of Pivotal's Intellectual Property Rights. Pivotal owns and/or has the right to use each of the Intellectual Property Rights listed on Section 5.10 of the Disclosure Schedule. The Intellectual Property Rights constitute all of the material intellectual property necessary to conduct the business of Pivotal in the manner presently conducted. None of the Intellectual Property Rights is involved in any pending or threatened Action. Except as set forth in Section 5.10 of the Disclosure Schedule, no other Person has the right to use any of the Intellectual Property and no Person is infringing upon any Intellectual Property Rights. Pivotal's use of the Intellectual Property Rights is not infringing upon or otherwise violating the rights of any other Person. No proceedings have been instituted against or notices received by Pivotal that are presently outstanding alleging that Pivotal's use of the Intellectual Property Rights infringes upon or otherwise violates any rights of a third party. 5.11 Employee Benefit Matters. (a) Disclosure; Delivery of Copies of Relevant Documents and Other Information. Section 5.11(a) of the Disclosure Schedule contains a complete list of Employee Plans. Pivotal has delivered to Buyer a true and complete set of copies of (a) all Employee Plans and related trust agreements, annuity contracts or other funding instruments; (b) the latest IRS determination letter obtained with respect to any such Employee Plan qualified or exempt under Section 401 or 501 of the Internal Revenue Code; (c) Forms-5500 and certified financial statements for each Employee Plan required to file such form, together with the most recent actuarial report, if any, prepared by the Employee Plan's enrolled actuary; (d) all summary plan descriptions for each Employee Plan required to prepare, file and distribute summary plan descriptions; (e) all summaries furnished to employees, officers and directors of Pivotal and its Subsidiaries of all incentive compensation, other plans and fringe benefits for which a summary plan description is not required; and (f) the notifications to employees of their rights under Section 4980B of the Internal Revenue Code. (b) Each Pension Plan required to be listed in Section 5.11(a) of the Disclosure Schedule, and the related trust, if any, now meet and since inception have met, the requirements for qualification under Internal Revenue Code Section 401(a) and are currently, and since their inception have been, exempt from taxation under Internal Revenue Code Section 501(a); the Internal Revenue -- 48 -- Service has issued a favorable determination or advisory letter with respect to the qualified status of each such Pension Plan and trust, and has not taken any action to revoke such letter; Pivotal has performed all obligations required to be performed by it under the Pension Plan (including the making of all contributions), is not in default under, or in violation of, and have no knowledge of any such default or violation of any other party to the Pension Plan. (c) Representations. Except as set forth in Section 5.11(a) of the Disclosure Schedule: (i) Pension Plans. Pivotal has no pension plans (ii) Multi-employer Plans. There are no Multi-employer Plans, and neither Pivotal nor any ERISA Affiliate has ever maintained, contributed to, participated or agreed to participate in a Multi-employer Plan. (iii) Welfare Plans. (A) Each Welfare Plan which covers or has covered employees or former employees of Pivotal (with respect to their relationship with such entities) has been maintained, and presently is, in material compliance with its terms and, both as to form and operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including without limitation ERISA and the Internal Revenue Code. (B) An estimate of the liabilities of Pivotal and its ERISA Affiliates for providing retiree life medical benefits coverage to active and retired employee of Pivotal and such ERISA Affiliates has been made and is reflected on Pivotal's balance sheets and the books and records of Pivotal according to Statement of Financial Accounting Standards No. 106. Pivotal or an ERISA Affiliate has the right to modify and to terminate all Welfare Plans which cover retirees with respect to both retired and active employees. (C) Each Welfare Plan which is a "group health plan," as defined in Section 607(1) of ERISA, has been operated in material compliance with the provisions of Part 6 of Title I, Subtitle B of ERISA and Section 4980B of the Internal Revenue Code at all times. (iv) Benefit Arrangements. Each Benefit Arrangement is in material compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including, without limitation, the Internal Revenue Code. Except as set forth on Section 5.11(c)(iv) of the Disclosure Schedules, and except as provided by law, the -- 49 -- employment of all persons presently employed or retained by Pivotal is terminable at will. (v) Fiduciary Duties and Prohibited Transactions. Neither Pivotal nor any fiduciary of any Welfare Plan or Pension Plan has any material liability with respect to any transaction in violation of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in Section 4975(c)(1) of Internal Revenue Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of the Internal Revenue Code. Pivotal has not participated in a violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any Welfare Plan or Pension Plan or has any unpaid civil penalty under Section 502(1) of ERISA. (vi) Litigation. There is no action, order, writ, injunction, judgment or decree outstanding or claim, suit, litigation, proceeding, arbitral action, governmental audit or investigation relating to benefits under any Employee Plan that is pending or threatened or anticipated against Pivotal or any ERISA Affiliate. (vii) Unpaid Contributions, UBIT. Neither Pivotal nor any ERISA Affiliate has any material liability for unpaid contributions with respect to any Pension Plan, Multi-employer Plan or Welfare Plan. Pivotal or an ERISA Affiliate has made all required contributions under each Employee Plan for all prior periods or proper accruals been made and are reflected on the appropriate balance sheet and books and records of Pivotal. No Employee Plan is subject to any tax under Section 511 of the Internal Revenue Code. (viii) Parachute Payments. There is no contract, agreement, plan or arrangement covering any employee or former employee of Pivotal that provides for the payment by Pivotal of any amount (i) that is not deductible under Section 162(a)(1) or 404 of the Internal Revenue Code or (ii) that is an "excess parachute payment" pursuant to Section 2806 of the Internal Revenue Code. (ix) No Amendments. Neither Pivotal nor any ERISA Affiliate has any announced plan or legally binding commitment to create any additional Employee Plans which are intended to cover employees or former employees of Pivotal or to amend or modify any existing Employee Plan which covers or has covered employees or former employees of Pivotal. (x) No Other Material Liability. No event has occurred in connection with which Pivotal or any ERISA Affiliate or any Employee Plan, directly or indirectly, could be subject to any material liability (A) under any statute, regulation or governmental order relating to any Employee Plans or (B) pursuant to any obligation of Pivotal or any ERISA Affiliate to indemnify any person against liability incurred under any such statute, regulation or order as they relate to the -- 50 -- Employee Plans. (xi) No Acceleration or Creation of Rights. Neither the execution and delivery of this Agreement or any of the Transactional Documents by Pivotal nor the consummation of the transactions contemplated hereby or thereby will result in the acceleration or creation of any rights of any person to benefits under any Employee Plan (including, without limitation, the acceleration of the vesting of any Membership Interests, the acceleration of the accrual or vesting of any benefits under any Pension Plan or the acceleration or creation of any rights under any severance, parachute or change in control agreement). 5.12 Labor Matters. Section 5.12 of the Disclosure Schedule sets forth a true and correct list of (i) all collective bargaining agreements to which Pivotal is a party and (ii) all written employment or severance agreements to which Pivotal is a party with respect to any employee, former employee and which may not be terminated at will, or by giving notice of 30 days or less, without cost penalty. Except as set forth in Section 5.12 of the Disclosure Schedule, Pivotal has not entered into any severance or similar arrangement in respect of any present employee of Pivotal that will result in any obligation (absolute or contingent) of Buyer or Pivotal to make any payment to any present employee of Pivotal following termination of employment or upon a change of control of Pivotal. Except as set forth in Section 5.12 of the Disclosure Schedule, Pivotal has not engaged in any unfair labor practice and there are no complaints against Pivotal pending before the National Labor Relations Board or any similar state or local labor agency by or on behalf of any employee of Pivotal. Except as disclosed in Section 5.12 of the Disclosure Schedule, there are no representation questions, arbitration proceedings, labor strikes, slow downs or stoppages, grievances or other labor disputes pending or, to the knowledge of Pivotal, threatened with respect to the employees of Pivotal, and Pivotal has not experienced any attempt by organized labor to cause Pivotal to comply with or conform to demands of organized labor relating to its employees. Except as disclosed in Section 5.12 of the Disclosure Schedule, Pivotal has complied in all material respects with all laws, rules and regulations relating to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining, the payment of social security and similar taxes, occupational safety and health (hereinafter collectively referred to as the "Employment Laws." Pivotal is not liable for the payment of material taxes, fines, penalties or other amounts, however designated, for failure to comply with any of the foregoing Employment Laws. 5.13 Tax Matters. Except to the extent disclosed on Section 5.13 of the Disclosure Schedules: (a) Pivotal has duly filed with the appropriate Tax authorities all Tax Returns required to be filed, and such Tax Returns are true, complete, and correct in all material respects. -- 51 -- (b) Pivotal has duly paid in full or set aside for payment in the Reserve Account all Taxes that accrue or are payable by Pivotal in respect of any taxable periods that end on or before the Closing Date. Pivotal has duly paid in full all Taxes that accrue or are payable by Pivotal for any taxable period that begins before the Closing Date and ends thereafter, to the extent that such Taxes are attributable to the portion of such period ending on the Closing Date (the "Pre-Closing Partial Period"); or established an adequate reserve in the Interim Financial Statements or the Reserve Account for the portion of the Pre-Closing Partial Period covered thereby. (c) There is no audit or other matter in controversy with respect to any Taxes due and owing by Pivotal, and there is no Tax deficiency or claim assessed or proposed or threatened (whether orally or in writing) against Pivotal, other than in respect of any such audits, controversies, deficiencies, assessments, or assessments that are being contested in good faith, for which adequate reserves have been established in accordance with GAAP, and which is set forth on Section 5.13 of the Disclosure Schedules; (d) Pivotal has withheld all Taxes required to have been withheld and paid by Pivotal in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party, and such withheld Taxes have either been duly paid to the proper Governmental Authority or set aside in accounts for such purpose; (e) Pivotal has not (i) waived any statutory period of limitations for the assessment of any Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency other than in the case of any such waivers or extensions in respect of an assessment or deficiency of Tax the liability of which has been satisfied or settled, (ii) filed a consent under the Internal Revenue Code, or (iii) has any liability for the Taxes of any other person as defined in Section 7701(a)(1) of the Internal Revenue Code or under Treas. Reg. ss. 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee, successor or by contract; (f) No claim has been made in any taxable year which remains open in respect of such claim by an authority in a jurisdiction where Pivotal does not file Tax Returns that Pivotal is or may be subject to taxation by that jurisdiction, other than in the case of any such claims the liability of which has been satisfied or settled; (g) None of the assets of Pivotal (i) are required to be treated as being owned by any other Person pursuant to the so-called safe harbor lease provisions of former Section 168(f)(8) of the Internal Revenue Code, (ii) secures any debt the interest on which is tax-exempt under Internal Revenue Code Section 103(a), or (iii) is tax-exempt use property within the meaning of Internal Revenue Code Section 168(h); -- 52 -- (h) Pivotal has not agreed to and is not required to make any adjustment pursuant to Internal Revenue Code Section 481(a) by reason of a change in accounting method initiated by Pivotal and the IRS has not proposed any such adjustment or change in accounting method; (i) Pivotal has been treated since its formation, as a partnership which is not subject to United States federal or state income tax, and is not, and has never been, treated as an association taxable as a corporation for United States federal and state income tax purposes and has never made an election under Treasury Regulations Section 301.7701-3(c)(1)(i) or any analogous state or local statutory or regulatory provision) to be treated for federal or state or local tax purposes as an entity other than one described in Treasury Regulations Section 301.7701-3; (j) Pivotal has not requested an extension of the time within which to file any Tax Return for which such Tax Return has not been filed; (k) Pivotal has no obligation under any Tax allocation or sharing agreement, and after the Closing Date, Pivotal shall not be a party to, bound by or have any obligation under any Tax allocation or sharing agreement or have any liability thereunder for amounts due in respect of periods prior to and including the Closing Date; (l) Pivotal has not made any payments, nor is Pivotal obligated to make any payments, and is not a party to any agreement that could obligate it to make any payments that will not be deductible under Internal Revenue Code Section 280G; (m) Pivotal has not been a United States real property holding corporation within the meaning of Internal Revenue Code Section 897(c)(2) during the applicable period specified in Internal Revenue Code Section 897(c)(1)(A)(ii) and is not described in either the first sentence of Treasury Regulation Section 1.897-7T(a) or 1.445-11T(d)(1); (n) Pivotal has not entered into transfer pricing agreements or other like arrangements with respect to any foreign jurisdiction; (o) Pivotal has not participated in or cooperated with an international boycott or has been requested to do so in connection with any transaction or proposed transaction. 5.14 Environmental Matters. (a) Except as disclosed in Section 5.14 of the Disclosure Schedule, (i) Pivotal is and at all times has been in compliance with all Laws relating to pollution or the environment (including, without limitation, the Handling of Substances or the presence of Substances, under or from any real property) the Medical Waste Tracking Act, or the Resource Conservation Recovery Act and any -- 53 -- amendments or modifications thereto ("Environmental Laws"), and (ii) Pivotal is in compliance with all of its Licenses issued under Environmental Laws. (b) Except as disclosed in Section 5.14 of the Disclosure Schedule, neither Sellers nor Pivotal has received any written request for information, or been notified that either is a potentially responsible party, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or any similar Environmental Law with respect to any current or former Leased Real Property or any other location used or associated with the business of Pivotal. (c) Except as disclosed in Section 5.14 of the Disclosure Schedule, neither Sellers nor Pivotal has received any notice of any violation or alleged violation of any Environmental Law in connection with the Leased Real Property or operation of the Pivotal Business. (d) Except as disclosed in Section 5.14 of the Disclosure Schedule, there are no writs, injunctions, decrees, orders or judgments outstanding, or any actions, suits, claims, proceedings or investigations pending or threatened, relating to compliance with or liability under any Environmental Laws affecting Pivotal. (e) Except as disclosed in Section 5.14 of the Disclosure Schedule, to the knowledge of the Sellers, none of the Leased Real Property is listed or proposed for listing on the "National Priorities List" under CERCLA, or on the Comprehensive Environmental Response, Compensation and Liability Information System maintained by the United States Environmental Protection Agency, or any similar state list of sites requiring investigation or cleanup. (f) Except as disclosed in Section 5.14 of the Disclosure Schedule, there is no Substance spilled, discharged released or disposed of by Pivotal arising out of the conduct of the Pivotal Business that may pose any material risk to safety, health or the environment on or under any property owned, leased or operated by Pivotal, currently or in the past, there has heretofore been no spillage, discharge, release or disposal of any Substance on or under such property by Pivotal arising out of the conduct of the Pivotal Business in any amount or of a nature that could reasonably be expected to result in material liability to Pivotal. (g) Except as disclosed in Section 5.14 of the Disclosure Schedule, Pivotal has not assumed or retained, by contract or operation of law in connection with the sale or transfer of any assets or business, any material liabilities arising from or associated with or otherwise in connection with such assets or business of any kind, fixed or contingent, known or not known, under any applicable Environmental Law. -- 54 -- (h) True, complete and correct copies of the written reports, and all parts thereof, of all environmental audits or assessments in the possession, custody or control of Pivotal that have been conducted in respect of any Leased Real Property within the past five years, either by Pivotal or attorney, environmental consultant or engineer engaged for such purpose, have been delivered to Buyer. 5.15 Insurance. (a) Section 5.15(a) of the Disclosure Schedule contains an accurate and complete description of all policies property, fire and casualty, product liability, workers' compensation, and other forms of insurance held by Pivotal. True, correct and complete copies of such insurance policies have been made available to Buyer. (b) Except as disclosed in Section 5.15(b) of the Disclosure Schedule, all policies listed on Section 5.15(a) of the Disclosure Schedule (i) are valid, outstanding, and enforceable policies, and (ii) will not terminate or lapse by reason of the transactions contemplated by this Agreement. (c) Except as set forth in Section 5.15(c) of the Disclosure Schedule, Pivotal has not received (i) any notice of cancellation of any policy listed on Section 5.15(a) of the Disclosure Schedule or refusal of coverage thereunder, (ii) any notice that any issuer of such policy has filed for protection under applicable bankruptcy laws or is otherwise in the process of liquidating or has been liquidated, or (iii) any other notice that such policies are no longer in full force or effect or that the issuer of any such policy is no longer willing or able to perform its obligations thereunder. 5.16 Customers, Distributors and Suppliers. Section 5.16 of the Disclosure Schedule sets forth a complete and accurate list of the names of Pivotal's (i) ten (10) largest customer Pharmaceutical Companies for the most recent fiscal year listed based on revenue received by Pivotal, setting forth the approximate amount of payments received from each such customer during the most recent fiscal year and (ii) the suppliers for the most recent fiscal year showing the approximate total purchases in dollars by Pivotal from each such supplier during such fiscal year. Except as disclosed in Section 5.16 of the Disclosure Schedule, Pivotal has not received any communication from any customer or supplier named on Section 5.16 of the Disclosure Schedule of any intention to terminate or materially reduce purchases from or supplies to Pivotal. 5.17 Affiliate Transactions. Except as set forth on Section 5.17 of the Disclosure Schedule, (i) no officer, manager under the Pivotal LLC Agreement, member, or Affiliate of Pivotal, (ii) no individual related by blood, marriage or adoption to any person described in clause (i) and (iii) no entity in which any of the foregoing persons described in clause (i) or clause (ii) owns individually or in the aggregate a greater than 10% beneficial interest is a party to any agreement, -- 55 -- contract, commitment or transaction with Pivotal or has a material interest in any material property used by Pivotal (any such agreement, contract, commitment, transaction or interest, a "Related Party Transaction"). All Related Party Transactions shall be terminated prior to the Closing Date. 5.18 Liability. Except as set forth on Section 5.18 of the Disclosure Schedule, neither Pivotal nor the Sellers have committed any act or omission which would result in, or has any knowledge of any facts or circumstances which would give rise to, (i) any material liability not covered by insurance (other than deductibles or self retention amounts under such insurance policies) or (ii) any liability in excess of the reserve established therefore on Pivotal's Audited Financial Statements or the Reserve Account. Except as set forth in Section 5.18 of the Disclosure Schedule, none of Kirby, Bonacci, Michael J. Colombo, Craig M. McCarthy, Troy Williams, or Chrysonne Rinderkinecht have ever been the subject of (a) any Action relating to Pivotal, the business of Pivotal, or the conduct of any activities by or on behalf of Pivotal in any capacity whatsoever, or (b) any investigation by any Governmental Authority, medical board, hospital, health care organization or any professional organization, related or pertaining to the practice of medicine on behalf of Pivotal or the business of Pivotal, or the conduct of any activities by or on behalf of Pivotal in any capacity whatsoever, or any other activities on behalf of Pivotal or the business of Pivotal. 5.19 Full Disclosure. No representation or warranty made by Pivotal or any Seller in this Agreement, nor any Transaction Document or any document, exhibit, statement, certificate or schedule attached to the Transaction Document to which Pivotal or such Seller is a party or delivered by Pivotal at the Closing to Buyer in connection with the transactions contemplated hereby contains any untrue statement of material fact or omits to state any material fact necessary in order to make the statement contained herein or therein not misleading. 5.20 Financial Statements. (a) Attached as Section 5.20(a) of the Disclosure Schedule are true and complete copies of (i) the Audited Financial Statements and (ii) the Interim Financial Statements. Except as set forth in the notes thereto or as disclosed in Section 5.20(a) of the Disclosure Schedule, all such financial statements (including the footnotes thereto) were prepared in accordance with GAAP and fairly present in all material respects the financial condition, results of operations and changes in cash flows and Member's capital of Pivotal as of the dates thereof and for the periods covered thereby, subject to, in the case of the Interim Financial Statements, normal recurring year-end adjustments (the effect of which is not expected to be material) and the absence of footnotes. Pivotal's fiscal and tax year are both based on the calendar year. (b) Pivotal has no liabilities required to be disclosed in accordance with GAAP, other than liabilities (i) reflected and reserved against on Pivotal's balance sheet as of June 30, 2003, (ii) -- 56 -- disclosed in Section 5.20(b) of the Disclosure Schedule, or (iii) incurred since June 30, 2003 in the ordinary course of business, consistent with Pivotal's past practice, which, individually or in the aggregate, will not have a Material Adverse Effect on Pivotal. (c) Except as set forth on Schedule 5.20(c), the accounts and notes receivable reflected on the Interim Financial Statements are free and clear of any Encumbrance. (d) As of the Closing Date, Pivotal has no Net Debt. 5.21 No Changes. (a) Except as otherwise disclosed to Buyer, since the date of the Interim Financial Statements, there has not been any event or condition that has materially and adversely affected Pivotal's business, prospects, condition, affairs, operations, properties or assets other than events affecting the economy or Pivotal's industry generally. (b) Except as expressly contemplated by this Agreement or as set forth on Schedule 5.21(b), since September 30, 2003, there has been no: (i) (a) increase in the compensation payable or to become payable to Pivotal to any of its employees or independent contractors, except for normal increases in the ordinary course of business, (b) bonus, incentive compensation, service award or other like benefit granted, made or accrued, contingently or otherwise, for or to the credit of any of the personnel, except in the ordinary course of business, (c) employee welfare, pension, retirement, profit-sharing or similar payment or arrangement made or agreed to by Pivotal for any personnel except pursuant to the existing Employee Plans described in Section 5.11(a) of the Disclosure Schedules or (d) new employment agreement to which Pivotal is a party except as contemplated by this Agreement; (ii) addition to or modification of the Employee Plans other than (a) contributions made in accordance with the normal practices of Pivotal or (b) the extension of coverage to other personnel who became eligible after September 30, 2003. (iii) cancellation of any Liabilities or waiver of any rights of substantial value to Pivotal; (iv) cancellation, termination or material amendment of any Material Contract, License or other instrument of Pivotal that adversely affects Pivotal; (v) failure to operate the business of Pivotal in the ordinary course in any material respect so as to use reasonable efforts to preserve the business intact, to keep available the services of employees and independent contractors, and -- 57 -- to preserve the goodwill of Pivotal's suppliers, customers and other Persons having business relations with Pivotal; (vi) change in accounting methods or practices by Pivotal; (vii) revaluation by Pivotal of any of its respective assets or properties, including without limitation, writing off notes or accounts receivable; (viii) Liabilities incurred by Pivotal or any commitment to incur Liabilities entered into by Pivotal, or any loans made or agreed to be made by Pivotal, other than Liabilities incurred in the ordinary course of business consistent with past practice or loans to fund insurance; (ix) declaration, setting aside for payment or payment of dividends or distributions in respect of any Equity Securities of Pivotal or any redemption, purchase or other acquisition by Pivotal of any of Pivotal's Equity Securities except for such distributions to Sellers on the date hereof pursuant to Section 2.2(a)-(b) of this Agreement; (x) issuance or reservation for issuance by Pivotal of, or commitment to issue or reserve for issuance of, any Equity Securities of Pivotal; (xi) execution, termination, or material amendment of any lease for real or personal property involving annual payments; or xii) any agreement by Pivotal to do any of the foregoing. (c) Except as expressly contemplated by this Agreement or as set forth on Schedule 5.21(c), since September 30, 2003, Pivotal has not: (i) discharged or satisfied any lien or paid any obligation or liability, other than current liabilities paid in the ordinary course of business; (ii) mortgaged or pledged any of its properties or assets or subjected them to any Liabilities, except Liabilities for current property taxes not yet due and payable; (iii) sold, assigned or transferred any of its tangible assets, except in the ordinary course of business, or canceled any debts or claims, except in the ordinary course of business; (iv) sold, assigned or transferred any Intellectual Property, trade secrets or other intangible assets, or disclosed any proprietary confidential information to any person; (v) made capital expenditures or incurred any commitments or liabilities other than in the ordinary course of business; (vi) made any loans or advances to, guarantees for the benefit -- 58 -- of, or any investments in, any persons; (vii) suffered any damage, destruction or casualty loss whether or not covered by insurance; or (viii) entered into any other transaction other than in the ordinary course of business. 5.22 Contracts. Schedule 5.22 sets forth a list of Pharmaceutical Contracts to which Pivotal is a party and is currently performing, or has agreed to perform Clinical Research Services Post-Closing. Pivotal and each and every other party to each such contract are not in material breach or default, and are not alleged to be in material breach or default under any such contract, and no event has occurred and no condition or state of facts exists (or would exist upon the giving of notice or the lapse of time or both) that would become or cause a material breach, default or event of default under any such contract or would cause an acceleration of any liability under any such contract. Except as set forth in Section 5.22 of the Disclosure Schedules, Pivotal has not received any notice of actual, alleged, possible or potential default or violation with respect to any such contract. 5.23 Litigation and Legal Proceedings. (a) Except as set forth in attached Section 5.23 of the Disclosure Schedule, (i) there are no Actions pending or threatened against Pivotal, or any of its employees arising out of, related or pertaining to their relationship or employment with Pivotal, or any of the assets or properties of Pivotal, before any court or administrative agency involving a claim; (ii) Pivotal and its assets and properties used in the business of Pivotal are not subject to any Governmental Order, (iii) neither Pivotal nor any of its assets or properties are subject of any pending or threatened investigation by any Governmental Authority, (iv) there are no unsatisfied judgments against Pivotal, and (v) Pivotal is not subject to any arbitration proceedings under collective bargaining agreements or otherwise any governmental investigations or inquiries (including inquiries as to the qualification to hold or receive any license or permit). The foregoing includes, without limiting its generality, actions pending or threatened involving the prior employment of any of Pivotal's employees, or their use in connection with Pivotal's business of any information or techniques allegedly proprietary to any of its former employers. There is no action, suit, proceeding, claim or investigation initiated by Pivotal currently pending. (b) There are no Governmental Orders outstanding and no Actions pending or threatened against, relating or affecting any Seller or any of its assets or properties which could reasonably be expected to result in the issuance of a Governmental Order restraining, enjoining or otherwise prohibiting or making illegal the consummation by such Seller of any of the transactions contemplated by this Agreement or any of the Transaction Documents to which such Seller is a party or which could -- 59 -- reasonably be expected to have a material adverse effect on the validity or enforceability as against such Seller of this Agreement or any of the Transaction Documents to which such Seller is a party or the ability of such Seller to perform his, her or its obligations hereunder or thereunder. 5.24 Approvals; Consents. Except as set forth on Section 5.24 of the Disclosure Schedule and other than consents required in connection with the Pivotal LLC Agreement which consents have been obtained prior to the date hereof, no consent, approval, authorization, license, order or permit of, or declaration, filing or registration with, or notification to, any Governmental Authority, or any other Person, including, but not limited to, any party to a Contract, is required to be made or obtained by Pivotal or any Seller in connection with the execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated hereby and thereby. 5.25 Compliance with Law. Except as disclosed in Section 5.25 of the Disclosure Schedule and except for compliance by Pivotal with any Laws to the extent Sellers are making a representation and warranty with respect to such Laws in this Article V pursuant to any section other than this Section 5.25, including, Environmental Laws addressed in Section 5.14, Employment Laws addressed in Section 5.12, Laws relating to Employee Plans addressed in Section 5.11, and Laws relating to Taxes addressed in Section 5.13, Pivotal and the Sellers are, and at all times during the past five (5) years have been, in compliance in all respects with all applicable Laws. Except as disclosed in Section 5.25 of the Disclosure Schedule, neither the Sellers, nor Pivotal has received any written notice during the past five (5) years to the effect that any Seller or Pivotal is not in compliance in any respect with applicable Laws. Except as set forth in Section 5.25 of the Disclosure Schedule, Pivotal has not, during the past five (5) years, conducted any internal investigation in connection with which Pivotal retained or sought advice from outside legal counsel with respect to any actual, potential or alleged material violation of any Law by a Seller, Pivotal, or any of Pivotal's employees, officers, directors or agents. 5.26 Title to Transferred Interest. Each Seller owns, beneficially and of record, such Seller's Membership Interest free and clear of any Encumbrances. The delivery to Buyer of a duly authorized and executed Assignment Agreement at the Closing will transfer to Buyer good and valid title to such Seller's Membership Interest free and clear of any Encumbrances except for those in favor of the Sellers described in the Transaction Documents. Except for any of this Agreement, the Pivotal LLC Agreement, and any Transaction Documents to which such Seller is a party, such Seller is not a party to any contract, agreement, proxy or other similar instrument with respect to the sale or voting of, or otherwise relating to or affecting such Seller's Membership Interest. 5.27 Finders. No broker's, finder's or any other similar fee, expense or commission has been or shall be incurred by or on behalf of Pivotal or the Sellers in connection with the origin, negotiation, execution or delivery of this Agreement or the consummation of the transactions contemplated hereby. -- 60 -- 5.28 Securities Disclosure. Sellers have reviewed all SEC Reports filed from the period commencing on January 1, 2002, and ending on the Closing Date. The Closing Stock is sold to Sellers in reliance upon Sellers' representations and warranties which shall include that, except as set forth in Schedule 5.28, each Seller is an Accredited Investor. 5.29 Pre-Closing Conditions. Except as set forth in Section 5.29 of the Disclosure Schedule, there are no Pre-Closing claims, disputes, conflicts, facts, circumstances, conditions, events, or occurrences which individually, or in the aggregate, would, except for those items for which Sellers have deposited funds into the Reserve Account, result, directly or indirectly, in any damage or liability to Pivotal or the Pivotal Business, or impair the Sellers ability to perform their obligations hereunder. 5.30 Disclosure. Pivotal's disclosure of an item in a Disclosure Schedule attached to this Agreement shall be deemed actual notice thereof to Buyer with respect to the applicable Section of this Agreement to which such disclosure applies, but only to the extent of the actual disclosure set forth in writing therein. -- 61 -- ARTICLE VI Representations and Warranties of Buyer The Buyer represents and warrants to Sellers as follows: 6.1 Organization. Buyer is a corporation duly formed, validly existing and in good standing under the laws of the State of Massachusetts and has the requisite power and authority to own or lease its properties and to carry on its business as now conducted. Buyer is duly qualified to conduct business as a foreign corporation and is in good standing in each jurisdiction where the character of its properties owned, operated or leased or the nature of its activities makes such qualification necessary, except where failure to do so would not have a Material Adverse Effect. 6.2 Power and Authority. Buyer has all requisite power and authority to enter into the Transaction Documents and to perform fully its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of the Transaction Documents and the performance by Buyer of its obligations thereunder and the consummation of the transactions contemplated thereby have been duly and validly authorized by all necessary action on the part of Buyer. Each of the Transaction Documents is a valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms, except to the extent such enforceability (a) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors generally, or (b) is subject to general principles of equity. 6.3 Authorized Closing Stock. Buyer's Board of Directors has duly authorized the Closing Stock and the Note C Shares. The Closing Stock has been duly and validly issued, fully paid and is non-assessable. When issued, the Note C Shares will have been duly and validly issued, fully paid and non-assessable 6.4 Finders. No broker's, finder's or any similar fee has been or shall be incurred by or on behalf of Buyer in connection with the origin, negotiation, execution or delivery of this Agreement or the consummation of the transactions contemplated hereby, except such fees as Buyer shall pay to Bathgate Capital Partners, which fees, if any, shall be the sole and separate responsibility of Buyer. 6.5 Approvals; Consents. All consents, approvals, orders or authorizations of, or registrations, qualifications, designations, declarations or filings with, any Governmental Authority or Person on the part of Buyer required in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement shall have been obtained prior to, and be effective as of, the Closing. 6.6 Compliance with Other Instruments; Law. The execution, delivery and performance of the Transaction Documents by the Buyer, and the consummation of the transactions contemplated thereby will not result in any violation, nor be in conflict with or constitute, with or -- 62 -- without the passage of time and giving of notice, a default under any such provision, nor, except as set forth on Schedule 6.6, or otherwise provided in this Agreement or a Loan Document, result in the creation or imposition of any lien pursuant to any such provision. 6.7 Investment Representations. Except as set forth in Section 6.7 of the Disclosure Schedules: (a) Buyer understands that the Membership Interests have not been registered under the Securities Act, or any state security act and are being sold to Buyer by reason of specific exemptions under the provisions thereof. (b) Buyer understands that the Membership Interests are "restricted securities" under applicable federal securities laws and that the Securities Act and the rules of the Securities and Exchange Commission promulgated thereunder provide in substance that Buyer may dispose of the Membership Interests only pursuant to an effective registration statement under the 1933 Act or an exemption from registration if available. (c) Buyer acknowledges that neither Pivotal nor any person acting on behalf of Pivotal has used general solicitation, general or public mass media or mass mailing in connection with the offer, solicitation or sale of the Membership Interests. (d) Buyer is an "accredited investor" as defined in Rule 501 Under Regulation D promulgated under the Securities Act. 6.8 SEC Filings. Buyer has filed all forms, reports and documents (the "SEC Reports") required to be filed by Buyer with the Securities and Exchange Commission ("SEC") for the period commencing on January 1, 2003 through the date hereof. Each such SEC Report, when filed, complied in all respects with the requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and the applicable rules and regulations thereunder and, as of their respective dates, none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. ARTICLE VII CONDITIONS TO CLOSING 7.1 Conditions to Obligations of the Sellers. The obligations of the Sellers and Pivotal to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver, at or prior to the Closing, of each of the following conditions: (a) Representations and Warranties Covenants. (i) The representations and warranties of Buyer contained in this Agreement and in each Transaction Document shall be true and correct in all material respects as of the Closing (or, in the case of representations and warranties of Buyer which address matters only as of a particular date, as of such date) and (ii) the covenants and agreements contained in this Agreement and in each Transaction -- 63 -- Document to be complied with by Buyer on or prior to the Closing shall have been complied with in all material respects. (b) Opinion. Buyer shall have delivered the legal opinion of Arent Fox Kintner Plotkin & Kahn, PLLC in the form of Exhibit 7.1(b) to this Agreement; (c) Good Standing. Buyer shall have delivered to Sellers evidence of the good standing of Buyer issued by the Massachusetts Secretary of State not later than within five (5) days prior to the Closing. (d) Registration of Closing Stock. All steps shall have been taken to affect the issuance of the Closing Stock in compliance with all applicable federal and state securities laws. (e) Buyer shall have executed Note A; (f) Buyer shall have executed Note B; (g) Buyer shall have executed Note C; (h) Buyer shall have executed the Pledge Agreement in favor of the Sellers in the form attached hereto as Exhibit 7.1(h); (i) Buyer shall have executed the Security Agreement in the form attached hereto as Exhibit 7.1(i); (j) Buyer shall have executed the Financing Statement in favor of the Sellers in the form attached hereto as Exhibit 7.1(j); (k) Buyer shall have obtained the Acquisition Financing and the Line of Credit financing. (l) Buyer shall have transferred the Closing Stock to the Sellers, subject to the obligations on registration set forth in this Agreement. 7.2 Conditions to Obligations of the Buyer. The obligations of the Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver, at the Closing, of each of the following conditions: (a) Sellers' Representations and Warranties; Covenants. (i) The representations and warranties of each of the Sellers contained in this Agreement and in each of the Transaction Documents shall be true and correct in all material respects as of the Closing, with the same force and effect as if made as of the Closing (or, in the case of representations and warranties of the Sellers which address matters only as of a particular date, as of such date) and (ii) the covenants and agreements contained in the Transaction Documents to be complied with by the Sellers at or prior to the Closing shall have been complied with in all material respects; it being understood by the parties hereto that it shall be a condition of the Buyer's obligations to consummate -- 64 -- the transactions with any Seller that all of the Sellers shall have satisfied the condition set forth in this Section 7.2. (b) Legal Opinion. Sellers shall have delivered the legal opinion of Cynthia Y. McCoy, P.C., counsel to Sellers, in the form of Exhibit 7.2(b) to this Agreement; (c) Tender for Purchase. Each Seller or its Representative shall have delivered at the Closing an Assignment Agreement with respect to the Membership Interests being sold by such Seller pursuant to this Agreement and shall otherwise have performed or shall perform at the Closing, the obligations of such Seller described in Section 7.1, it being understood by the parties hereto that it shall be a condition of the Buyer's obligation to consummate the transactions with any Seller that all of the Sellers shall have satisfied the condition set forth in this Section 7.2. (d) Good Standing. Pivotal shall have delivered to Buyer evidence of the good standing of Pivotal in the State of Arizona issued by the Secretary of State of the State of Arizona, and evidence of good standing issued by the applicable Governmental Authority in every other jurisdiction where Pivotal is registered or qualified to conduct business, within 5 days prior to the Closing. (e) Third Party Consents. The consents, approvals, permissions or acknowledgments or notices listed on Section 5.24 of the Disclosure Schedule shall have been obtained or made, and Buyer shall have received reasonably acceptable written evidence thereof; (f) Resignation of Managers. Each member of the Board of Directors of Pivotal shall have resigned as elected or appointed managers of Pivotal effective as of the Closing Date. (g) Related Party Transactions. All Related Party transactions shall have been terminated, effective as of the Closing Date and all sums payable by Pivotal pursuant to such Related Party Transactions shall have been paid in full. (h) Assignment. Each of Sellers shall have executed an Assignment Agreement. (i) Commitment. The Buyer shall have received a binding commitment from a lender acceptable to Buyer to provide to Buyer the Acquisition Financing and the Line of Credit. 7.3 Concurrent Conditions. As a condition to closing for all parties hereto, each of the following transactions (collectively, the "Concurrent Transactions") shall have been consummated at or prior to the Closing: (a) Due Diligence. Buyer and each Seller shall have completed, and shall in each of their sole and absolute discretion be satisfied -- 65 -- with the results of, all business, financial and legal due diligence that it deems necessary or appropriate in connection with the Transaction Documents. (b) General. The form and substance of all instruments and documents executed and delivered in connection with the Closing shall be reasonably acceptable to Sellers, Buyer and their respective counsel. (c) Kirby Employment Agreement. Kirby shall have executed the Kirby Employment Agreement. (d) Colombo Employment Agreement. Michael J. Colombo shall have executed the Colombo Employment Agreement. (e) No Injunction. No injunction or restraining order shall be in effect or threatened that restrains or prohibits the consummation of the transactions contemplated hereby or that would limit or adversely affect Buyer's ownership of the Membership Interests or Sellers' ownership of the Closing Stock, and no proceedings for such purpose shall be pending, and no Governmental Authority shall have enacted, issued promulgated, enforced or entered into any statute, rule, regulation, injunction or other Governmental Order that is in effect and has the effect of making the transaction contemplated by this Agreement or any of the Transaction Documents illegal or otherwise restricts or delays the consummation of transactions. (f) Certified Documents. Each of Pivotal and Buyer shall have executed and delivered to each other a certificate certifying the resolutions of the directors and members of their respective entities with respect to the transactions contemplated by the Transaction Documents. (g) No Order. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, injunction or other Governmental Order which is in effect and has the effect of making the transactions contemplated by any of the Transaction Documents illegal or otherwise prohibiting consummation of such transactions. ARTICLE VIII SURVIVAL AND INDEMNIFICATION 8.1 Survival. Subject to the limitations and other provisions of this Agreement, the representations, warranties and covenants of the parties contained herein and in any certificate delivered at the Closing shall survive the Closing and shall remain in full force and effect, regardless of any investigation made by or on behalf of the Sellers or the Buyer, for a period of six years after the Closing Date. For purposes of this Agreement, all references to the Buyer, the Sellers and Pivotal shall include successors and assigns. -- 66 -- 8.2 Indemnification. (a) Subject to the arbitration provisions of Section 10.12, from and after the Closing each Seller, jointly and severally, shall indemnify, defend and hold harmless the Buyer from and against any and all Losses whether or not involving any third party claim, arising out of, resulting from or relating to (i) any breach on the Closing Date of any representation or warranty of such Seller contained in Article V hereof or set forth in any certificate delivered by such Seller or his or its Representative hereof; (ii) any breach of any covenant or agreement of such Seller contained herein; or (iii) any litigation whether or not disclosed in Section 5.23 of the Disclosure Schedule resulting from a Pre-Closing event, facts, circumstances, conditions whether or not asserted prior to the Closing Date. (b) Subject to the arbitration provisions of Section 10.12, from and after the Closing Sellers shall jointly and severally indemnify, defend and hold harmless the Buyer and its Affiliates from and against all Losses from Taxes (i) with respect to all periods of Pivotal ending prior to the Closing Date or (ii) with respect to any period of Pivotal beginning before the Closing Date and ending after the Closing Date, but only with respect to the Pre-Closing Partial Period. Payment of any amount due under this Section 8.2 shall be made within 30 days following written notice by Buyer that payment of such amounts to the appropriate tax authority is due. (c) Subject to the arbitration provisions of Section 10.12, from and after the Closing Buyer shall indemnify, defend and hold harmless Sellers from and against any and all Losses, whether or not involving any third party claim, arising out of, resulting from or relating to (i) any breach on the date hereof or on the Closing Date of any representation or warranty of such Buyer contained in Article VI hereof, or (ii) any breach of any covenant or agreement of such Buyer contained herein. (d) If a claim for Losses (a "Claim") is to be made by an indemnified party, such indemnified party shall give written notice (a "Claim Notice") to the party against whom such Claim is being asserted, in the case of indemnification pursuant to Section 8.2(a)-(c), the recipient of such notice referred to below as the "Indemnifying Party"), in either case promptly after such indemnified party becomes aware of any fact, condition or event which may give rise to Losses for which indemnification may be sought under this Section 8.2. If any lawsuit or other action is filed or instituted against any indemnified party with respect to a matter subject to indemnity hereunder, notice thereof (a "Third Party Notice") shall be given to the indemnifying party as promptly as practicable (and in any event within fifteen (15) calendar days after the service of the citation or summons). The failure of any indemnified party to give timely notice hereunder shall not affect such indemnified party's rights to -- 67 -- indemnification hereunder, except to the extent of actual damage caused by such failure. After receipt of a Third Party Notice, the Indemnifying Party shall have the right to (i) take control of the defense and investigation of such lawsuit or action, (ii) employ and engage attorneys of its own choice (subject to the approval of the indemnified party, such approval not to be unreasonably withheld) to handle and defend the same, at the indemnifying party's sole cost, risk and expense, and (iii) compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the indemnified party (such consent not to be unreasonably withheld). The indemnified party shall cooperate in all reasonable respects with the Indemnifying Party and such attorneys in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom; and the indemnified party may, at its own cost, participate in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom. If the Indemnifying Party fails to assume the defense of such claim within thirty (30) calendar days after receipt of the Third Party Notice (or such earlier date, if the failure to assume the defense on such earlier date would materially impair the ability of such indemnified party to defend such claim), the indemnified party against which such claim has been asserted will (upon delivering notice to such effect to the Indemnifying Party) have the right to undertake the defense, compromise or settlement of such claim (all at the cost and expense of the Indemnifying Party) and the Indemnifying Party shall have the right to participate therein at its own cost. (e) Notwithstanding the foregoing, Bonacci's liability to Buyer under this Agreement and the Transaction Documents, with respect to each individual Loss shall not exceed an amount equal to (x) Bonacci's Percentage Interest multiplied by (y) the amount of each individual Loss, not to exceed, in the aggregate, for all Losses, the total amount of consideration paid to Bonacci hereunder. (f) Notwithstanding anything in this Agreement to the contrary, any breach of a representation or warranty under this Agreement that results in a Loss or Losses that do not exceed $5,000 on an individual basis, or $25,000 in the aggregate, shall not give rise to an indemnifiable or arbitratable claim or liability under this Agreement, provided, however, that this provision shall not limit Buyer's right to pursue relief under Article IV of this Agreement. 8.3 Limitation of Liability and Termination of Indemnification. The liability of any indemnifying party under Sections 8.2 or 8.3 shall terminate upon the termination of survival of the subject representation, warranty or covenant as described in Section 8.1. 8.4 Adjustment of Purchase Price. Any payment under this Section 8 shall be treated by the parties as an adjustment to the Purchase Price for tax purposes. -- 68 -- 8.5 Claims Resulting from Breach of Representation or Warranty. From and after the Closing Date, no Seller shall have any right of contribution or indemnification against Pivotal and shall not seek recourse from Pivotal for any amounts paid to Buyer as a result of any Claim arising from or relating to a breach by any Seller of any of its representations, warranties, covenants or other agreements contained herein. 8.6 Mitigation. The parties hereto shall make commercially reasonable efforts to mitigate any Losses subject to any claim for indemnification pursuant to this Section 8.6; provided that, no party shall be required to assert any claim against any customer or supplier in order to so mitigate such Losses. ARTICLE IX TAX COVENANTS AND RELATED MATTERS 9.1 Returns. Sellers shall cause to be prepared and timely filed all Tax Returns of Pivotal for taxable years or periods ending on or before the Closing Date but which are due to be filed after Closing Date (taking into account all applicable extensions of time for filing). The Sellers agree not to amend any Tax Return of Pivotal for any period on or before the Closing Date without the prior written consent of Buyer unless, prior to such amendment, a party obtains a formal tax opinion from a nationally recognized law firm that it is more likely than not that the position taken by Pivotal could be sustained in the event of an audit. In the event Pivotal obtains such an opinion, Buyer agrees to amend such Tax Return in a manner consistent with said opinion. 9.2 Cooperation. Buyer and Sellers shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of any Tax Returns for Pivotal, the facing and prosecution of any Tax claims and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and, (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. 9.3 Allocation of Taxes. In the case of Taxes that are payable with respect to a taxable period that begins before the Closing Date and ends after the Closing Date, the portion of such Taxes payable for the period ending on the Closing Date shall be (a) in the case of any property or ad valorem tax, the amount of such tax for the entire period multiplied by a fraction, the numerator of which is number of days in the period ending on the Closing Date and the denominator of which is the number of days in the entire period, and (b) in the case of all other Taxes, determined based upon the activities, taxable income or taxable loss of Pivotal for the portion of the period ending on the Closing Date. -- 69 -- ARTICLE X MISCELLANEOUS 10.1 Right of Set-Off. Subject to the conditions set forth in this Section 10.1, Buyer shall have the right to apply or set-off any adjustments to the Purchase Price as provided herein to any future payments due to Sellers hereunder. If Buyer shall in good faith determine that a set-off is necessary, Buyer shall promptly notify Sellers in writing of such determination and shall provide Sellers with a summary of Buyer's justification for such determination (the "Set-Off Notice"). In the event any Seller disagrees with Buyer's exercise of such setoff right, such Seller will notify Buyer of their position in writing within 5 business days from the date of their receipt of the Set-Off Notice and either Buyer or Sellers shall thereupon be entitled to initiate arbitration proceedings under Section 10.12 to resolve such dispute. If Buyer is attempting to exercise its set-off rights under this Section 10.1 and if Buyer has not received written notice from Kirby, acting in his capacity as Sellers' representative for purposes of this Section 10.1 (or any other Seller designated by Sellers, in writing, with notice to the Buyer, to act in the capacity as Sellers' representative), indicating that set-off is appropriate, then all amounts alleged by Buyer to be subject to such set-off right shall be paid into an escrow account with the Escrow Agent on or before the date such amounts are due to be paid to Sellers. The amount escrowed shall in no event be greater than the amount alleged by Buyer to be the subject of a set-off claim. All escrowed monies shall be disbursed from the escrow account in the manner instructed by the arbitrator selected in accordance with Section 10.12 to resolve the set-off dispute but in no event later than five (5) Business Days subsequent to the arbitrator's decision. In the event the arbitrator selected by the parties holds that Buyer is not entitled to exercise its right of setoff hereunder, a default interest rate of 15% shall, in lieu of the rate of interest provided under the applicable Note, apply to the amount subject to the setoff during the pendency of the arbitration proceedings. Buyer and Seller shall, within 30 days after the Closing Date, select a mutually acceptable escrow agent (the "Escrow Agent") and prepare a mutually acceptable form of escrow agreement (the "Escrow Agreement") to be utilized in the event Buyer elects to exercise its set-off right under this Section 10.1. 10.2 Breach or Failure to Perform. Unless otherwise set forth in this Section 10.2, if a party to this Agreement shall breach or fail to perform any provision of this Agreement, such party shall have the right to cure such breach or non-performance within the applicable "Cure Period" (as defined below). For purposes of this Agreement, the term "Cure Period" shall mean a period of time that commences upon the giving of written notice by a non-breaching party to the breaching party(ies) that a breach has occurred and expires, in the event of a breach relating to a representation or warranty contained in Article V or VI of this Agreement, thirty (30) calendar days from the date such notice is given or deemed given, or, in the case of any other breach, ten (10) calendar days from the date such notice is given or deemed given. Notwithstanding the foregoing, no Cure Period shall be available in the event of a breach of Sections 5.1, 5.2, 5.3, 5.5, and 5.26 of this Agreement. -- 70 -- 10.3 Entire Agreement; No Third-Party Beneficiaries. This Agreement and the documents referred to herein constitute the entire agreement among the parties with respect to the subject matter hereof, and no other agreements, warranties, representations or covenants regarding the subject matter hereof shall be of any force of effect unless in writing, executed by the party to be bound thereby and dated on or after the date hereof. This Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies. 10.4 Public Announcement. Unless otherwise required by applicable Law, and except as otherwise provided herein, Sellers shall make no public announcements in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of Buyer, and the parties shall cooperate as to the timing and contents of any such announcement. 10.5 Expenses. All costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred and, for purposes of determining the EBITDA under the Notes, Post-Closing Buyer shall not allocate such transaction-related expenses to the Pivotal Business or the Non-Pivotal Business. 10.6 Notices. All notices or other communications hereunder shall be made in writing and shall be deemed duly given (a) when personally delivered to the intended recipient (or an officer of authorized representative of the intended recipient), (b) on the day of transmittal when sent by facsimile with confirmation of receipt if sent prior to 5:00 pm, or on the immediately following day if sent after 5:00 pm, (c) on the first business day after the date sent when sent by a nationally recognized overnight courier service, or (d) three business days after it is sent by first class U.S. mail, postage prepaid, to the intended recipient at the address set forth below: (a) if to Pivotal or to Buyer, to: PHC, Inc. 200 Lake Street, Suite 102 Peabody, MA 01960 Attention: Bruce A. Shear, President Facsimile No.: (978) 536-2677 with a copy to: Arent Fox Kintner Plotkin & Kahn, PLLC 1050 Connecticut Avenue, NW Washington, DC 20036-5339 Attention: J. Aaron Ball, Esq. Facsimile No.: (202) 857-6395 (b) if to a Seller, to him or her at the address set forth below his/her signature to this Agreement. -- 71 -- Any party may change the address to which notices and communications hereunder are to be delivered by giving the other parties notice in the manner set forth herein. 10.7 Waivers and Amendments. This Agreement may be amended, superseded, canceled, renewed or extended and any terms hereof may be waived only by a written instrument signed by all of the parties hereto or, in the case of a waiver, by the party waiving compliance with such terms. 10.8 Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. Should any clause, section or part of this Agreement be held or declared to be void or illegal for any reason, all other clauses, sections or parts of this Agreement shall nevertheless continue in full force and effect. 10.9 Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 10.10Assignment. This Agreement shall not be assigned by operation of Law or otherwise; provided, however, that Buyer may assign this Agreement and such Buyer's rights and obligations hereunder without the prior written consent of any other party hereto (i) to any person who acquires all or substantially all of the Equity Securities or assets of Buyer (by merger, recapitalization, sale or otherwise), provided that contemporaneous with such assignment, Sellers' security interest in the Assets of the Pivotal Business and the Membership Interests are likewise assigned in accordance with the requirements set forth in Section 3.11 of this Agreement, or (ii) to a Subsidiary or Affiliate of Buyer as part of a restructuring or reorganization of PHC or its business, provided that such Subsidiary or Affiliate shall comply with the requirements set forth in Section 3.11 of this Agreement, and provided further that Buyer shall guaranty such Subsidiary's or Affiliate's payment and performance under the Transaction Documents, which guaranty shall be in the form set forth in attached Exhibit 3.11. 10.11Binding Effect. This Agreement shall be binding upon, and inure to the benefit of, the parties and their respective successors. This Agreement and all rights and obligations hereunder shall not be assignable by any party without the prior written consent of all of the other parties. 10.12 Arbitration of Disputes. (a) Appointment of Arbitrator. Any dispute that arises under this Agreement shall be settled by arbitration. Any party may commence an arbitration proceeding by submitting to the other parties a written notice of intent to arbitrate (the "Arbitration Notice"). -- 72 -- All arbitration proceedings shall be conducted under the rules of the American Arbitration Association (the "AAA"). Unless one party objects, a sole arbitrator appointed by the AAA shall conduct the arbitration. If one party so objects, each party shall select an arbitrator within thirty (30) days of receipt of an Arbitration Notice. If a party fails or refuses to appoint an arbitrator during such thirty (30) day period, then the arbitrator selected by the other party shall conduct the arbitration. In the event both parties select an arbitrator within such thirty (30) day time period, then such arbitrators shall have an additional thirty days to select an arbitrator to conduct the arbitration. In the event the two arbitrators selected by the parties fail to agree on the appointment of a third arbitrator to conduct the arbitration, either one or both parties may, by written notice to the AAA, request that the AAA select an arbitrator to conduct the arbitration. In such event, the arbitrator shall be appointed and the arbitration proceedings shall commence within 30 days after the AAA receives a copy of the Arbitration Notice. The prevailing party in any proceeding in accordance with this Section 10.12 shall be awarded attorneys' fees and related costs. (b) Proceedings. The decision and award of the arbitrator shall be rendered within 45 days after commencement of the arbitration proceedings, unless otherwise mutually agreed by the parties. The decision of the arbitrator shall be final and binding on the parties, not subject to appeal, and shall be enforceable in any court of competent jurisdiction. The decision of the arbitrator shall be in writing, shall state the arbitrator's conclusions and shall be signed by the arbitrator. Arbitration proceedings shall be conducted in the following locations: (i) if the arbitration proceeding is initiated by the Sellers as a result of an alleged breach by Buyer of any of the Transaction Documents, then the forum for the arbitration shall be Phoenix, Arizona; (ii) if the arbitration is initiated by Buyer as a result of an alleged breach by the Sellers of any of the Transaction Documents, then the forum for the arbitration shall be Washington, D.C.; 10.13Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 10.14Termination of Certain Agreements. The parties hereto and the parties to the Pivotal LLC Agreement acknowledge that this Agreement shall operate to terminate the Pivotal LLC Agreement and neither Pivotal, nor any Seller shall have any rights or liabilities thereunder (including any distribution for taxes with respect to income of Pivotal prior to the Closing) whether relating to the period before, on or after the Closing Date. [SIGNATURE PAGE FOLLOWS] -- 73 -- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed on the date and year first above written. PHC, Inc., A MASSACHUSETTS CORPORATION By: /s/ Bruce A. Shear __________________________________________ Bruce A. Shear, President PIVOTAL RESEARCH CENTERS, L.L.C. By: /s/ Louis C. Kirby __________________________________________ Louis C. Kirby, President SELLERS: /s/ Louis C. Kirby __________________________________________ Louis C. Kirby 5633 North Royal Circle Paradise Valley, AZ 85253 /s/ Carol A. Colmbo __________________________________________ Carol A. Colombo 2525 E. Camelback Road, Suite 840 Phoenix, AZ 85016 /s/ Anthony A. Bonacci __________________________________________ Anthony A. Bonacci 2525 E. Camelback Road, Suite 840 Phoenix, AZ 85016 -- 74 -- EX-10 4 exh10_28.txt PLEDGE AGREEMENT Exhibit 10.28 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT ("Pledge Agreement") is made and entered into this April 30, 2004 by and between PHC, Inc., a Massachusetts corporation ("PHC" or the "Pledgor"), Louis Kirby ("Kirby"), Carol Colombo ("Colombo") and Anthony Bonacci ("Bonacci" and together with Kirby and Colombo, the "Pledgees"). RECITALS A. Pledgor has delivered to Pledgees: (i) a Secured Promissory Note of even date herewith in the original principal amount of $1,000,000 ("Note A"), (ii) a Secured Promissory Note of even date herewith in the original principal amount of $500,000 ("Note B") and, (iii) a Secured Promissory Note of even date herewith in the original principal amount of $1,000,000 ("Note C"). Note A, Note B and Note C are sometimes referred to together as the "Notes." The Notes were delivered pursuant to a Membership Purchase Agreement dated of even date herewith (the "Purchase Agreement") between Pledgor, Pivotal Research Centers, LLC ("Pivotal") and the Pledgees in their capacity as members of Pivotal, pursuant to which Pledgor acquired all of the membership interests of Pivotal. All capitalized terms not defined herein shall have the meaning set forth in the Purchase Agreement. In the event of a conflict between a defined term in this Agreement and a defined term in the Purchase Agreement, the meaning set forth in the Purchase Agreement shall govern. B. In order to secure the payment and performance of all of Pledgor's Obligations (as defined below), Pledgor has agreed to pledge the Collateral (as defined below) to Pledgees, and Pledgor and Pivotal have agreed to grant to Pledgees a security interest in the Assets of the Pivotal Business as more particularly set forth in that certain Security Agreement of even date herewith between Pledgor and Pledgees (the "Security Agreement"). AGREEMENT NOW, THEREFORE, in consideration of the mutual promises contained herein, the Pledgor and the Pledgees agree as follows: SECTION 1. Pledge. To secure the prompt payment and performance of Pledgor's obligations under the Obligations (as defined below), (i) Pledgor hereby pledges and grants a security interest to Pledgees in the all of the Collateral (as defined below), and (ii) pursuant to an escrow agreement satisfactory to Pledgor, Pledgor shall deposit with a third party independent escrow agent that is a nationally recognized financial institution (the "Escrow Agent") on behalf of Pledgees the Equity Securities evidencing Pledgor's ownership interest in Pivotal and deliver to Escrow Agent on behalf of Pledgees certificates or instruments therefore, accompanied by undated powers duly executed in blank by Pledgor and such other instruments of transfer as are reasonably acceptable to Pledgees. Any and all fees, costs, charges, and expenses whatsoever charged by Escrow Agent in connection with the establishment and regular maintenance of the Escrow with the Escrow Agent shall be paid by Pledgees. This Pledge Agreement shall remain in effect until all amounts payable under the Notes have been paid in full. Upon the satisfaction of the Obligations, Pledgees will release their security interest created hereunder and under the Security Agreement. -- 75 -- (a) Definitions. The term "Interest" shall mean all the Membership Interests at any time owned by Pledgor, together with all distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in exchange for any or all of the Interests. All Interest at any time pledged or required to be pledged hereunder together with the Cash Collateral (as defined in Section 6(a)(ii) and Non-cash Collateral (as defined in Section 6(a)(iii) and all rights derived from any of the foregoing and all proceeds thereof is hereinafter called the "Collateral." (b) Subsequently Acquired Securities. If either Pledgor or any affiliate of Pledgor shall acquire (by purchase, stock dividend or otherwise) any additional Equity Securities (as defined in the Purchase Agreement) representing an interest in Pivotal at any time or from time to time after the date hereof (including without limitation all additional Membership Interests in Pivotal from time to time acquired by Pledgor), Pledgor will promptly thereafter pledge to Pledgees and deposit such Equity Securities (or certificates or instruments representing such Equity Securities) as security with Escrow Agent on behalf of Pledgees and deliver to Escrow Agent certificates or instruments therefore, accompanied by undated powers duly executed in blank by such Pledgor and such other instruments of transfer as are reasonably acceptable to Pledgees, and will promptly thereafter deliver to the Pledgees a certificate executed by a principal executive officer of Pledgor describing such Equity Securities and certifying that the same has been duly pledged to Escrow Agent on behalf of Pledgees hereunder. (c) Uncertificated Securities. Notwithstanding anything to the contrary contained herein, if any Equity Securities (whether now owned or hereafter acquired) are uncertificated securities, the Pledgor shall promptly notify the Pledgees thereof, and shall promptly take all actions required to perfect the security interest under applicable law (including in any event the Arizona Uniform Commercial Code, if applicable). Pledgor further agrees to take such actions reasonably necessary to effect the foregoing and to permit the Pledgees to exercise any of their rights and remedies hereunder. SECTION 2. Security for Obligations. This Agreement is made to secure the timely payment and performance of all obligations of Pledgor now or hereafter existing under the Notes, this Agreement, and the Security Agreement (together, the "Covered Transaction Documents") in each case including, without limitation, interest accruing after maturity of any obligation and after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to Pledgor or to the obligor under any of the Notes, whether or not a claim for post filing or post-petition interest is allowed in such proceeding, and all other obligations of Pledgor to any of the Pledgees, whether direct, indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise out of or in connection with the Covered Transaction Documents, (in each case as the same may be amended from time to time), whether on account of principal, interest, reimbursement obligations, fees, costs, expenses (including without limitation all fees and disbursements of counsel related to enforcing Pledgees' rights) or otherwise (collectively, the "Obligations"). -- 76 -- SECTION 3. Event of Default. Any of the following shall constitute an "Event of Default" under this Agreement: (i) any breach or failure of Pledgor to perform any material provision of this Agreement and the failure of Pledgor to cure such breach or failure within the applicable "Cure Period", if any; (ii) any event or occurrence that constitutes an event of default under any other Covered Transaction Document. For purposes of determining an Event of Default based on a failure to perform under this Agreement, (i) there shall be no "Cure Period" for any breach or failure to perform that is based in whole or in part upon a failure to pay monies when due, and (ii) the term "Cure Period" shall mean a period of time that commences upon the giving of written notice by Pledgees that a breach or failure to perform has occurred and expires ten (10) Business Days from the date such notice is given or deemed given. An Event of Default hereunder based on any Covered Transaction Document other than this Agreement shall occur after the expiration of the applicable cure period, if any, set forth in such other Covered Transaction Document, and no additional time to cure under this Agreement shall be given or is intended to be given hereby. In the event of conflicting cure periods in Covered Transaction Documents, the shortest cure period shall control. SECTION 4. Representations and Warranties. Pledgor represents and warrants as follows as of the Effective Date: (a) Effect of Pledge. The pledge of the Collateral pursuant to this Agreement creates a valid and enforceable first priority security interest in the Collateral, securing the payment and performance of the Obligations subject and subordinate only to the Acquisition Financing and Line of Credit. (b) Liens. As of the Effective Date: (i) Pledgor is the legal and beneficial owner of their respective Collateral free and clear of any lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement; (ii) the Membership Interests are titled in the name of Pledgor; and (iii) no prior or superior effective financing statement or other similar instrument is on file in any recording office covering the Collateral, except such as may have been filed in favor of Pledgees relating to this Agreement, or except as may be required in connection with the Acquisition Financing or Line of Credit. Pledgor shall have no liability for the failure of the foregoing representation to be true if such failure is caused by (i) the failure of Sellers (as defined in the Purchase Agreement) to have properly transferred the Membership Interests to PHC under the Purchase Agreement or (b) the breach of any representation or warranty of Sellers under the Purchase Agreement. (c) Consents. No authorization, approval, or other action by, and no notice to or filing with, PHC, any member, manager, shareholder or director of PHC, or any governmental authority or regulatory body (other than such as may be filedin favor of Pledgee relating to this Agreement), is required either (i) for the pledge by Pledgors of any or all of the Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by Pledgor, or (ii) for the exercise by Pledgees of the voting or other rights provided for in this Agreement or the remedies in respect of any or all of the Collateral pursuant to this Agreement (except as may be required in connection with -- 77 -- disposition of the Collateral by laws affecting the offering and sale of securities generally). Pledgor shall have no liability for the failure of the foregoing representation to be true if such failure is caused by (i) the failure of Sellers (as defined in the Purchase Agreement) to have properly transferred the Membership Interests under the Purchase Agreement or (b) the breach of any representation or warranty of Sellers under the Purchase Agreement. SECTION 5. Affirmative Covenants. Pledgor agrees that at all times prior to the satisfaction in full of the Obligations, Pledgor shall comply with the following affirmative covenants, unless compliance is waived in writing by Pledgee: (a) Taxes. Pledgor will pay before delinquent and before penalties accrue all property taxes, income taxes, assessments and governmental and other charges levied and imposed by the United States of America or by any state, county or municipality or other taxing body prior to the filing or recordation of a lien against the Collateral based on the failure to pay any such items. (b) Further Assurances. Pledgor agrees that at any time and from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary, or that Pledgees may reasonably request, in order to perfect and protect any security interest granted or purported to be granted by this Agreement or to enable Pledgees to exercise and enforce its rights and remedies under this Agreement with respect to any Collateral. Without limiting the generality of the foregoing, Pledgor will execute and file such financing or continuation statements, or amendments thereto and such other instruments or notices, or take such further action, as may be necessary or as Pledgees may request, in order to perfect and preserve the security interests granted or purported to be granted hereby. SECTION 6. Voting Rights; Dividends. (a) Prior to Default. As long as no Event of Default has occurred: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with or violative of the terms of this Agreement or the other Obligations. (ii) Pledgor shall be entitled to retain any and all dividends, interest and other payments and distributions paid by the Companies in respect of the Collateral (the "Cash Collateral"). (iii)Any and all distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed by PHC in -- 78 -- respect of, or in exchange for, any Collateral ("Non-cash Collateral") shall be additional Collateral subject to the terms of this Agreement and, pursuant to Section 1, shall be promptly delivered to Escrow Agent to hold as Collateral for the benefit of Pledgees. Any Non-cash Collateral shall, if received by Pledgor, be received in trust as agent of Pledgees, be segregated from the other property or funds of Pledgor, and be promptly delivered to Escrow Agent on behalf of Pledgees as Collateral in the same form as so received (with any necessary endorsement). (b) After Default. Upon the occurrence of an Event of Default, (i) All rights of Pledgor to exercise the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 6(a)(i) shall cease, and all such rights shall automatically become vested in Pledgees who shall then have the sole right to exercise such voting and other consensual rights. (ii) All rights of Pledgor to receive any Cash Collateral shall cease and all such rights shall automatically become vested in Pledgees who shall have the sole right to receive such Cash Collateral. (iii)All rights of Pledgor to receive any Non-cash Collateral shall cease and all such rights shall automatically become vested in Pledgees who shall have the sole right to receive such Non-cash Collateral. SECTION 7. Transfers and Other Liens; Additional Interests. Except as provided in Section 3.11 of the Purchase Agreement, Pledgor shall not (a) sell or otherwise dispose of, or grant any option with respect to, any of the Collateral without the written consent of Pledgees, which consent may be withheld in Pledgees' sole and absolute discretion; (b) create or permit to exist any superior lien, security interest, or other charge or encumbrance upon or with respect to any of the Collateral, except for the security interest under this Agreement; or (c) re-title any of all of the Collateral other than in the name of Pledgor without the consent of Pledgees, which consent may be withheld in Pledgees' sole and absolute discretion other than in accordance with a transfer or assignment compliant with the terms of Section 3.11 of the Purchase Agreement. SECTION 7A. Appointment Attorney-in-Fact. Pledgor appoints Louis Kirby, in his capacity as a Pledgee, as Pledgor's attorney-in-fact with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time, to take any action and to execute any instrument in accordance with the terms hereof to receive, endorse and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same, subject only to the terms of Section 6(a)(ii). The attorney-in-fact appointment set forth in this Section 7A shall only become effective immediately upon the occurrence of an Event of Default. -- 79 -- SECTION 8. Pledgees May Perform. If any Event of Default occurs, Pledgees may, with prior written notice to Pledgor, cure the Event of Default on behalf of Pledgor by providing written notice to Pledgor of Pledgees' intent to cure, provided that Pledgees shall have no responsibility or liability for continuing such cure efforts (which efforts the Pledgees may terminate in whole or in part at any time, provided Pledgees provide to Pledgor written notice of their termination or intention to terminate such efforts to cure and use reasonable efforts to describe generally Pledgees' efforts to cure, if any, up to and including the date Pledgees terminate such efforts) or for the failure of the Event of Default to be cured. The reasonable expenses of Pledgees incurred in connection therewith shall become Obligations and subject to repayment by Pledgors in accordance with the provisions of Section 12. SECTION 9. Reasonable Care. If Pledgees receive Collateral, Pledgees shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded by Pledgees treatment substantially equal to that which Pledgees accords their own property, it being understood that Pledgees shall have no responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not Pledgees have or are deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any parties with respect to any Collateral. SECTION 10. Remedies upon Default. If any Event of Default has occurred and is continuing, and in addition to such other remedies, rights and consequences set forth herein (including without limitation as described in Section 6(b): (a) Pledgees may exercise, in respect of the Collateral, all the rights and remedies of a secured party under the Uniform Commercial Code (the "Code") in effect in the State of Arizona at that time, in addition to other rights and remedies provided for herein or otherwise available to Pledgees. Without in any way limiting the foregoing, Pledgees shall have the right, at any time in their sole and absolute discretion, to: (i) receive from the Escrow Agent and transfer to, or register in the name of, Pledgees or any of its nominees any or all of the Collateral; or (ii) take possession of and sell the Collateral or any part thereof in one or more lots at one or more public or private sales, at any exchange, broker's board or at any of Pledgees' offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as are commercially reasonable. Pledgor agrees that at least ten (10) Business Days notice to Pledgor, by registered mail to the address stated herein, of the time and place of any sale shall constitute reasonable notification. With respect to any public or private sale: (a) Pledgees are hereby relieved from any liability or claim for inadequacy of price; (b) at any sale (public or private), the Pledgees, or any of them, may themselves purchase the whole or any part of the Collateral or interest therein being sold; and (c) if any sale be made on credit for future delivery, the Collateral so sold may be retained by Pledgees until the selling price is paid by the purchaser without any liability on the part of the Pledgees in the event of failure of the purchaser to take up and pay for the Collateral sold and with the right of -- 80 -- the Pledgees to sell the Collateral again in the event of a default by the purchaser. Pledgees shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Pledgees may adjourn any sale from time to time by announcement of the time and place fixed therefor, and such sale may, upon giving the same notice to Pledgor as required above, be made at the time and place to which it was so adjourned, or Pledgee shall be entitled to give notice of its intent to terminate such sale. (b) All cash proceeds received by Pledgees in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of Pledgees, be held by Pledgees as collateral for, and/or then or at any time thereafter be applied (after payment of any amounts payable to Pledgees pursuant to Section 12) in whole or in part against, all or any part of the Obligations in such order as Pledgees shall elect. Any surplus of such cash or cash proceeds held by Pledgees and remaining after payment in full of all the Obligations shall be paid over to Pledgor or to whomsoever may be lawfully entitled to receive such surplus. In the event that the proceeds from any such sale or other disposition are insufficient to satisfy the obligations, Pledgees retain and may pursue all deficiencies directly against Pledgor. (c) Upon written request of any Pledgee to the Escrow Agent, and delivery of a copy of such written request to the Pledgor in accordance with Section 15 hereof, representing that an Event of Default has occurred and is continuing, Escrow Agent shall deliver to such Pledgees all Collateral held by Escrow Agent. Escrow Agent shall be entitled to rely on this Agreement and on the instructions of Pledgees as its instructions. SECTION 11. Cooperation With Sale. If Pledgees elect to exercise Pledgees' right to sell all or any of the Collateral pursuant to Section 10, Pledgor agrees that, upon request of Pledgees, Pledgor will, at its own expense do or cause to be done all such other acts and things as may be reasonably necessary to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable Law. SECTION 12. Expenses. Upon any dispute under this Agreement, the prevailing party shall be entitled to collect from the other all reasonable expenses, including the reasonable fees and expenses of the prevailing party's in-house or outside counsel and of any experts and agents, which the prevailing party may incur in connection with (i) the exercise of any rights under this Agreement by reason of the actions of the non-prevailing party, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, or recovery of, the Collateral (iii) the exercise or enforcement of any of the rights of the prevailing party, (iv) operation of the Business pending the sale or other transfer of the Collateral, or (v) the failure by the non-prevailing party to perform or observe any of the provisions hereof. Upon the occurrence and continuance of an Event of Default as to which there is no reasonable dispute, Pledgor agrees to be responsible for such reasonable fees and expenses of Pledgor as described above incurred from and after such Event of Default. Amounts for which any party is responsible under this Section 12 shall be -- 81 -- payable within ten (10) Business Days after demand. Interest thereon shall accrue at the rate of 15% per annum. SECTION 13. Security Interest Absolute. Subject to the Acquisition Financing and the Line of Credit, all rights of Pledgees and security interests under this Agreement, and all obligations of Pledgor under this Agreement, shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of any of the Notes (other than as a result of full payment and satisfaction thereof) or any other agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Notes or this Agreement; (iii)any exchange, release or non-perfection of any other collateral for all or any of the Obligations; (iv) the discharge in bankruptcy of either of Pledgor's obligations under any of the Notes. SECTION 14. Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by Pledgor from the terms of this Agreement, shall be effective unless it is in writing and signed by Pledgees, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. For purposes of this Section, the Pledgor shall be entitled to rely on the signature of Louis Kirby as agent for all of the Pledgees. SECTION 15. Notices. Any and all notices required by this Agreement shall be made in accordance with Section 10.6 of the Purchase Agreement. SECTION 16. Continuing Security Interest; Transfer of Notes. This Agreement shall create a continuing security interest in the Collateral and shall remain in full force and effect until all of the payment obligations under each and all of the Notes, the Security Agreement and this Agreement have been fully satisfied. This Agreement shall be binding upon Pledgor, and its successors and assigns, and inure to the benefit of Pledgee and its successors, transferees and assigns. Without limiting the generality of the preceding sentence, Pledgees may assign or otherwise transfer all or a portion of their interest in this Agreement to a transferee of one or more of the Notes, in which case such transferee shall automatically become vested with all of the benefits of this Agreement. SECTION 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws, without giving effect to the law of conflicts, of the State of Arizona, except for conflict of Law principles in the event of a conflict between the defined terms of this Agreement and those of the Purchase Agreement, in which case Delaware Law shall govern the interpretation of the defined term. Each of the parties is and shall remain subject to the in personam, in rem and subject matter jurisdiction of the Courts of the State of Arizona for all purposes pertaining to this instrument and all documents and instruments executed in connection herewith, securing the same, or in any way -- 82 -- pertaining hereto. The parties specifically acknowledge that, notwithstanding any provision of the Purchase Agreement or any other agreement, a claim or action to enforce this Agreement is not required to be brought in arbitration, and may be prosecuted in a court of competent jurisdiction as described above. SECTION 18. No Waiver; Cumulative Remedies. The Pledgees shall not by any act (except a written instrument pursuant to Section 14 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, or delay in exercising any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by Pledgees of any right or remedy hereunder on any one occasion shall not be a bar to any right or remedy which the Pledgees would otherwise have on any future occasion. The rights and remedies herein and in the other Covered Transaction Documents are cumulative, may be exercised singularly or concurrently and are not exclusive of any other rights or remedies provided by law. SECTION 19. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts and by facsimile signature, each of which when so executed and delivered (including by facsimile) shall be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement on the date hereof. Pledgees Pledgor: PHC, Inc. /s/ Louis C. Kirby By: /s/ Bruce A. Shear _______________________________ __________________________ Louis C. Kirby Bruce Shear, President /s/ Carol A. Colombo _______________________________ Carol A. Colombo /s/ Anthony A. Bonacci _______________________________ Anthony A. Bonacci -- 83 -- EX-10 5 ex10_29.txt SECURITY AGREEMENT Exhibit 10.29 SECURITY AGREEMENT This SECURITY AGREEMENT ("Security Agreement") is made and entered into this April 30, 2004 by and among Pivotal Research Centers, L.L.C. ("Pivotal") and PHC, Inc. ("PHC"), a Delaware corporation (Pivotal and PHC are jointly and severally referred to herein as the "Companies") and Louis Kirby ("Kirby"), Carol Colombo ("Colombo"), and Anthony Bonacci ("Bonacci" and, together with Colombo and Kirby, the "Creditors"). RECITALS A. PHC has delivered to Creditors (i) a Secured Promissory Note of even date herewith in the original principal amount of $1,000,000 ("Note A"), (ii) a Secured Promissory Note of even date herewith in the original principal amount of $500,000 ("Note B") and, (iii) a Secured Promissory Note of even date herewith in the original principal amount of $1,000,000 ("Note C"). Note A, Note B and Note C are sometimes referred to together as the "Notes." The Notes were delivered pursuant to a Membership Purchase Agreement dated of even date herewith (the "Purchase Agreement") between PHC, Pivotal and the Creditors in their capacity as members of Pivotal, pursuant to which PHC acquired all of the Membership Interests of Pivotal. All capitalized terms not defined herein shall have the meaning set forth in the Purchase Agreement. In the event of a conflict between a defined term in this Agreement and a defined term in the Purchase Agreement, the meaning set forth in the Purchase Agreement shall govern. B. In order to secure the payment and performance of all of the Secured Obligations (as defined below), PHC has agreed that payment of the Notes and performance of the other Secured Obligations are to be secured by all of the Assets of the Pivotal Business now existing or hereafter acquired as well as by PHC's ownership interest in Pivotal pursuant to that certain Pledge Agreement of even date herewith executed by PHC as pledgor and the Creditors as pledgees (the "Pledge Agreement"). AGREEMENT NOW, THEREFORE, in consideration of the mutual promises contained herein, and in partial consideration for the Creditors to accept the Notes, the parties agree as follows 1. GRANT OF SECURITY INTEREST. To secure payment and performance of the "Secured Obligations" (as herein defined) Creditors shall have, and Pivotal hereby grants to Creditors, a security interest in the Collateral subject and subordinate only to the lien, if any, created to secure payment of the Acquisition Financing and the Letter of Credit (as defined in the Purchase Agreement). 2. DEFINITIONS. "Secured Obligations" means all obligations of the Companies, in each case as their respective interests may appear, now or hereafter existing under the Notes, the Pledge Agreement and this Agreement (in each case including without limitation interest accruing after maturity of any obligation and after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to either of the Companies, whether -- 84 -- or not a claim for post filing or post-petition interest is allowed in such proceeding), and all other obligations of Companies to any of the Creditors, whether direct, indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise out of or in connection with the Notes, this Agreement, or the Pledge Agreement, (in each case as the same may be amended from time to time by mutual written agreement of the parties) and any other document made, delivered or given in connection therewith or herewith, whether on account of principal, premium, interest, reimbursement obligations, fees, costs, expenses (including without limitation, all fees and disbursements of counsel) or otherwise. "Collateral" means all or any portion of the assets described on Schedule 1 hereto. 3. WARRANTIES. PHC and Pivotal each warrants that, except as otherwise provided in the Purchase Agreement: (a) each of the Companies has the authority and has obtained all approvals and consents necessary to incur the Secured Obligations and enter into this Agreement, and there is no legal restriction or agreement affecting its right to grant a security interest in the Collateral; (b) except for the Accounts Receivable (as defined in the Purchase Agreement, which definition refers to accounts receivable existing or created prior to the Closing Date and in no way limits the coverage of this Security Agreement relating to accounts receivable created subsequent to the Closing Date), Pivotal is, and will be, the owner of the Collateral, free and clear of all liens, encumbrances and claims whatsoever except for liens securing the payment of the Acquisition Financing and the Line of Credit; (c) except for Accounts Receivable (as defined in the Purchase Agreement, which definition refers to accounts receivable existing or created prior to the Closing Date and in no way limits the coverage of this Security Agreement relating to accounts receivable created subsequent to the Closing Date), all accounts or general intangibles comprising Collateral are genuine, as appearing on their face, enforceable according to their terms, free of disputes, set-offs, counterclaims and defenses, and represent indebtedness, obligations, interests or property justly owing to and owned by Pivotal as therein provided; (d) the Collateral will be primarily used and located at the Locations; and (e) following the Closing Date, except for the financing statement evidencing the lien to secure payment of the Acquisition Financing or the Line of Credit, no financing statement or security agreement covering any of the property of the type, kind or class of the Collateral is or will be on file in any public office without Creditors' consent. PHC shall have no liability for the failure of the foregoing representation to be true if such failure is caused by (i) the failure of Sellers, or any of them to have properly transferred the Membership Interests to PHC in accordance with the terms of the Purchase Agreement or (ii) the breach of any representation or warranty of Sellers under the Purchase Agreement. 4. AFFIRMATIVE COVENANTS. PHC and Pivotal each agrees to: (a) defend the Collateral and its proceeds against the claims and demands of all third persons; (b) except for the lien to secure payment of the Acquisition Financing and the Line of Credit, keep the Collateral free of all levies, liens, encumbrances and other security interests; (c) pay when due all taxes, licenses, charges and other impositions on or for the Collateral or the Secured Obligations; (d) at its expense, keep the Collateral insured in amounts, on terms and against such risks and casualties as are reasonable, customary or appropriate, with loss payable to Creditors, and providing for written notice to Creditors at least thirty (30) days prior to cancellation or material change; (e) properly care -- 85 -- for, house, store and maintain the Collateral; (f) comply with all laws, statutes and regulations pertaining to the Collateral; (g) execute, deliver, file and/or record such instruments, documents, statements, notices or agreements, in such form and substance, as Creditors may request, and take such action and obtain such certificates and documents, in accordance with all applicable laws, statutes and regulations as is necessary, to create, preserve, validate, perfect, evidence and/or continue Creditors' security interest in the Collateral, and/or to enable Creditors to exercise or enforce its rights with respect to such security interest; (h) supply Creditors with any information Creditors may reasonably request, and permit Creditors to inspect and copy Pivotal's records, with respect to the Pivotal Business or the Collateral; (i) supply Creditors with any information Creditors may reasonably request, and permit Creditors to inspect and copy Pivotal's records, with respect to the Pivotal Business or the Collateral, and upon the occurrence of an Event of Default, account fully for and promptly deliver to Creditors the proceeds thereof as and when received and (j) upon demand, pay Creditors all reasonable sums actually expended and reasonable expenses actually incurred by Creditors with respect to enforcing their rights in the Collateral upon an Event of Default, together with the balance of any deficit under the Secured Obligations remaining after any sale or other disposition of the Collateral by Creditors, together with interest as provided herein. 5. COMPANIES' NEGATIVE COVENANTS. Neither PHC nor Pivotal will, without Creditors' written consent: (a) exchange, lease, lend, use, operate, demonstrate, sell, assign, transfer or dispose of the Collateral or their respective rights therein, except in the ordinary course of Pivotal's or PHC's business, except as otherwise provided in Section 3.11 of the Purchase Agreement; (b) make any compromise, adjustment, amendment, modification, settlement, substitution or termination with respect to the Collateral except as otherwise provided in Section 3.11 of the Purchase Agreement; (c) enter into any agreement or borrowing relationships that creates or could with the passage of time result in the creation of a lien or encumbrance of any nature whatsoever affecting the Collateral, other than those created as a result of or in accordance with the Purchase Agreement, the Notes, the Pledge Agreement or other documents executed in connection therewith; or (d) permit anything to be done that may impair it or its value, or Creditors' security interest and rights hereunder. 6. CREDITORS' AUTHORITY. Upon the occurrence of an Event of Default, each of PHC and Pivotal hereby authorizes Creditors to do the following from time to time in connection with the Collateral, in their own name or in Pivotal's or PHC's name (as appropriate), and without affecting Companies' liability hereunder or on the Secured Obligations: (a) notify any obligor or account of Companies on an instrument or account that is part of the Collateral to make payment to Creditors; (b) demand, sue for, collect, or make any compromise or settlement with reference to the Collateral, and any interest, dividends, principal payments, benefits and other sums payable on account of the Collateral, as Creditors in their sole discretion choose; (c) collect by legal proceedings or otherwise, and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable with respect to or on account of the Collateral; (d) make any payment and perform any agreement undertaken by either Pivotal or PHC in connection with the Pivotal Business, and expend such sums and incur such expense, including reasonable attorney's fees and legal expenses, as Creditors reasonably deem advisable; (e) transfer the Collateral into its own name or into the name of one -- 86 -- of its nominees; (f) renew or extend the time for payment of the Secured Obligations; (g) take and hold security, other than the Collateral, for the payment of the Secured Obligations or any part thereof, and exchange, enforce, waive, and release the Collateral or any part thereof or any such other security; (h) apply the Collateral or other security, and direct the order or manner of sale thereof as Creditors in their discretion may determine; (i) except as provided under the Purchase Agreement or in accordance with the terms of the Acquisition Financing or Line of Credit, enter into any extension, subordination, reorganization, deposit, merger or consolidation agreement or any other agreement affecting or relating to the Collateral, and in connection therewith deposit or surrender control of the Collateral or any part thereof, and accept other property in exchange or substitution therefor; (j) except as provided under the Purchase Agreement or in accordance with the terms of the Acquisition Financing or Line of Credit, assign or negotiate any of the Secured Obligations and, in the case of such transfer, deliver the whole or any part of the Collateral to the transferee who shall succeed to all the powers and rights of Creditors in respect thereof, and Creditors shall thereafter be forever relieved and fully discharged from any liability or responsibility with respect to the transferred Collateral; (k) release or substitute the appropriate Company of any of its liabilities and obligations or any part thereof; (l) delay exercising or not exercise any right or remedy under this or any other agreement, without waiving that or any other past, present or future right or remedy; (m) insure, process and preserve all or any part of the Collateral; (n) receive premiums and proceeds of insurance covering the Collateral with prior written notice to PHC; and (o) take any reasonable action it deems advisable, and exercise all the rights, powers and remedies of an owner with respect to all or any part of the Collateral. 7. CREDITORS' DUTIES. Creditors' duty with respect to the Collateral shall be to use reasonable care in the custody and preservation of Collateral in its possession, which shall not include any steps necessary to preserve rights against prior parties nor the duty, except as otherwise provided herein, to send notices, perform services or take any action in connection with the management of the Collateral. Such care as Creditors give to the safekeeping of their own property of like kind shall constitute reasonable care of the Collateral when in Creditors' possession. Neither Creditors nor their correspondents or agents shall have any responsibility or liability for: (a) the form, sufficiency, correctness, genuineness or legal effect of any instrument or document constituting a part of or in any way relating to the Collateral, or any signature thereon; (b) making any presentment, demand or protest, or giving notice, in connection with any obligation or evidence of indebtedness held by it as part of the Collateral or in connection with the Secured Obligations; (c) the description or misdescription, quantity, weight, quality, condition, packing, delivery or value of property or goods represented, or purported to be represented, by documents or instruments except in the case of Creditors' gross negligence or intentional misconduct; or (d) the performance or nonperformance of any contract or obligation, insurance or otherwise, relating thereto except to the extent such performance or nonperformance constitutes a breach of such Creditor's obligations under the Transaction Documents; (e) consequences arising out of acts or decisions of public authorities, strikes, lockouts, riots, wars, acts of God or other causes beyond the control of Creditors, its correspondents or agents; or (f) any act or failure to act of their correspondents or agents. -- 87 -- 8. EVENTS OF DEFAULT. (a) Mandatory. Any of the following shall constitute an "Event of Default" under this Agreement: (i) any breach of, or failure of any party to perform, any provision of this Agreement or the Notes, or the occurrence of any of the events described in (a) - (e) below, and the failure of such party to cure such breach, non-performance or event within the applicable "Cure Period", if any; (ii) termination of an Executive by PHC without Cause, as defined in the Employment Agreements; (iii) an Executive terminates his employment for Good Reason, as defined in the Employment Agreements; or (iv) Buyer breaches Section 3.5 of the Purchase Agreement concerning maintenance of the Line of Credit. There shall be no "Cure Period" under this Agreement for any breach or failure to perform that is based in whole or in part upon a failure to pay monies when due under the Notes. For purposes of this Agreement, the term "Cure Period" shall mean a period of time that commences upon the giving of written notice by a non-defaulting party to the defaulting party(ies) that a breach or failure to perform has occurred, or in the case of an event described in items (a)- (e) below the occurrence of such event, and expires ten (10) Business Days from the date such notice is given. An Event of Default hereunder based on any Note or the Pledge Agreement, but not the Employment Agreements or other this Agreement, shall occur after the expiration of the applicable cure period, if any, set forth in any Note or the Pledge Agreement, and no additional time to cure under this Agreement shall be given or is intended to be given hereby. In the event of conflicting cure periods in any Note or the Pledge Agreement, the shortest cure period shall control. (b) Optional. At Creditors' option, an Event of Default hereunder shall be deemed to occur upon the following events and the expiration of the Cure Period described above: (a) either of Companies (i) is adjudicated a bankrupt, or an order for relief under the Bankruptcy Code (Title 11 of the United States Code) is entered naming either of Companies as "Debtor", (ii) fails to pay, or admits in writing its inability to pay, its debts generally as they become due, (iii) makes an assignment for the benefit of creditors, (iv) applies for, seeks, consents to, or acquiesces in, the appointment of a receiver, custodian, trustee (interim or otherwise), examiner, liquidator or similar official for it or any substantial part of its property, (v) institutes any proceeding seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fails to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (vi) takes any corporate action to authorize or effect any of the foregoing, or (vii) fails to contest in good faith any appointment or proceeding described above; (b) either of Companies fails to pay and discharge any material indebtedness when and as due (except in the case of a good faith dispute), or by reason of a default, the holder of any indebtedness becomes entitled to accelerate the stated maturity thereof except where failure to do so does not have a Material -- 88 -- Adverse Effect; (c) either of Companies contests the validity or enforceability of any document executed in connection herewith or with the Secured Obligations or denies it has any further liability or obligation thereunder, or fails to perform any of its obligations hereunder; (d) there occurs a sale, assignment, pledge, transfer, hypothecation, encumbrance or other disposition of the Collateral or any portion thereof (or any interest therein) other than (i) in the ordinary course of business, (ii) a disposition of obsolete or retired property, or (iii) as otherwise provided in the Purchase Agreement; or (e) there is any injury to, or any destruction, loss or decline in value or market price of, the Collateral other than in the ordinary course of business that is not covered by insurance. 9. CREDITORS' REMEDIES. Upon the occurrence and continuance of an Event of Default, Creditors (and its agents) shall have the rights and remedies of a secured creditor, and Companies shall have the rights and duties provided under the Uniform Commercial Code in force in Arizona at the date of this Agreement or as such Uniform Commercial Code may thereafter be amended, and Creditors may, at their election and in addition to all other rights, powers and privileges and notwithstanding the cessation of the Companies' liability, which the Companies waive (other than by payment in full of the Secured Obligations), to the fullest extent permitted by law: (a) declare the Secured Obligations immediately fixed, due and payable, the same as if the Secured Obligations had become in default or past due, and proceed to collect the same; (b) waive or remedy any default, without waiving it or any prior or subsequent default; (c) as appropriate, take immediate possession of the Collateral, without notice and with or without resort to legal process, and for such purpose Creditors may, subject to the restrictions set forth under the Law including, but not limited to, the Uniform Commercial Code as enacted by the state of Arizona enter upon any premises on which the Collateral or any part thereof may be situated and remove it therefrom or render the Collateral unusable and upon Creditors' demand, each Company shall assemble the Collateral and make it available at a reasonably convenient place designated by Creditors; (d) remove any and all Collateral from the state or country in which it may be held to any other state or country, and there be dealt with by Creditors as provided in this Agreement; (e) transfer any voting securities, if any, constituting all or any part of the Collateral into the name of Creditors for the purpose of voting said securities as Creditors may determine in their sole discretion; (f) at its option, retain the Collateral in satisfaction of the Secured Obligations by sending written notice of such election to PHC; (g) lease all or any part of the Collateral, or sell, assign and deliver all or any part of the Collateral at public or private sale (regardless whether the Collateral is present at the place of sale), without notice or advertisement, and at any sale or disposition of the Collateral, Creditors may bid and become a purchaser at any public sale, and may accept a trade of property for all or a portion of the sale price; (h) make or have made any necessary repairs, the reasonable cost of which is to be charged to PHC; (i) realize upon insurance policies with a cash surrender value, securities, instruments or documents that will be redeemed by the issuer upon surrender, without notice to PHC; and (j) apply the Collateral, or the proceeds of any disposition of Collateral, towards the satisfaction of the Secured Obligations, in any order that Creditors, in their sole discretion, choose. In the event of a failure by PHC in so doing, Creditors may obtain physical damage/loss insurance (protecting Creditors only if it chooses), pay taxes, assessments, liens, fees, charges or encumbrances, and order and pay for repairs or spend any amounts necessary to maintain the Collateral in Companies' exclusive possession and in -- 89 -- good condition and repair, and all amounts so expended shall, with interest thereon at the highest rate contracted with respect to the Secured Obligations, constitute part of the Secured Obligations and shall be immediately due and payable. No such act or expenditure by Creditors shall relieve Companies from the consequences of such default. The making of any such payment or the performance of any obligation on behalf of either Company shall constitute prima facie evidence of the necessity and the reasonableness therefor. If notice to either Company is required, Creditors shall give written notice to PHC not less than ten (10) Business Days prior to the date of public sale of the Collateral or prior to the date after which private sale of the Collateral will be made by mailing such notice to PHC at the address designated in the Purchase Agreement. PHC shall continue to be liable to Creditors for any deficiency remaining after application of the Collateral or proceeds thereof to the Secured Obligations, together with interest thereon at the rate applicable upon a default under the agreement or instrument evidencing the Secured Obligations, and if no rate is provided, then at 15% per annum. 10. WAIVERS. Companies each waive: (a) any right to require Creditors to proceed against any person, exhaust any Collateral, or pursue any other remedy in Creditors' power; (b) any defense arising by reason of any disability or other defense of Company, or any other person, or by reason of cessation from any cause whatsoever of the liability of Company, or any other person; (c) any right to enforce or compel the enforcement of any remedy which Creditors now has or may hereafter have against Companies, or either of them, or against any other person; (d) any benefit of and any right to participate in the Collateral or other security whatsoever now or hereafter held by Creditors; and (e) the provisions of Delaware and Arizona Statutes, if applicable, relating to sureties. Until all of the Secured Obligations shall have been satisfied and paid in full, neither of Companies shall have any right of subrogation. 11. MISCELLANEOUS AGREEMENTS. Each Company agrees: (a) to give Creditors prior written notice of any change of residence, place of business or insurance with respect to the Collateral; (b) demands for additional or substituted Collateral, and any other demands or notices may be given by telegram, telephone or cable, or by mailing the same, postage prepaid, to Companies' addresses shown below; (c) acceptance by Creditors of any performance which does not comply strictly with the terms hereof shall not be deemed to be a waiver or bar of any right of Creditors, nor a release of any of the Secured Obligations; (d) each of Companies is and shall remain subject to the in personam, in rem and subject matter jurisdiction of the Courts of the State of Arizona for all purposes pertaining to this instrument and all documents and instruments executed in connection herewith, securing the same, or in any way pertaining hereto; (e) this Agreement shall be governed by the laws of the State of Arizona except for conflict of Law principles in the event of a conflict between the defined terms of this Agreement and those of the Purchase Agreement, in which case Delaware Law shall govern the interpretation of the defined term; (f) time is of the essence of this Agreement; (g) this is a continuing agreement, and to the extent possible, applies to all past, present and future indebtedness, obligations and transactions of either of Companies, with Creditors, and whether or not such transactions continue, increase, decrease or create new indebtedness after or before payment of prior indebtedness, and notwithstanding the death, incapacity or bankruptcy of, or other event or proceedings affecting either of Companies; (h) this Agreement may not be assigned by either of the Companies without the express written consent of Creditors; (i) the obligations and agreements of Companies hereunder are binding upon their respective successors and assigns, and the delivery or other accounting of the Collateral (in whatever form) to -- 90 -- them shall discharge Creditors of all liability therefore; and (j) the parties specifically acknowledge that, notwithstanding any provision of the Purchase Agreement or any other agreement, a claim or action to enforce this Agreement is not required to be brought in arbitration, and may be prosecuted in a court of competent jurisdiction as described above. All words used herein shall be construed to be of such gender and number as the circumstances require. This instrument shall be binding upon the personal representatives, successors and assigns of Companies and inure to the benefit of Creditors, their heirs, successors and assigns. Except as otherwise provided herein, this Agreement constitutes the entire agreement between the parties concerning the subjects addressed herein and may not be altered or amended except by a writing signed by Companies and Creditors. Dated: April 30, 2004 PHC, Inc. By: /s/ Bruce Shear _______________________________ Bruce A. Shear, President PIVOTAL RESEARCH CENTERS, L.L.C By: /s/ Louis C. Kirby _______________________________ Louis C. Kirby, President CREDITORS: /s/ Louis C. Kirby _______________________________ Louis C. Kirby 5633 North Royal Circle Paradise Valley, AZ 85253 /s/ Carol A. Colombo _______________________________ Carol A. Colombo 2525 E. Camelback Road, Suite 840 Phoenix, AZ 85016 /s/ Anthony A. Bonacci _______________________________ Anthony A. Bonacci 2525 E. Camelback Road, Suite 840 Phoenix, AZ 85016 -- 91 -- Schedule 1 All of Pivotal's existing and hereafter acquired right, title and interest in and to all properties, assets and rights of any kind, whether tangible or intangible, real or personal, or in which Pivotal has any interest whatsoever, and specifically including without limitation accounts receivable, contracts and in the following service mark, together with all goodwill associated therewith. Mark Registration Number Registration Date ________ ___________________ _________________ Pivotal 2,498,718 October 16, 2001 STATE OF MASSACHUSETTS ) ) ss. County of Essex ) On this __ day of _______________, 2004, before me, the undersigned officer, personally appeared Bruce Shear, who acknowledged himself to be President of PHC, Inc., a Massachusetts corporation and that he, in such capacity, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the company by himself. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _________________________________ Notary Public My Commission Expires: STATE OF MASSACHUSETTS ) ) ss. County of Essex ) On this __ day of ____________, 2004, before me, the undersigned officer, personally appeared Bruce Shear, who acknowledged himself to be ___________________ of Pivotal Research Centers, L.L.C., an Arizona limited liability company and that he, in such capacity, being authorized so to do, executed the foregoing instrument of the purposes therein contained by signing the name of the company by himself. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _________________________________ Notary Public My Commission Expires: -- 92 -- STATE OF ARIZONA ) ) ss. County of Maricopa ) On this __ day of ____________, 2004, before me, personally appeared Louis C. Kirby, M.D., who acknowledged that he executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _________________________________ Notary Public My Commission Expires: STATE OF ARIZONA ) ) ss. County of Maricopa ) On this __ day of ____________, 2004, before me, personally appeared Carol A. Colombo, who acknowledged that she executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _________________________________ Notary Public My Commission Expires: STATE OF ARIZONA ) ) ss. County of Maricopa ) On this __ day of ____________, 2004, before me, personally appeared Anthony A. Bonacci, who acknowledged that he executed the foregoing instrument for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _________________________________ Notary Public My Commission Expires: -- 93 -- EX-10 6 ex10_30.txt SECURED PROMISSORY NOTE $1,000,000.00 10.30 SECURED PROMISSORY NOTE $1,000,000.00 February 1, 2004 Note A Phoenix, Arizona FOR VALUE RECEIVED, PHC, Inc., a Massachusetts corporation ("PHC") agrees and promises to pay to the order of Louis C. Kirby ("Kirby"), Carol A. Colombo ("Colombo") and Anthony A. Bonacci ("Bonacci"), or their heirs, successors and assigns (Kirby, Colombo and Bonacci may be collectively referred to herein as "Lenders" or individually as a "Lender"), the principal sum of $1,000,000, with interest accruing on a daily basis on the unpaid principal balance from time to time outstanding from the date hereof at the rate of six percent (6%) per annum, compounded annually (the "Note Rate"), interest to be calculated on a 360-day year, both principal and interest being payable to Lender at Lenders' respective accounts at 1st National Bank of Arizona7150 East Camelback Road, Ste. 275, Scottsdale, AZ 85251, Attention: Mr. Joe Botero, or at such other address as Lender may designate by notice from time to time, without presentment for payment, diligence, grace, exhibition of this Note, protest, or special notice of any kind, all of which are hereby expressly waived. For purposes of this Note, PHC shall be referred to as "Debtor." The unpaid balance of this Note at any time shall be the then current Remaining Note Principal (as defined herein), plus interest accrued thereon and costs, expenses and fees chargeable hereunder, which balance may be endorsed hereon from time to time by the holder hereof. The term of this Note will be five (5) years, commencing on the date of execution of this Note. All payments due under this Note will be paid by Debtor to each Lender pro-rata, calculated by multiplying the applicable payment amount by each Lender's Percentage Interest. 1. Definitions. 1.1 Generally. All capitalized terms not defined herein shall have the meanings set forth in that certain Membership Purchase Agreement (the "Purchase Agreement") between PHC, Pivotal Research Centers, L.L.C. ("Pivotal"), and Lenders of even date herewith. 1.2 "EBITDA" for any applicable period means the earnings of the Pivotal Business before interest, taxes, depreciation or amortization, determined in accordance with GAAP. For purposes of determining the EBITDA of the Pivotal Business, all costs attributable to the Non-Pivotal Business shall not be included regardless where such cost is incurred. 1.3 "Adjusted EBITDA" means an amount equal to the sum (without duplication) of (i) all bonuses paid to employees of Pivotal (including but not limited to Michael J. Colombo and Louis C. Kirby), plus (ii) the EBITDA generated by the Pivotal Business during the applicable Note Adjustment Period, plus (iii) the sum of all principal and interest payments, if any, made by the Pivotal Business to repay any portion of the Acquisition Financing, the Line of Credit, and the Notes, plus (iv) any corporate level overhead charges assessed against the Pivotal Business by PHC in violation of the provisions of Section 3.10 of the Purchase Agreement. 1.4 "Base Amount" means $780,000 (U.S.) for any calendar year, pro-rated for any partial periods. -- 94 -- 1.5 "Note Adjustment Amount" means an amount equal to the Adjusted EBITDA of the Pivotal Business at the conclusion of the applicable Note Adjustment Period minus the Base Amount, provided however, that if the Note Adjustment Amount is a negative number, then the procedures set forth in Section 2.4.1(c) or 2.4.2(c), as applicable, of this Note shall be applied to determine the Note Adjustment Amount. 1.6 "Note Adjusted Interest" means, in the case of any Determination Date where a Note Adjustment Amount is a negative number, the lesser amount of Interest that would have otherwise been due and payable under this Note during the applicable Note Adjustment Period if the Principal was reduced by an amount equal to the Note Adjustment Amount. In the case of any Determination Date where a Note Adjustment Amount is a positive number, "Note Adjusted Interest" means the greater amount of Interest that would have otherwise been due and payable under this Note during the applicable Note Adjustment Period if the Principal was increased by an amount equal to the Note Adjustment Amount. 1.7 "Note Adjustment Period" means the two periods, the first of which shall commence on the date of execution of this Note and end on December 31, 2004 ("Note Adjustment Period A"), and the second of which shall commence on January 1, 2005 and end on December 31, 2005 ("Note Adjustment Period B"). 1.8 "Note Interest Adjustment Amount" means (a) in the case the Note Adjusted Interest for the applicable Note Adjustment Period is a positive number, an amount equal to the net interest payments made by Debtor to Sellers pursuant to this Note during the applicable Note Adjustment Period, plus the Note Adjusted Interest, or (b) in the case the Note Adjusted Interest for the applicable Note Adjustment Period is a negative number, an amount equal to the net interest payments made by Debtor to Sellers pursuant to this Note during the applicable Note Adjustment Period, minus the Note Adjusted Interest. 1.9 "Remaining Note Principal" means, on a given date, an amount equal to the principal of this Note minus any principal payments made by Debtor to Sellers pursuant to this Note prior to such date, plus any Note Adjustment Amounts and Note Interest Adjustment Amounts determined pursuant to Sections 1.7 and 1.8 hereof prior to such date. 2. Payments. Debtor shall make payments under this Note as follows: 2.1 Interest Accrual. Interest shall begin to accrue on the principal balance of this Note from the date of execution of this Note. All interest that accrues from the date of execution of this Note until December 31, 2004 shall be added to the then outstanding principal balance of this Note on the date the Quarterly Installment (as defined below) would otherwise have been due, as set forth below. 2.2 Quarterly Installments of Principal and Interest. Commencing on January 1, 2005 and on the first day of each quarterly period thereafter (March, June, September, December) through and including December 1, 2008, Debtor shall make quarterly installment payments of principal and interest to Lender with such installments based on the Remaining Note Principal outstanding at the beginning of such quarter -- 95 -- amortized in quarterly installments over the remaining term (the "Quarterly Installments"). The annual principal adjustments described in Section 1.5 of this Note shall adjust the principal balance of this Note, if at all, on February 1 of the year in which such adjustment occurs. 2.3 Maturity. Anything in this Note to the contrary notwithstanding, absent earlier acceleration upon an Event of Default, all then outstanding principal and accrued and unpaid interest and all other amounts due under this Note shall be due and payable to Lender in full on December 31, 2008 (the "Maturity Date"). 2.4 Two Annual Principal Adjustments. The principal balance of this Note shall be adjusted annually for each of the first two years after the date of execution of this Note, in the manner described below. The adjustment for Note Adjustment Period A shall take place on February 1, 2005 ("Determination Date A") and the adjustment for Note Adjustment Period B shall take place on February 1, 2006 ("Determination Date B"). Debtor shall be responsible for calculating the Note Adjustment Amount for each Note Adjustment Period, all of which calculations shall be made in good faith, in accordance with the requirements set forth in this Note, and utilizing commercially reasonable standards of care. Debtor shall provide Lenders with written notice of its findings and reasonable financial support for its calculations on or before the applicable Determination Date. 2.4.1 Year One Adjustment. (a) Positive Adjustment. If the Pivotal Business for Note Adjustment Period A generates a positive Note Adjustment Amount, the Remaining Note Principal shall be increased in an amount equal to the Note Adjustment Amount plus an amount equal to the Note Interest Adjustment Amount, and Debtor shall make all payments under this Note subsequent to Determination Date A in accordance with such adjusted Remaining Note Principal. So for example, if the Adjusted EBITDA for Note Adjustment Period A equals $850,000, then the Remaining Note Principal shall be increased by $70,000 ($850,000 - $780,000 = $70,000). (b) Negative Adjustment. If the Pivotal Business generates an Adjusted EBITDA of less than the Base Amount during Note Adjustment Period A, then, subject to the provisions of Section 2.4.1(c) below, the Remaining Note Principal shall be decreased by an amount equal to the Note Adjustment Amount minus an amount equal to the Note Interest Adjustment Amount, and Debtor shall make all payments under this Note subsequent to Determination Date A in accordance with such adjusted Remaining Note Principal. So for example, if the Adjusted EBITDA for Note Adjustment Period A equals $700,000, then the Remaining Note Principal shall be decreased by $80,000 ($700,000 - $780,000 = ($80,000)) -- 96 -- (c) Adjustment Review. If, in the case of a Note Adjustment Amount to which Section 2.4.1(b) applies, such Note Adjustment Amount is equal to or greater than $50,000, then the CEO of the Pivotal Business shall meet with the CEO of PHC and, in good faith, determine the amount of salary related expenses borne by the Pivotal Business that reasonably could have been allocated to activities other than the Pivotal Business (e.g., a percentage of the salaries of employees that were spending a portion of their time supporting the development of Debtor's other clinical research sites and operations) (hereinafter referred to as the "Estimated Allocation") and the principal balance of the Note shall be reduced by an amount equal to the Base Amount minus the Adjusted EBITDA plus the Estimated Allocation, if any. Notwithstanding anything herein to the contrary, if after the Estimated Allocation is added to the Adjusted EBITDA the result is that there exists an overage that under normal circumstances would result in a positive adjustment to the face value of this Note, then the principal balance of this Note will not be adjusted and no overage adjustment will be made except to satisfy any shortfalls in any prior or any future years. Notwithstanding anything in this Note to the contrary, if the Pivotal Business generates an Adjusted EBITDA of less than the Base Amount during the above referenced period, and if Debtor has increased the salary or salaries of any employees of the Pivotal Business by an amount that exceeds the standard salary increase, then the Adjusted EBITDA for such period shall be increased by an amount equal to the salary increases actually granted by Debtor to the employees of the Pivotal Business minus standard salary increase. 2.4.2 Year Two Adjustment: (a) Positive Adjustment. If the Pivotal Business for Note Adjustment Period B generates a positive Note Adjustment Amount, the Remaining Note Principal shall be increased in an amount equal to the Note Adjustment Amount plus an amount equal to the Note Interest Adjustment Amount, and Debtor shall make all payments under this Note subsequent to Determination Date B in accordance with such adjusted Remaining Note Principal. So for example, if the Adjusted EBITDA for Note Adjustment Period B equals $850,000, then the Remaining Note Principal shall be increased by $70,000 ($850,000 - $780,000 = $70,000). (b) Negative Adjustment. If the Pivotal Business generates an Adjusted EBITDA of less than the Base Amount during Note Adjustment Period B, then subject to the provisions of Section 2.4.2 (c) below, the Remaining Note Principal shall be decreased by an amount equal to the Note Adjustment Amount minus an amount equal to the Note Interest Adjustment Amount, and Debtor shall make all payments under this Note subsequent to Determination Date B in accordance with such adjusted Remaining Note Principal. So for example, if the -- 97 -- Adjusted EBITDA for Note Adjustment Period B equals $700,000, then the Remaining Note Principal shall be decreased by $80,000 ($700,000 - $780,000 = ($80,000)). (c) Adjustment Review. If, in the case of a Note Adjustment Amount to which Section 2.4.2(b) applies, such Note Adjustment Amount is equal to or greater than $50,000, then the CEO of the Pivotal Business shall meet with the CEO of PHC and, in good faith, determine the amount of salary related expenses borne by the Pivotal Business that reasonably could have been allocated to activities other than the Pivotal Business (e.g., a percentage of the salaries of employees that were spending a portion of their time supporting the development of Debtor's other clinical research sites and operations) (hereinafter referred to as the "Estimated Allocation") and the principal balance of the Note shall be reduced by an amount equal to the Base Amount minus the Adjusted EBITDA plus the Estimated Allocation, if any. Notwithstanding anything herein to the contrary, if after the Estimated Allocation is added to the Adjusted EBITDA the result is that there exists an overage that under normal circumstances would result in a positive adjustment to the face value of this Note, then the principal balance of this Note will not be adjusted and no overage adjustment will be made except to satisfy any shortfalls in any prior or any future years. Notwithstanding anything in this Note to the contrary, if the Pivotal Business generates an Adjusted EBITDA of less than the Base Amount during the above referenced period, and if Debtor has increased the salary or salaries of any employees of the Pivotal Business by an amount that exceeds the standard salary increase, then the Adjusted EBITDA for such period shall be increased by an amount equal to the salary increases actually granted by Debtor to the employees of the Pivotal Business minus the standard salary increase. 2.4.3 "Freeze" of Remaining Principal. In the event (i) Debtor breaches its obligation to maintain the Line of Credit as set forth in Section 3.5 of the Purchase Agreement, (ii) Debtor terminates an Executive without Cause, as defined in the applicable Employment Agreement, or (iii) an Executive terminates his employment with Debtor for Good Reason, as defined in the applicable Employment Agreement, then, in such event, the Remaining Principal shall, at Lender's option, no longer be subject to adjustment pursuant to this Section 2.4.3 (a "freeze") provided that Lender provides to Debtor written notice, within thirty (30) days of the first to occur of items (i), (ii) or (iii) above, of the Lender's desire to freeze the Remaining Principal (the "Election Term"). If an election is made under this Section 2.4.3 to freeze the Remaining Principal, then the date upon which such Remaining Principal shall be deemed to have been frozen shall the on the first to occur of items (i), (ii) or (iii) above. Notwithstanding the foregoing, Lender shall not be entitled to accelerate payment under this Note based solely on the occurrence of items (ii) or (iii) above. -- 98 -- 3. Adjustments to Reflect Actual Collections. If the actual cash collections of the Pivotal Business during Note Adjustment Period A shall be less than the EBITDA of the Pivotal Business utilized for purposes of determining principal adjustments under this Note for such Note Adjustment Period, then, for purposes of making the Year Two Adjustment, Adjusted EBITDA for Adjustment Period B will be reduced by an amount equal to the shortfall. 4. Application. All payments received by Lender under this Note shall be applied as follows: (a) first, to any amounts due under this Note, other than interest and principal accrued or outstanding under this Note; (b) second, to accrued and unpaid interest under this Note; and (c) third, to the outstanding principal balance of this Note. 5. Prepayment. Debtor may prepay the principal balance of this Note in whole or in part at any time. 6. Related Documents. The transaction evidenced by this Note is also evidenced and secured by: (a) the Security Agreement; (b) the Financing Statements; and (c) the Pledge Agreement. 7. Additional Indebtedness. Debtor shall not incur any material indebtedness related to the Pivotal Business except the indebtedness resulting from the Acquisition Financing or the Line of Credit. 8. Compliance with Covenants. Debtor will provide the Line of Credit to the Pivotal Business in the manner described in the Purchase Agreement. Debtor's breach of that obligation under the Purchase Agreement, and Debtor's failure to cure such breach within the Cure Period specified in the Purchase Agreement, shall be deemed an Event of Default under the terms of this Note. 9. Prohibition on PHC's Corporate Overhead Charges. PHC will not impose any corporate level overhead charges or expenses upon the Pivotal Business as provided in Section 3.10 of the Purchase Agreement. If, for any reason, the Pivotal Business pays any PHC corporate level overhead charge on the Pivotal Business in violation of Section 3.10 of the Purchase Agreement, then notwithstanding anything to the contrary in this Note, the Adjusted EBITDA for the period during which such charges are paid shall be increased by an amount equal to the corporate level overhead charges paid by the Pivotal Business as determined in accordance with the Purchase Agreement. 10. Default. 10.1 Events of Default. The existence of any one or more of the following shall constitute an "Event of Default" under this Note: 10.1.1 Non-Payment. Debtor's failure to make any payment to Lender under this or any of the other Notes, including, without limitation, any Quarterly Installment or Annual Installment, as applicable, on or before the date such payment is due; or 10.1.2 Non-Performance. Debtor's failure to comply timely and fully with (i) any other provision of this Note or any of the other Notes (other than those described in Section 10.1.1 above) within ten (10) calendar days after Lender's delivery of written notice -- 99 -- of non-performance, or, with respect to Section 9 of this Note, within the cure period specified in the Purchase Agreement. 10.1.3 Bankruptcy; Insolvency. (a) Debtor making a general assignment for the benefit of creditors; (b) the filing by Debtor of a voluntary petition or application for a custodian, as defined by the United States Bankruptcy Code, or for the appointment of a receiver; (c) the filing against Debtor of an involuntary petition or case under any state insolvency law of the United States Bankruptcy Code, including, without limitation, for the appointment of a receiver, and the petition or case remains pending for more than 60 days or the court in which such petition or case is pending approves it or Debtor is adjudicated a bankrupt or becomes a debtor or debtor in possession in any such proceeding; or (d) the commencement, under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, of proceedings for the relief of Debtor or for the composition, or arrangement of a substantial portion of the obligations of Debtor or affecting the property of Debtor. 10.1.4 Assignment; Change in Control. Debtor shall not assign this Note or its obligations hereunder without the prior written consent of Lender except in conjunction with a transaction described in Section 10.10 of the Purchase Agreement. 10.2 Default Interest. Upon the occurrence and continuance of an Event of Default, at the option of Lender without notice to Debtor, all amounts then unpaid under this Note and the Transaction Documents shall bear default interest at the rate of 15% per annum (the "Default Interest Rate") commencing on the initial due date of the failed payment or performance constituting the Event of Default. Interest at the Default Interest Rate shall continue for so long as the Event of Default shall remain uncured and shall be payable monthly on the same day that the Quarterly Installments are due under Section 2.2, or at the Maturity Date, including any maturity as the result of the acceleration of this Note. 10.3 Acceleration. In addition to all other rights and remedies Lender may have if an Event of Default shall occur and (i) shall not have been cured within the applicable cure period or, (ii) if no cure period, shall continue for a period of 10 calendar days, Lender, at its option without further notice to Debtor, may declare immediately due and payable the Remaining Note Principal and interest accrued thereon together with all other sums owed by Debtor under this Note and any other Notes. Lender shall not be entitled to exercise its right to accelerate payment of this Note, as provided in this Section 10.3, during any period when Kirby or Michael J. Colombo are not in compliance with their obligations under Section 3 of the applicable Employment Agreement, or Kirby, Colombo and Bonacci are not in compliance with their obligations under Article IV of the Purchase Agreement. 11. Remedies Cumulative. The remedies provided in this Note and the other Notes shall be cumulative and concurrent and may be pursued singly, successively or together, at the sole discretion of affected party, and may be exercised as often as occasion therefore shall occur. The exercise or the failure to -- 100 -- exercise any such right or remedy shall in no event be construed as a waiver or release thereof. 12. Enforcement Costs. If Lender brings suit on any of the Notes or employs an attorney or incurs expenses to interpret or enforce this Note or otherwise to compel payment of any amounts due under this Note or to defend the priority of any of the collateral evidenced by the Pledge Agreement or the Security Agreement, or to preserve and enforce its rights in connection with any bankruptcy or other proceeding, Debtor shall pay all reasonable attorneys' fees, costs and expenses actually incurred by Lender as a result thereof. Lender shall be entitled to enforce this Note in any court of competent jurisdiction and shall not be bound by the arbitration provisions set forth in the Purchase Agreement. 13. Maximum Rate of Interest. The undersigned acknowledges that the undersigned has agreed to the rate of interest represented by the Note Rate and the Default Interest Rate (as applicable). Any provision in this Note to the contrary notwithstanding, the total liability for payments of interest and payments in the nature of interest, including, without limitation, all charges, fees or any sums that may at any time be deemed to be interest by a court of competent jurisdiction, shall not exceed the amount Lender may lawfully collect. If the total liability for payments of interest and payments in the nature of interest, including, without limitation, all charges, fees or other sums that may at any time be deemed to be interest, shall, for any reason whatsoever, result in an effective rate of interest that for any month or other interest payment period exceeds the amount Lender may lawfully collect, all sums in excess of those lawfully collectible as interest for the period in question automatically shall, without further notice to Debtor, be applied as a reduction of the then outstanding principal balance of this Note or any other amounts due under this Note (other than interest) immediately upon receipt of such sums by Lender, with the same force and effect as if Debtor had specifically designated such excess sums to be so applied to the reduction of such principal balance or such other amounts due; provided, however, that Lender may elect, at any time and from time to time by notice in writing to Debtor, to waive, reduce or limit the collection of any sums (or to refund to Debtor any sums collected) in excess of those lawfully collectible as interest rather than accept such sums on prepayment of the principal balance of this Note or as payment of such other amounts. 14. Notices. All notices or other communications hereunder shall be made in accordance with Section 10.6 of the Purchase Agreement. 15. Waiver of Notice. Debtor hereby waives diligence, grace, demand, presentment for payment, protest, notice of protest, notice of dishonor, notice of demand, notice of nonpayment, exercise of any option hereunder, any homestead or exemption rights and any release or discharge arising from any extension or extensions of time of payment of this Note any other cause of release or discharge arising from any extension or extension of time of payment of this Note, or any other cause of release or discharge other than actual payment in full hereof. 16. No Waiver by Lender. Lender shall not be deemed, by an act of omission or commission, to have waived any of its rights or remedies under this Note unless such waiver is in writing and signed by Lender, and then only to the extent specifically set forth in such writing. The acceptance by Lender of -- 101 -- any payment hereunder that is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of Lender's remedies under this Note at that time or at any subsequent time or nullify any prior exercise of any such remedies without the express written consent of Lender, except as and to the extent otherwise provided by law. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. 17. Transfer by Lender. The term "Lender," as used in this Note, as far as covenants or obligations on the part of Lender are concerned, shall include Lender, and any heirs, successors, assigns or future holders. Except as otherwise provided herein or in the Purchase Agreement, Lender may transfer all or part of its interest in this Note or any of the other Transaction Documents without the consent of Debtor and such act or subsequent act shall not be deemed in violation on Lender's part of any of the terms and conditions of this Note or the other Transaction Documents. Upon any transfer by Lender, at Lender's option, Lender may surrender this Note to Debtor for issuance to transferee of a new instrument in replacement of this Note. In the event of any surrender of this Note to Debtor for reissuance or replacement as provided in the immediately preceding sentence, Debtor shall, contemporaneously with such surrender, reissue the Note acknowledging the transferee as the new "Lender" hereunder or, if requested by Lender, execute and deliver to the transferee a replacement Note identical to this Note except identifying the transferee as the Lender hereunder, and Debtor's failure to do so shall be an Event of Default under this Note. 18. Severability. If any term or provision of this Note shall, to any extent, be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Note shall not be affected thereby, but such term or provision shall be reduced or otherwise modified by such court or authority only to the minimum extent necessary to make it valid and enforceable, and each term and provision of this Note shall be valid and enforceable to the fullest extent permitted by law. If any term or provision cannot be reduced or modified to make it reasonable and permit its enforcement, it shall be severed from this Note and the remaining terms shall be interpreted in such a way as to give maximum validity and enforceability to this Note. It is the intention of the parties hereto that if any provision of this Note is capable of two constructions, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the meaning which renders it valid. 19. Acknowledgments. Debtor acknowledges that, except as otherwise provided in Section 10.1 of the Purchase Agreement: (a) with respect to the amounts payable to Lender under this Note, that Debtor has no offset, defense or counterclaim with respect thereto, no claim against Lender or with respect to any document forming part of the transaction in respect of which this Note was made or forming part of any other transaction under which the undersigned is indebted to Lender; and (b) all interest imposed under this Note through the date hereof, and all fees and other charges that have been collected from or imposed with respect to this Note were and are agreed to, and were properly computed from or imposed with respect to this Note were and are agreed to, and were properly computed and collected. -- 102 -- 20. Headings and Captions. The headings and captions in this Note are for convenience of reference only and shall in no way alter or modify the terms of this Note. 21. Governing Law. This Note and the Transaction Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of Arizona except for conflict of Law principles in the event of a conflict between the defined terms of this Note and those of the Purchase Agreement, in which case Delaware Law shall govern the interpretation of the defined term. 22. Time of Essence. Time is of the essence of this Note. PHC, Inc. A Massachusetts corporation By: /s/ Bruce A. Shear ________________________________ Bruce Shear, President -- 103 -- STATE OF MASSACHUSETTS) SS County of Essex) On this __ day of February, 2004, before me, the undersigned officer, personally appeared Bruce Shear, who acknowledged himself to be President of PHC, Inc., a Massachusetts corporation and that he, in such capacity, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the company by himself. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Janet Esterkes Notary Public My Commission Expires: March 12, 2010 -- 104 -- EX-10 7 ex10_31.txt SECURTED PROMISSORY NOTE $500,000.00 Exhibit 10.31 SECURED PROMISSORY NOTE $500,000.00 April 30, 2004 Note B Phoenix, Arizona FOR VALUE RECEIVED, PHC, Inc., a Massachusetts corporation ("PHC") agrees and promises to pay to the order of Louis C. Kirby ("Kirby"), Carol A. Colombo ("Colombo") and Anthony A. Bonacci ("Bonacci"), or their heirs, successors and assigns (Kirby, Colombo and Bonacci may be collectively referred to herein as "Lenders" or individually as a "Lender"), the principal sum of $500,000 with interest accruing on a daily basis on the unpaid principal balance from time to time outstanding from the date hereof at the rate of six percent (6%) per annum, compounded annually (the "Note Rate"), interest to be calculated on a 360-day year, both principal and interest being payable to Lender at Lenders' respective accounts at 1st National Bank of Arizona, 7150 East Camelback Road, Ste. 275, Scottsdale, AZ 85251, Attention: Mr. Joe Botero, or at such other address as Lender may designate by notice from time to time, without presentment for payment, diligence, grace, exhibition of this Note, protest, or special notice of any kind, all of which are hereby expressly waived. For purposes of this Note, PHC shall be referred to as "Debtor." The unpaid balance of this Note at any time shall be the then current Remaining Note Principal (as defined herein), plus interest accrued thereon and costs, expenses and fees chargeable hereunder, which balance may be endorsed hereon from time to time by the holder hereof. The term of this Note will be five (5) years, commencing on the date of execution of this Note. All payments due under this Note will be paid by Debtor to each Lender pro-rata, calculated by multiplying the applicable payment amount by each Lender's Percentage Interest. 1. Definitions. 1.1 Generally. All capitalized terms not defined herein shall have the meanings set forth in that certain Membership Purchase Agreement (the "Purchase Agreement") between PHC, Pivotal Research Centers, L.L.C. ("Pivotal"), and Lenders of even date herewith. 1.2 "EBITDA" for any applicable period means the earnings of the Pivotal Business before interest, taxes, depreciation or amortization, determined in accordance with GAAP. For purposes of determining the EBITDA of the Pivotal Business, all costs attributable to the Non-Pivotal Business shall not be included regardless where such cost is incurred. 1.3 "Adjusted EBITDA" means an amount equal to the sum (without duplication) of (i) all bonuses paid to employees of Pivotal (including but not limited to Michael J. Colombo and Louis C. Kirby), plus (ii) the EBITDA generated by the Pivotal Business during the applicable Note Adjustment Period, plus (iii) the sum of all principal and interest payments, if any, made by the Pivotal Business to repay any portion of the Acquisition Financing, the Line of Credit, and the Notes, plus (iv) any corporate level overhead charges assessed against the Pivotal Business by PHC in violation of the provisions of Section 3.10 of the Purchase Agreement. -- 105 -- 1.4 "Base Amount" means $780,000 (U.S.). 1.5 "Note Adjustment Amount" means an amount equal to the Adjusted EBITDA of the Pivotal Business at the conclusion of the applicable Note Adjustment Period minus the Base Amount, provided however, that if the Note Adjustment Amount is a negative number, then the procedures set forth in Section 2.4.1(c), as applicable, of this Note shall be applied to determine the Note Adjustment Amount. 1.6 "Note Adjusted Interest" means, in the case of any Determination Date where a Note Adjustment Amount is a negative number, the lesser amount of Interest that would have otherwise been due and payable under this Note during the applicable Note Adjustment Period if the Principal was reduced by an amount equal to the Note Adjustment Amount. In the case of any Determination Date where a Note Adjustment Amount is a positive number, "Note Adjusted Interest" means the greater amount of Interest that would have otherwise been due and payable under this Note during the applicable Note Adjustment Period if the Principal was increased by an amount equal to the Note Adjustment Amount. 1.7 "Note Adjustment Period" means the period commencing on January 1, 2006 and ending on December 31, 2006. 1.8 "Note Interest Adjustment Amount" means (a) in the case the Note Adjusted Interest for the Note Adjustment Period is a positive number, an amount equal to the net interest payments made by Debtor to Sellers pursuant to this Note during the Note Adjustment Period, plus the Note Adjusted Interest, or (b) in the case the Note Adjusted Interest for the Note Adjustment Period is a negative number, an amount equal to the net interest payments made by Debtor to Sellers pursuant to this Note during the applicable Note Adjustment Period, minus the Note Adjusted Interest. 1.9 "Remaining Note Principal" means, on a given date, an amount equal to the principal of this Note minus any principal payments made by Debtor to Sellers pursuant to this Note prior to such date, plus any Note Adjustment Amounts and Note Interest Adjustment Amounts determined pursuant to Sections 1.7 and 1.8 hereof prior to such date. 2. Payments. Debtor shall make payments under this Note as follows: 2.1 Interest Accrual. Interest shall begin to accrue on the principal balance of this Note from the date of execution of this Note. All interest that accrues from the date of execution of this Note until December 31, 2006 shall be added to the then outstanding principal balance of this Note on the date the Quarterly Installment (as defined below) would otherwise have been due, as set forth below. -- 106 -- 2.2 Quarterly Installments of Principal and Interest. Commencing on January 1, 2007 and on the first day of each quarterly period thereafter (March, June, September, December) through and including December 1, 2008, Debtor shall make quarterly installment payments of principal and interest to Lender with such installments based on the Remaining Note Principal outstanding at the beginning of such quarter amortized in quarterly installments over the remaining term (the "Quarterly Installments"). The annual principal adjustments described in Section 1.5 of this Note shall adjust the principal balance of this Note, if at all, on February 1 of the year in which such adjustment occurs. 2.3 Maturity. Anything in this Note to the contrary notwithstanding, absent earlier acceleration upon an Event of Default, all then outstanding principal and accrued and unpaid interest and all other amounts due under this Note shall be due and payable to Lender in full on December 31, 2008 (the "Maturity Date"). 2.4 One Annual Principal Adjustment. The principal balance of this Note shall be adjusted on February 1, 2006 (the "Determination Date") in the manner described below. Debtor shall be responsible for calculating the Note Adjustment Amount for the Note Adjustment Period, all of which calculations shall be made in good faith, in accordance with the requirements set forth in this Note, and utilizing commercially reasonable standards of care. Debtor shall provide Lenders with written notice of its findings and reasonable financial support for its calculations on or before the applicable Determination Date. 2.4.1 Adjustment: (a) Positive Adjustment. If the Pivotal Business for the Note Adjustment Period generates a positive Note Adjustment Amount, the Remaining Note Principal shall be increased in an amount equal to the Note Adjustment Amount plus an amount equal to the Note Interest Adjustment Amount, and Debtor shall make all payments under this Note subsequent to Determination Date in accordance with such adjusted Remaining Note Principal. So for example, if the Adjusted EBITDA for Note Adjustment Period equals $850,000, then the Remaining Note Principal shall be increased by $70,000 ($850,000 - $780,000 = $70,000). (b) Negative Adjustment. If the Pivotal Business generates an Adjusted EBITDA of less than the Base Amount during the Note Adjustment Period, then, subject to the provisions of Section 2.4.1(c) below, the Remaining Note Principal shall be decreased by an amount equal to the Note Adjustment Amount minus an amount equal to the Note Interest Adjustment Amount, and Debtor shall make all payments under this Note subsequent to Determination Date in accordance with such adjusted Remaining Note Principal. So for example, if the Adjusted EBITDA for Note Adjustment Period equals $700,000, then the Remaining Note Principal shall be decreased by $80,000 ($700,000 - $780,000 = ($80,000)). -- 107 -- (c) Adjustment Review. If, in the case of a Note Adjustment Amount to which Section 2.4.1(b) applies, such Note Adjustment Amount is equal to or greater than $50,000, then the CEO of the Pivotal Business shall meet with the CEO of PHC and, in good faith, determine the amount of salary related expenses borne by the Pivotal Business that reasonably could have been allocated to activities other than the Pivotal Business (e.g., a percentage of the salaries of employees that were spending a portion of their time supporting the development of Debtor's other clinical research sites and operations) (hereinafter referred to as the "Estimated Allocation") and the principal balance of the Note shall be reduced by an amount equal to the Base Amount minus the Adjusted EBITDA plus the Estimated Allocation, if any. Notwithstanding anything herein to the contrary, if after the Estimated Allocation is added to the Adjusted EBITDA the result is that there exists an overage that under normal circumstances would result in a positive adjustment to the face value of this Note, then the principal balance of this Note will not be adjusted and no overage adjustment will be made except to satisfy any shortfalls in any prior or any future years. Notwithstanding anything in this Note to the contrary, if the Pivotal Business generates an Adjusted EBITDA of less than the Base Amount during the above referenced period, and if Debtor has increased the salary or salaries of any employees of the Pivotal Business by an amount that exceeds the standard salary increase, then the Adjusted EBITDA for such period shall be increased by an amount equal to the salary increases actually granted by Debtor to the employees of the Pivotal Business minus standard salary increase. 2.4.2 "Freeze" of Remaining Principal. In the event (i) Debtor breaches its obligation to maintain the Line of Credit as set forth in Section 3.5 of the Purchase Agreement, (ii) Debtor terminates an Executive without Cause, as defined in the applicable Employment Agreement, or (iii) an Executive terminates his employment with Debtor for Good Reason, as defined in the applicable Employment Agreement, then, in such event, the Remaining Principal shall, at Lender's option, no longer be subject to adjustment pursuant to this Section 2.4 (a "freeze") provided that Lender provides to Debtor written notice, within thirty (30) days of the first to occur of items (i), (ii) or (iii) above, of the Lender's desire to freeze the Remaining Principal (the "Election Term"). If an election is made under this Section 2.4.2 to freeze the Remaining Principal, then the date upon which such Remaining Principal shall be deemed to have been frozen on the first to occur of items (i), (ii) or (iii) above. Notwithstanding the foregoing, Lender shall not be entitled to accelerate payment under this Note based solely on the occurrence of items (ii) or (iii) above. 2.4.3 Adjustments to Reflect Actual Collections. If the actual cash collections of the Pivotal Business during the Note Adjustment Period shall be less than the EBITDA of the Pivotal Business utilized for purposes of determining principal adjustments under this Note for the Note Adjustment Period, then Adjusted EBITDA for the next year's earn-out calculation will be reduced by an amount equal to the shortfall. -- 108 -- 3. Application. All payments received by Lender under this Note shall be applied as follows: (a) first, to any amounts due under this Note, other than interest and principal accrued or outstanding under this Note; (b) second, to accrued and unpaid interest under this Note; and (c) third, to the outstanding principal balance of this Note. 4. Prepayment. Debtor may prepay the principal balance of this Note in whole or in part at any time. 5. Related Documents. The transaction evidenced by this Note is also evidenced and secured by: (a) the Security Agreement; (b) the Financing Statements; and (c) the Pledge Agreement. 6. Additional Indebtedness. Debtor shall not incur any material indebtedness related to the Pivotal Business except the indebtedness resulting from the Acquisition Financing or the Line of Credit. 7. Compliance with Covenants. Debtor will provide the Line of Credit to the Pivotal Business in the manner described in the Purchase Agreement. Debtor's breach of that obligation under the Purchase Agreement, and Debtor's failure to cure such breach within the Cure Period specified in the Purchase Agreement, shall be deemed an Event of Default under the terms of this Note. 8. Prohibition on PHC's Corporate Overhead Charges. PHC will not impose any corporate level overhead charges or expenses upon the Pivotal Business as provided in Section 3.10 of the Purchase Agreement. If, for any reason, the Pivotal Business pays any PHC corporate level overhead charge on the Pivotal Business in violation of Section 3.10 of the Purchase Agreement, then notwithstanding anything to the contrary in this Note, the Adjusted EBITDA for the period during which such charges are paid shall be increased by an amount equal to the corporate level overhead charges paid by the Pivotal Business as determined in accordance with the Purchase Agreement. 9. Default. 9.1 Events of Default. The existence of any one or more of the following shall constitute an "Event of Default" under this Note: 9.1.1 Non-Payment. Debtor's failure to make any payment to Lender under this or any of the other Notes, including, without limitation, any Quarterly Installment or Annual Installment, as applicable, on or before the date such payment is due; or 9.1.2 Non-Performance. Debtor's failure to comply timely and fully with (i) any other provision of this Note or any of the other Notes (other than those described in Section 9.1.1 above) within ten (10) calendar days after Lender's delivery of written notice of non-performance, or, with respect to Section 9 of this Note, within the cure period specified in the Purchase Agreement. 9.1.4 Bankruptcy; Insolvency. (a) Debtor making a general assignment for the benefit of creditors; (b) the filing by Debtor of a voluntary petition or application for a custodian, as defined by the United States Bankruptcy Code, or for the appointment of a receiver; (c) the filing against Debtor of an involuntary petition or case under any state insolvency law of the United States Bankruptcy Code, including, -- 109 -- without limitation, for the appointment of a receiver, and the petition or case remains pending for more than 60 days or the court in which such petition or case is pending approves it or Debtor is adjudicated a bankrupt or becomes a debtor or debtor in possession in any such proceeding; or (d) the commencement, under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, of proceedings for the relief of Debtor or for the composition, or arrangement of a substantial portion of the obligations of Debtor or affecting the property of Debtor. 9.1.5 Assignment; Change in Control. Debtor shall not assign this Note or its obligations hereunder without the prior written consent of Lender except in conjunction with a transaction described in Section10.10 of the Purchase Agreement. 9.2 Default Interest. Upon the occurrence and continuance of an Event of Default, at the option of Lender without notice to Debtor, all amounts then unpaid under this Note and the Transaction Documents shall bear default interest at the rate of 15% per annum (the "Default Interest Rate") commencing on the initial due date of the failed payment or performance constituting the Event of Default. Interest at the Default Interest Rate shall continue for so long as the Event of Default shall remain uncured and shall be payable monthly on the same day that the Quarterly Installments are due under Section 2.2, or at the Maturity Date, including any maturity as the result of the acceleration of this Note. 9.3 Acceleration. In addition to all other rights and remedies Lender may have if an Event of Default shall occur and (i) shall not have been cured within the applicable cure period or, (ii) if no cure period, shall continue for a period of 10 calendar days, Lender, at its option without further notice to Debtor, may declare immediately due and payable the Remaining Note Principal and interest accrued thereon together with all other sums owed by Debtor under this Note and any other Notes. Lender shall not be entitled to exercise its right to accelerate payment of this Note, as provided in this Section 9.3, during any period when Kirby or Michael J. Colombo are not in compliance with their obligations under Section 3 of the applicable Employment Agreement, or Kirby, Colombo and Bonacci are not in compliance with their obligations under Article IV of the Purchase Agreement. 10. Remedies Cumulative. The remedies provided in this Note and the other Notes shall be cumulative and concurrent and may be pursued singly, successively or together, at the sole discretion of affected party, and may be exercised as often as occasion therefore shall occur. The exercise or the failure to exercise any such right or remedy shall in no event be construed as a waiver or release thereof. 11. Enforcement Costs. If Lender brings suit on any of the Notes or employs an attorney or incurs expenses to interpret or enforce this Note or otherwise to compel payment of any amounts due under this Note or to defend the priority of any of the collateral evidenced by the Pledge Agreement or the Security Agreement, or to preserve and enforce its rights in connection with any bankruptcy or other proceeding, Debtor shall pay all reasonable attorneys' fees, costs and expenses actually incurred by Lender as a result thereof.. Lender shall be entitled to enforce this Note in any court of competent jurisdiction -- 110 -- and shall not be bound by the arbitration provisions set forth in the Purchase Agreement. 12. Maximum Rate of Interest. The undersigned acknowledges that the undersigned has agreed to the rate of interest represented by the Note Rate and the Default Interest Rate (as applicable). Any provision in this Note to the contrary notwithstanding, the total liability for payments of interest and payments in the nature of interest, including, without limitation, all charges, fees or any sums that may at any time be deemed to be interest by a court of competent jurisdiction, shall not exceed the amount Lender may lawfully collect. If the total liability for payments of interest and payments in the nature of interest, including, without limitation, all charges, fees or other sums that may at any time be deemed to be interest, shall, for any reason whatsoever, result in an effective rate of interest that for any month or other interest payment period exceeds the amount Lender may lawfully collect, all sums in excess of those lawfully collectible as interest for the period in question automatically shall, without further notice to Debtor, be applied as a reduction of the then outstanding principal balance of this Note or any other amounts due under this Note (other than interest) immediately upon receipt of such sums by Lender, with the same force and effect as if Debtor had specifically designated such excess sums to be so applied to the reduction of such principal balance or such other amounts due; provided, however, that Lender may elect, at any time and from time to time by notice in writing to Debtor, to waive, reduce or limit the collection of any sums (or to refund to Debtor any sums collected) in excess of those lawfully collectible as interest rather than accept such sums on prepayment of the principal balance of this Note or as payment of such other amounts. 13. Notices. All notices or other communications hereunder shall be made in accordance with Section 10.6 of the Purchase Agreement. 14. Waiver of Notice. Debtor hereby waives diligence, grace, demand, presentment for payment, protest, notice of protest, notice of dishonor, notice of demand, notice of nonpayment, exercise of any option hereunder, any homestead or exemption rights and any release or discharge arising from any extension or extensions of time of payment of this Note any other cause of release or discharge arising from any extension or extension of time of payment of this Note, or any other cause of release or discharge other than actual payment in full hereof. 15. No Waiver by Lender. Lender shall not be deemed, by an act of omission or commission, to have waived any of its rights or remedies under this Note unless such waiver is in writing and signed by Lender, and then only to the extent specifically set forth in such writing. The acceptance by Lender of any payment hereunder that is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of Lender's remedies under this Note at that time or at any subsequent time or nullify any prior exercise of any such remedies without the express written consent of Lender, except as and to the extent otherwise provided by law. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. 16. Transfer by Lender. The term "Lender," as used in this Note, as far as covenants or obligations on the part of Lender are concerned, shall include Lender, and any heirs, successors, assigns or future holders. Except as otherwise provided herein or in the Purchase Agreement, Lender may transfer all or part of its interest in this Note or any of the other Transaction Documents -- 111 -- without the consent of Debtor and such act or subsequent act shall not be deemed in violation on Lender's part of any of the terms and conditions of this Note or the other Transaction Documents. Upon any transfer by Lender, at Lender's option, Lender may surrender this Note to Debtor for issuance to transferee of a new instrument in replacement of this Note. In the event of any surrender of this Note to Debtor for reissuance or replacement as provided in the immediately preceding sentence, Debtor shall, contemporaneously with such surrender, reissue the Note acknowledging the transferee as the new "Lender" hereunder or, if requested by Lender, execute and deliver to the transferee a replacement Note identical to this Note except identifying the transferee as the Lender hereunder, and Debtor's failure to do so shall be an Event of Default under this Note. 17. Severability. If any term or provision of this Note shall, to any extent, be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Note shall not be affected thereby, but such term or provision shall be reduced or otherwise modified by such court or authority only to the minimum extent necessary to make it valid and enforceable, and each term and provision of this Note shall be valid and enforceable to the fullest extent permitted by law. If any term or provision cannot be reduced or modified to make it reasonable and permit its enforcement, it shall be severed from this Note and the remaining terms shall be interpreted in such a way as to give maximum validity and enforceability to this Note. It is the intention of the parties hereto that if any provision of this Note is capable of two constructions, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the meaning which renders it valid. 18. Acknowledgments. Debtor acknowledges that, except as otherwise provided in Section 10.1 of the Purchase Agreement: (a) with respect to the amounts payable to Lender under this Note, that Debtor has no offset, defense or counterclaim with respect thereto, no claim against Lender or with respect to any document forming part of the transaction in respect of which this Note was made or forming part of any other transaction under which the undersigned is indebted to Lender; and (b) all interest imposed under this Note through the date hereof, and all fees and other charges that have been collected from or imposed with respect to this Note were and are agreed to, and were properly computed from or imposed with respect to this Note were and are agreed to, and were properly computed and collected. 19. Headings and Captions. The headings and captions in this Note are for convenience of reference only and shall in no way alter or modify the terms of this Note. 20. Governing Law. This Note and the Transaction Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of Arizona except for conflict of Law principles in the event of a conflict between the defined terms of this Note and those of the Purchase Agreement, in which case Delaware Law shall govern the interpretation of the defined term. -- 112 -- 21. Time of Essence. Time is of the essence of this Note. PHC, Inc. A Massachusetts corporation By: /s/ Bruce A. Shear _________________________________ Bruce Shear, President -- 113 -- STATE OF MASSACHUSETTS) ) ss. County of Essex ) On this ____ day of February, 2004, before me, the undersigned officer, personally appeared Bruce Shear, who acknowledged himself to be President of PHC, Inc., a Massachusetts corporation and that he, in such capacity, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the company by himself. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Janet Esterkes Notary Public My Commission Expires: March 12, 2010 -- 114 -- EX-10 8 ex10_32.txt SECURED PROMISSORY NOTE $1,000,000.00 Exhibit 10.32 SECURED PROMISSORY NOTE $1,000,000.00 April 30, 2004 Note C Phoenix, Arizona FOR VALUE RECEIVED, PHC, Inc., a Massachusetts corporation ("PHC") agrees and promises to pay to the order of Louis C. Kirby ("Kirby"), Carol A. Colombo ("Colombo") and Anthony A. Bonacci ("Bonacci"), or their heirs, successors and assigns (Kirby, Colombo and Bonacci may be collectively referred to herein as the "Lender"), the principal sum of $1,000,000 payable to Lender at Lender's accounts at First National Bank of Arizona, 7150 E. Camelback Road, Ste. 275, Scottsdale AZ 85251, Attention: Mr. Joe Botero, or at such other address as Lender may designate by notice from time to time, without presentment for payment, diligence, grace, exhibition of this Note, protest, or special notice of any kind, all of which are hereby expressly waived. For purposes of this Note, PHC shall be referred to herein as "Debtor." The unpaid balance of this Note at any time shall be the then current Remaining Note Principal (as defined herein), plus interest accrued thereon and costs, expenses and fees chargeable hereunder, which balance may be endorsed hereon from time to time by the holder hereof. The term of this Note will be five (5) years and ninety (90) days, commencing on the date of execution of this Note. All payments due under this Note will be paid by Debtor to each Lender pro-rata, calculated by multiplying the applicable payment amount by each Lender's Percentage Interest. 1. Definitions. 1.1 Generally. All capitalized terms not defined herein shall have the meanings set forth in that certain Membership Purchase Agreement (the "Purchase Agreement") between PHC, Pivotal Research Centers, L.L.C. ("Pivotal"), and Lenders of even date herewith 1.2 "EBITDA" for any applicable Note Payment Period means the earnings of the Non-Pivotal Business before interest, taxes, depreciation or amortization and determined in accordance with GAAP. 1.3 "Adjusted EBITDA" means an amount equal to the sum (without duplication) of the EBITDA generated by the Non-Pivotal Business during the applicable Note Payment Period, plus (i) the sum of all principal and interest payments, if any, made by the Non-Pivotal Business to repay any portion of the Acquisition Financing, the Line of Credit, and the Notes, plus (ii) any corporate level overhead charges or expenses assessed against the Non-Pivotal Business by PHC in violation of the provisions of Section 3.10 of the Purchase Agreement. 1.4 "Note Payment Amount" means an amount equal to the (x) Adjusted EBITDA of the Non-Pivotal Business for the applicable Note Payment Period multiplied by (y) .35. 1.5 "Note C Shares" means a number of shares of PHC, Inc common stock equal to Two Hundred Thousand Dollars ($200,000.00) divided by the Closing Stock Price (as defined in the Purchase Agreement). -- 115 -- 1.6 "Note C Shortfall" means, with respect to this Note, an amount equal to $1,000,000 minus the sum of all Annual Installment payments made by Debtor during the term of this Note; provided, however, that no Note C Shortfall shall occur in the event the sum of all Annual Installment payments is equal to or greater than $1,000,000. 1.7 "Note Payment Period" means each of the five Note Payment Periods, the first of which shall commence on the date of execution of this Note and end on December 31, 2004 ("Note Payment Period 1"), the second of which shall commence on January 1, 2005 and end on December 31, 2005 ("Note Payment Period 2"), the third of which shall commence on January 1, 2006 and end on December 31, 2006 ("Note Payment Period 3"), the fourth of which shall commence on January 1, 2007 and end on December 31, 2007 ("Note Payment Period 4") and the fifth of which shall commence on January 1, 2008 and end on December 31, 2008 ("Note Payment Period 5"). 1.8 "Remaining Note Principal" means, on a given date, an amount equal to the principal of this Note minus the sum of all Note Payment Amounts paid by Debtor to Lender pursuant to this Note determined pursuant to Section 2.1 hereof prior to such date. 2. Payments. Debtor shall make payments under this Note as follows: 2.1 Annual Payments. Commencing on March 31, 2005 and on the first day of March each year thereafter through and including March 31, 2009, Debtor shall make annual principal installment payments to Lender (the "Annual Installments"), with such Annual Installments equal to the Note Payment Amount for the applicable Note Payment Period. So, for example, on or before March 31, 2005, Debtor shall pay to Lender an Annual Installment equal to the Note Payment Amount for Note Payment Period 1. All Annual Installment payments shall reduce, on a dollar for dollar basis, the Remaining Note Principal. Debtor shall be responsible for calculating the Note Payment Amount for each Note Payment Period, all of which calculations shall be made in good faith, in accordance with the requirements set forth in this Note, and utilizing commercially reasonable standards of care. Debtor shall provide Lenders with written notice of its findings and financial support for its calculations on or before the payment date of the applicable Annual Installment. 2.2 No Cap. Lender shall be entitled to receive payments under Section 2.1 of this Note that exceed the face amount of this Note, provided, however that all such payments that in the aggregate exceed the face amount of this Note shall be deemed to be interest income to Lender. 2.3 PHC Stock. Debtor covenants and agrees that the Note C Shares shall be freely tradable without restriction by December 31, 2008. If, under any circumstances whatsoever, Debtor has not made Annual Installment payments to Owners under Section 2.1 above totaling at least $1,000,000 by February 1, 2009, then Debtor shall deliver to Lender, pro rata, a number of Note C Shares in an amount equal to the Note C Shortfall divided by the Closing Stock Price, provided, however that Debtor's obligations relating to the Note C Shortfall shall not exceed the value of the Note C Shares. So, for example, if by March 31, 2009, -- 116 -- Lender has received Annual Installments under this Note totaling $800,000, then Debtor shall, on or before April 1, 2009, deliver to Lender, pro-rata, in accordance with each Lender's respective Percentage Interest, a number of Note C Shares in an amount equal to $200,000 ($1,000,000 - $800,000 = Note C Shortfall of $200,000) divided by the Closing Stock Price. 2.4 Registration Rights. With respect to all Note C Shares issued to Lender in accordance with the requirements of Section 2.3 above, PHC shall grant to Lender piggyback registration rights the terms and conditions of which must be mutually acceptable to Lender and Debtor, which rights shall become effective immediately upon the issuance of the Note C Shares to Lender. If PHC proposes to register any shares of PHC Stock, then on each such occasion, PHC shall notify Lender in writing ("Participation Notice") and give Lender the opportunity to participate in each such filing and register any Note C Shares then held by Lender. Lender's failure to respond affirmatively, in writing, to any such Participation Notice within ten (10) business days of its delivery shall be deemed a waiver of Lender's right to participate in the registration referenced in such Participation Notice. 3. Application. All payments received by Lender under this Note shall be applied as follows: (a) first to any unpaid charges or amounts due under this Note or the Transaction Documents, other than interest and principal accrued or outstanding under this Note, including without limitation, costs and expenses; (b) second to accrued and unpaid interest under this Note; and (c) third to the outstanding principal balance of this Note. 4. Adjustments to Reflect Actual Collections. If the actual cash collections of the Non-Pivotal Business during any Note Payment Period is less than the Adjusted EBITDA of the Non-Pivotal Business used for determining the Annual Installments, then, the Adjusted EBITDA of the subsequent Note Payment Period (or in the case of Note Payment Period Five, the final Annual Installment) shall be reduced by an amount equal to the shortfall for such Note Payment Period. 5. Prepayment. Debtor may prepay the principal balance of this Note in whole or in part at any time, provided, however, that Debtor shall have no right to prepay without Lender's prior written consent within the last 18 months of the expiration of the term of this Note. 6. Additional Documents. The transaction evidenced by the Notes is also evidenced and secured by: (a) the Security Agreement; (b) the Financing Statements; and (c) the Pledge Agreement. 7. Default. 7.1 Events of Default. The existence of any one or more of the following shall constitute an "Event of Default" under this Note: 7.1.1 Non-Payment. Debtor's failure to make any payment to Lender under any of Note A, Note B or Note C, including, without limitation, any Annual Installment or Quarterly Installment, as applicable, on or before the date such payment is due; or -- 117 -- 7.1.2 Non-Performance. Debtor's failure to comply timely and fully with any other provision of this Note or any of the other Notes (other than those described in Section 7.1.1 above) within ten (10) calendar days after Lender's delivery of written notice of non-performance. 7.1.3 Bankruptcy; Insolvency. (a) Debtor making a general assignment for the benefit of creditors; (b) the filing by Debtor of a voluntary petition or application for a custodian, as defined by the Untied States Bankruptcy Code, or for the appointment of a receiver; (c) the filing against Debtor of an involuntary petition or case under any state insolvency law of the United States Bankruptcy Code, including, without limitation, for the appointment of a receiver, and the petition or case remains pending for more than 60 days or the court in which such petition or case is pending approves it or Debtor is adjudicated a bankrupt or becomes a debtor or debtor in possession in any such proceeding; or (d) the commencement, under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, of proceedings for the relief of Debtor or for the composition, or arrangement of a substantial portion of the obligations of Debtor or affecting the property of Debtor. 7.1.4 Assignment; Change in Control. Debtor shall not assign this Note or its obligations hereunder without the prior consent of Lender except in conjunction with a transaction described in Section 10.10 of the Purchase Agreement. 7.2 Default Interest. Upon the occurrence and continuance of an Event of Default, at the option of Lender without notice to Debtor, all amounts then unpaid under this Note and the Transaction Documents shall bear default interest at the rate of 15% per annum (the "Default Interest Rate") commencing on the initial due date of the failed payment or performance constituting the Event of Default. Interest at the Default Interest Rate shall continue for so long as the Event of Default shall remain uncured and shall be payable monthly on the same day that the Annual Installments are due under Section 2.2, or at the Maturity Date, including any maturity as the result of the acceleration of this Note. 7.3 Acceleration. In addition to all other rights and remedies Lender may have if an Event of Default shall occur and (i) shall not have been cured within the applicable cure period or, (ii) if no cure period, shall continue for a period of 10 calendar days, Lender, at its option without further notice to Debtor, may declare immediately due and payable the Remaining Note Principal (which shall be equal to the face amount of this Note ($1,000,000) less any principal payments made by Debtor to Lender hereunder) and interest, if any, accrued thereon together with all other sums owed by Debtor under this Note and any other Notes. Lender shall not be entitled to exercise its right to accelerate payment of the Notes, as provided in this Section 7.3, during any period when Kirby or Michael J. Colombo is not in compliance with their respective obligations under Section 3 of their respective Employment Agreements, or Kirby, Colombo and Bonacci are not in compliance with their obligations under Article IV of the Purchase Agreement. -- 118 -- 8. Remedies Cumulative. The remedies of Lender, as provided in this Note and the other Notes, and the remedies of Lenders and Debtor, as provided in the Transaction Documents, shall be cumulative and concurrent and may be pursued singly, successively or together, at the sole discretion of Lender, and may be exercised as often as occasion therefore shall occur. The exercise or the failure to exercise any such right or remedy shall in no event be construed as a waiver or release thereof. 9. Enforcement Costs. If Lender brings suit on any of the Notes or employs an attorney or incurs expenses to interpret or enforce any Note or otherwise to compel payment of any amounts due under any Note or to defend the priority of any of the collateral evidenced by the Pledge Agreement or the Security Agreement or to preserve and enforce its rights in connection with any bankruptcy or other proceeding, Debtor shall pay all reasonable attorneys' fees, costs and expenses actually incurred by Lender as a result thereof. Lender shall be entitled to enforce any of the Notes in any court of competent jurisdiction and shall not be bound by the arbitration provisions set forth in the Purchase Agreement. 10. Maximum Rate of Interest. The undersigned acknowledges that the undersigned has agreed to the rate of interest represented by the Note Rate and the Default Interest Rate (as applicable). Any provision in this Note to the contrary notwithstanding, the total liability for payments of interest and payments in the nature of interest, including, without limitation, all charges, fees or any sums that may at any time be deemed to be interest by a court of competent jurisdiction, shall not exceed the amount Lender may lawfully collect. If the total liability for payments of interest and payments in the nature of interest, including, without limitation, all charges, fees or other sums that may at any time be deemed to be interest, shall, for any reason whatsoever, result in an effective rate of interest that for any month or other interest payment period exceeds the amount Lender may lawfully collect, all sums in excess of those lawfully collectible as interest for the period in question automatically shall, without further notice to Debtor, be applied as a reduction of the then outstanding principal balance of this Note or any other amounts due under this Note or the Transaction Documents (other than interest) immediately upon receipt of such sums by Lender, with the same force and effect as if Debtor had specifically designated such excess sums to be so applied to the reduction of such principal balance or such other amounts due; provided, however, that Lender may elect, at any time and from time to time by notice in writing to Debtor, to waive, reduce or limit the collection of any sums (or to refund to Debtor any sums collected) in excess of those lawfully collectible as interest rather than accept such sums on prepayment of the principal balance of this Note or as payment of such other amounts. 11. Notices. All notices or other communications hereunder shall be made in accordance with Section 10.6 of the Purchase Agreement. 12. Waiver of Notice. Debtor hereby waives diligence, grace, demand, presentment for payment, protest, notice of protest, notice of dishonor, notice of demand, notice of nonpayment, exercise of any option hereunder, any homestead or exemption rights and any release or discharge arising from any extension or extensions of time of payment of this Note any other cause of release or discharge arising from any extension or extension of time of payment of this Note, or any other cause of release or discharge other than actual payment in full hereof. -- 119 -- 13. No Waiver by Lender. Lender shall not be deemed, by an act of omission or commission, to have waived any of its rights or remedies under this Note or the Transaction Documents unless such waiver is in writing and signed by Lender, and then only to the extent specifically set forth in such writing. The acceptance by Lender of any payment hereunder that is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of Lender's remedies under this Note or the Transaction Documents at that time or at any subsequent time or nullify any prior exercise of any such remedies without the express written consent of Lender, except as and to the extent otherwise provided by law. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event. 14. Transfer by Lender. The term "Lender," as used in this Note, as far as covenants or obligations on the part of Lender are concerned, shall include Lender, and any heirs, successors, assigns or future holders. Except as otherwise provided herein or in the Transaction Documents, Lender may transfer all or part of its interest in this Note or any of the other Transaction Documents without the consent of Debtor and such act or subsequent act shall not be deemed in violation on Lender's part of any of the terms and conditions of this Note or the other Transaction Documents. Upon any transfer by Lender, at Lender's option, Lender may surrender this Note to Debtor for issuance to transferee of a new instrument in replacement of this Note. In the event of any surrender of this Note to Debtor for reissuance or replacement as provided in the immediately preceding sentence, Debtor shall, contemporaneously with such surrender, reissue the Note acknowledging the transferee as the new "Lender" hereunder or, if requested by Lender, execute and deliver to the transferee a replacement Note identical to this Note except identifying the transferee as the Lender hereunder, and Debtor's failure to do so shall be an Event of Default under this Note. 15. Severability. If any term or provision of this Note shall, to any extent, be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Note shall not be affected thereby, but such term or provision shall be reduced or otherwise modified by such court or authority only to the minimum extent necessary to make it valid and enforceable, and each term and provision of this Note shall be valid and enforceable to the fullest extent permitted by law. If any term or provision cannot be reduced or modified to make it reasonable and permit its enforcement, it shall be severed from this Note and the remaining terms shall be interpreted in such a way as to give maximum validity and enforceability to this Note. It is the intention of the parties hereto that if any provision of this Note is capable of two constructions, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the meaning which renders it valid. 16. Acknowledgments. Debtor acknowledges that: (a) with respect to the amounts payable to Lender under this Note, that Debtor has no offset, defense or counterclaim with respect thereto, no claim against Lender or with respect to any document forming part of the transaction in respect of which this Note was made or forming part of any other transaction under which the undersigned is indebted to Lender; (b) all interest imposed under this Note through the date hereof, and all fees and other charges that have been -- 120 -- collected from or imposed with respect to this Note were and are agreed to, and were properly computed from or imposed with respect to this Note were and are agreed to, and were properly computed and collected. 17. Headings and Captions. The headings and captions in this Note are for convenience of reference only and shall in no way alter or modify the terms of this Note. 18. Governing Law. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Arizona except for conflict of Law principles in the event of a conflict between the defined terms of this Note and those of the Purchase Agreement, in which case Delaware Law shall govern the interpretation of the defined term. 19. Time of Essence. Time is of the essence of this Note. PHC, Inc. A Massachusetts corporation By: /s/ Bruce A. Shear _______________________________ Bruce A. Shear Its: President -- 121 -- STATE OF MASSACHUSETTS) ) ss. County of Essex ) On this __ day of February, 2004, before me, the undersigned officer, personally appeared Bruce Shear, who acknowledged himself to be President of PHC, Inc, a Massachusetts corporation and that he, in such capacity, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of the company by himself. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Janet Esterkes Notary Public My Commission Expires: March 12, 2010 -- 122 -- EX-10 9 exh10_33.txt KIRBY EMPLOYMENT AND NON-COMPETE AGREEMENT Exhibit 10.33 KIRBY EMPLOYMENT AND NON-COMPETE AGREEMENT The parties to this Employment Agreement (this "Agreement") are PHC, Inc., a Massachusetts corporation ("PHC,") and its subsidiary, Pivotal Research Centers, LLC, an Arizona limited liability company ("Pivotal," and, together with PHC, the "Company"), and Louis C. Kirby (the "Executive"). RECITALS: A. PHC is a Massachusetts corporation engaged in the business of providing behavioral health services and Clinical Research Services. B. PHC currently conducts Clinical Research Services through operating divisions and subsidiaries (including but not limited to Pioneer Pharmaceutical Research, Inc. ("PPR"), a wholly owned subsidiary of PHC) at facilities located in Michigan, Nevada and Utah. C. Pivotal is a nationally recognized provider of Clinical Research Services to Pharmaceutical Companies, with clinical research facilities located in Peoria, Arizona and Mesa, Arizona. D. Executive has served as the CEO of Pivotal prior to its acquisition by PHC on the date of this Agreement. E. Company desires to have Executive serve as the Chief Medical Director of all of the Company's clinical research operations and activities (including but not limited to the activities conducted by PHC, Pivotal and PPR), with Executive reporting directly to the CEO of the Business (defined below), and Executive desires to provide such services to the Company, subject to the terms and conditions set forth below. AGREEMENT Now, therefore, with reference to the foregoing recitals, all of which are incorporated herein by this reference, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment, Term and Duties. 1.1 Employment. Pivotal hereby agrees to employ Executive as the Chief Medical Director of Pivotal for the Term set forth in Section 1.2. PHC hereby agrees to employ Executive as the Chief Medical Officer of PHC divisions, subsidiaries or affiliates engaged in the Clinical Research Services business for the Term set forth in Section 1.2. Executive shall perform all duties incident to such offices and such other duties as are reasonably assigned to Executive by the CEO of the Business, the Board of Directors of Pivotal, or the Board of Directors of PHC. For purposes hereof, the "Business" means the business of providing Clinical Research Services to Pharmaceutical Companies. The parties understand and acknowledge that PHC's current corporate -- 123 -- structure as it relates to Clinical Research Services, including the structure that will exist immediately Post-Closing, may need to be modified over time to improve the operational efficiency of the Business, and all parties understand and agree that such restructuring shall in all cases be consistent with Executive's role as the Chief Medical Director of the Business. 1.2 Term. The term of Executive's employment under this Agreement shall commence on the date of this Agreement and shall continue through December 31, 2006, unless sooner terminated pursuant to Section 4 (the "Initial Term"). Thereafter, this Agreement shall automatically and without further action be renewed for successive one-year periods (each a "Renewal Term") on the same terms and conditions unless sooner terminated pursuant to Section 4 hereof or by either party not less than 60 days prior to the expiration of the Initial Term or any Renewal Term. As used herein, "Term" shall mean the Initial Term and any Renewal Term. 1.3 Duties. During the Term, Executive shall report directly to the CEO of the Business and perform the duties set forth in attached Exhibit A and such reasonable additional duties related to the Business as may be assigned from time to time by the CEO of the Business. 1.4 Best Efforts. Executive shall devote his best efforts in promoting the Company's interests, and performing his duties and responsibilities. Executive shall devote his full working time to the Business and the Company. Executive's services under this Agreement shall be performed primarily at the Locations or at such other primary office as determined mutually by the CEO of the Business and Executive, subject to reasonable travel requirements on behalf of the Business or the Company. The Company hereby acknowledges and agrees that the Company has no right to review, restrict or take any ownership interest in or receive any revenues from any activities undertaken by Executive during non-business hours, provided such activities shall not: (i) involve the performance or provision of Clinical Research Services; (ii) interfere with Executive's performance of his duties under this Agreement; or (iii) violate applicable law. 1.5 Defined Terms. Any capitalized terms not defined herein shall have the meaning set forth in that certain Membership Interest Purchase Agreement (the "Purchase Agreement") between PHC, Pivotal, Executive, Carol Colombo and Anthony Bonacci of even date herewith. 2. Compensation. 2.1 Base Salary. During the Term, as compensation for the services rendered by Executive to the Company, PHC and Pivotal shall pay to Executive a single base salary at an annual rate of not less than $200,000 (the "Base Salary"). The Base Salary shall be payable in accordance with Pivotal's regular payroll practices (but no less frequently than monthly) less federal and state -- 124 -- income tax withholding, other deductions required by law and other normal deductions. The Base Salary shall be subject to adjustment from time to time (but to no less than $200,000) by the Board of Directors in its discretion. The Board of Directors shall review Executive's Base Salary no less frequently than annually to determine whether or not to make any adjustment in light of the duties, responsibilities and performance of Executive and the performance of the Company. 2.2 Incentive Compensation. During the Term, Executive shall be entitled to receive incentive compensation (a "Bonus") based on the Adjusted EBITDA (as defined in Note A): If Adjusted EBITDA of the Pivotal Business is: Equal to or greater than $780,000, Then Pivotal pays to Executive $30,000 Bonus less federal and state income tax withholding, other deductions required by law and other normal deductions 2.3 Employee Benefits. During the Term, Executive, subject to eligibility and other terms shall be entitled to participate in any employee benefits plans and programs from time to time established by the Company including, without limitation, any group health plans, insurance plans, life insurance plans, profit sharing, vacation, pension and other benefit plans adopted by the Company. Executive shall be entitled to four weeks paid vacation. 2.4 Expense Reimbursement. The Company shall promptly pay all reasonable expenses which are actually incurred by Executive on behalf of the Company incident to the discharge and performance of Executive's duties hereunder including, but not limited to, business expenses for travel, as evidenced by vouchers and such other reasonable supporting materials as the Company may require. Executive shall properly account for all expenses and shall maintain such records with respect thereto as are in accordance with the policies and practices determined by the Board in effect from time to time. 2.5 Auto Allowance. During the Term, Executive shall be entitled to an automobile allowance of twenty-six payments of Four Hundred Fifty Dollars ($450.00) during any given calendar year of the Term in accordance with Pivotal's customary payroll practices. Such auto allowance shall be in addition to other compensation paid to Executive. 3. Covenants of Executive. In order to induce the Company to enter into this Agreement, Executive hereby covenants as follows: -- 125 -- 3.1 Inventions and Innovations. Executive agrees that all right, title and interest in and to any innovation, design, technique, process, idea, product, system, program, machine, method or improvement which are or have been developed or created in whole or in part by Executive at any time and at any place during the term of his employment by the Company and related to or usable in connection with the business activities of the Company shall be and remain forever the sole and exclusive property of the Company unless otherwise agreed to in writing between the parties. Executive further agrees to promptly reveal all information relating to the same to the Board and to cooperate with the Company and execute such documents as may be necessary in the event that the Board desires to seek protection on behalf of the Company thereafter. 3.2 Covenant Not To Compete. In consideration of the consummation of the transactions contemplated under this Agreement, Executive hereby covenants and agrees that for the period beginning on the date hereof and ending upon the later to occur of (i) five (5) years from the Closing Date (as defined in the Purchase Agreement), or (ii) two (2) years after the Date of Termination, Executive will not, alone or in association with others, either as a principal, agent, direct or indirect owner, shareholder, partner, joint venturer or member, officer, director, employee, lender, investor, consultant, manager, or in any other capacity: (a) Recruit or hire any employee of the Company, or otherwise attempt to solicit or induce any employee of the Company to leave the employment of the Company. (b) Solicit any customer or Prospective Customer of the Company or otherwise interfere with the business relationships between the Company, its customers or Prospective Customers, suppliers and others with whom the Company conducts its Clinical Research Services business. (c) Perform any service for any customer or Prospective Customer of the Company which is competitive in any manner with Clinical Research Services which the Company may perform for such customers or Prospective Customers, regardless of whether the Company has or is now providing such Clinical Research Services. (d) Executive shall not directly or indirectly solicit for employment on Executive's own behalf, or on behalf of any other enterprise, any individual who is or has been an employee, agent or independent contractor of the Company in a capacity related or pertaining to Clinical Research Services. -- 126 -- This covenant not to compete shall in no way restrict the rights of Executive to hold 5% or less of the equity securities of any corporation whose equity securities are listed on a national securities exchange or are regularly traded in the over-the-counter market and for which quotations are available on the National Association of Securities Dealers Automated Quotation System. 3.3 Confidentiality. Executive acknowledges that, by virtue of his involvement with the Company, he has been, and in the future will be, exposed to and has had access, and, in the future will have access, to trade secrets, processes, computer programs, financial data and information, marketing information, customer information, pricing information, customer lists, information relating to the business or operations of the Company and any other information, software, equipment or processes which are used in connection with or relate to the Company or its members, managers, employees, customers or other vendors or which are otherwise proprietary to or in the possession of the Company ("Confidential Information") except where such Confidential Information (i) was or becomes generally available to the public other than as a result of a disclosure by Company or its affiliates to one or more unauthorized parties, (ii) is required by law to be disclosed or (iii) is made generally available to the public by the Company. Executive further acknowledges that his expertise, knowledge and experience in, of and with the Company would enable him to use such information to benefit individuals or entities other than the Company. Executive hereby covenants and agrees as follows: (a) During the Term and at all times thereafter, the Confidential Information shall be kept confidential by Executive, will not be used in any manner which is detrimental to the Company or its shareholders, members, managers or employees, and will be safeguarded by Executive from unauthorized disclosure. Executive also agrees that Executive will disclose to the Person or Persons designated by the Company all Confidential Information. (b) Following the expiration of the Term, Executive will return to the Company any Confidential Information currently in his possession or control or which may subsequently come into his possession or control, will not retain any copies, including non-conforming copies, thereof, including, without limitation, all analyses, compilations, studies or other documents in whatever form, including magnetic media, prepared by Executive or for Executive's use containing or reflecting any Confidential Information. Executive shall not disclose to the Company, use in the Company's business, or cause the Company to use, any confidential or proprietary information or materials of any third party. -- 127 -- 3.4 Enforcement by Injunction. Executive acknowledges that the protections of the Company set forth in Sections 3.1, 3.2 and 3.3 of this Agreement are of vital concern to the Company, that monetary damages for any violation thereof would not adequately compensate the Company and that the Company is engaged in a highly competitive business. Accordingly, Executive agrees that the restrictions set forth in Sections 3.1, 3.2 and 3.3 are reasonable and that, in addition to any other remedy, the Company shall be entitled to enforce such Sections by injunction whether or not Executive's employment hereunder has terminated. Executive hereby waives any requirement of a bond for such enforcement by injunction. 3.5 Early Termination of Restrictive Provisions. The restrictive covenant set forth in Section 3.2 of this Agreement shall terminate immediately upon the occurrence of (i) any termination of Executive not for Cause, (ii) any termination of Michael J. Colombo under the Colombo Employment Agreement not for Cause, or (iii) an "Event of Default" under any Note which is due to PHC's failure or refusal to pay amounts due to Sellers thereunder which such failure or failures continue for an aggregate period of not less than six (6) months during the Terms of any such Notes. 3.6 Partial Enforcement. If any term or condition of this Agreement shall be invalid or unenforceable to any extent or in any application, then such term or condition shall automatically, and without any further action, be reformed so as to retain the fullest extent of any restriction therein permitted by law and the remainder of this Agreement, and such term or condition, except to such extent or in such application, shall not be affected thereby, and each and every term and condition of this Agreement shall be valid and enforced to the fullest extent and in the broadest application permitted by law. 3.7 Cumulative Rights. Each and all of the various rights, powers and remedies of the Company as set forth in this Agreement shall be considered as cumulative, with and in addition to any other rights, powers or remedies of such parties, and no one of them is exclusive of the others or is exclusive of any other rights, powers and remedies allowed by law or in equity. The exercise, partial exercise or non-exercise of any rights, powers or remedies shall constitute neither the election thereof nor the waiver of any other rights, powers or remedies. All rights, powers and remedies of the parties hereto shall survive the termination of this Agreement. 3.8 Merger or Reorganization. The Company may assign its rights under this Agreement in accordance with Section 10.10 of the Purchase Agreement. 3.9 Enforcement. Executive agrees and warrants that the covenants contained herein are reasonable, that valid consideration has been and will be received therefore and that the agreements set forth herein are the result of arms-length negotiations between the parties hereto. Executive recognizes that the provisions of this Article 3 are important to the continuing welfare of the -- 128 -- Company, and that money damages are an inadequate remedy for any violation thereof. Accordingly, in the event of any such violation by Executive, Pivotal or PHC, in addition to any other remedies they may have, shall have the right to institute and maintain a proceeding to compel specific performance thereof or to issue an injunction restraining any action by Executive in violation of this Article 3. 4. Termination of Employment. 4.1 Death or Disability. Executive's employment under this Agreement shall terminate upon his death or Disability. Executive shall be deemed to be Disabled in the good faith determination of the Board. At any time and from time to time, upon reasonable request therefore by the Company, Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Company shall promptly give Executive notice of any such determination of Executive's Disability and of the decision of the Company to terminate Executive's employment by reason thereof. In the event of Disability, until the Date of Termination the Base Salary payable to Executive under Section 2.1 shall be reduced dollar-for-dollar by the amount of disability benefits, if any, paid to Executive in accordance with any disability policy or program of the Company. "Disability" shall mean the inability of Executive, by reason of any medically determinable physical or mental impairment for a period of 90 days during any 12 month period, regardless of the Executive's presence or absence at his place of employment, to carry out and perform the duties and obligations ordinarily required of Executive. 4.2 Termination by the Company. (a) With or Without Cause. The Company may terminate Executive's employment under this Agreement with or without Cause. "Cause" means, (i) commission of any dishonest act by Executive in connection with Executive's performance of activities including, without limitation, but not limited to, an act of fraud, embezzlement or willful breach of a fiduciary duty to the Company, (ii) drunkenness or intoxication while engaged in Company business or the use of drugs or alcohol in a manner which adversely affects performance of the Executive's activities, (iii) diversion of any corporate opportunity of the Company for Executive's direct or indirect benefit, (iv) commission by Executive of any act of sexual harassment, discrimination or other violation of any similar statute, ordinance, law or regulation regarding human rights, (v) any act or omission by Executive which causes the disqualification, expiration or termination of the Company's license which is issued by any governmental or quasi governmental authority under any statute governing the business or operations of the Company and which such disqualification, expiration or -- 129 -- termination has a Material Adverse Effect upon the Company's ability to conduct business, (vi) the breach by Executive of Article 3 of this Agreement, or (vii) Executive's failure to use commercially reasonable efforts to perform his duties under this Agreement and Executive's failure to cure such non-performance within thirty (30) calendar Days after receipt of written notice from the Company specifying the nature of such failure, or if such failure is not capable of being cured within thirty (30) calendar days, Company's acceptance, in writing, of a written plan of action submitted to the Company, in writing, within ten (10) calendar days of receipt of such notice from the Company, that sets forth a reasonable plan for Executive's cure of the failure, provided, however, that two or more occurrences of Executive's failure to use commercially reasonable efforts to perform his duties under this Agreement during the term of this Agreement shall, at Company's option, constitute an immediate termination for Cause. 4.3 Termination by Executive. Upon thirty days prior written notice Executive may terminate his employment under this Agreement with or without Good Reason (as defined below) If such termination is with Good Reason, Executive shall give the Board of PHC written notice, which shall identify with reasonable specificity the grounds for Executive's resignation. For purposes of this Agreement, "Good Reason" shall mean any of the following: (i) a reduction in Executive's compensation in violation of Section 2.1 of this Agreement, which reduction is accomplished without the prior written consent of Executive, (ii) a material diminution in Executive's duties and responsibilities under this Agreement for a period of one month or more other than by virtue of Executive's Disability, which material diminution is accomplished without the prior written consent of Executive, or the mutual written agreement of Executive and Company, or the unilateral conduct of the Executive, (iii) the failure to pay any of Executive's compensation when due (including any Bonus), except in the case of Executive's breach of this Agreement or any other agreement between Executive, the Company or its affiliates, (iv) any material breach of, or material failure of the Company to perform, any material provision of this Agreement, including but not limited to, the Bonus provisions contained in Sections 2.2, and the failure of such breaching party to cure such breach or non-performance within the applicable "Cure Period", or (v) any failure by PHC to fund the Company's working capital requirements in accordance with the terms and conditions and in the amount set forth in Section 3.5 of the Purchase Agreement, which failure would materially impair Executive's ability to perform the -- 130 -- duties set forth in attached Exhibit A. For purposes of this Agreement, the term "Cure Period" shall mean a period of time that commences upon the giving of written notice by a non- defaulting party to the defaulting party(ies) that a breach or failure to perform has occurred and expires ten (10) calendar days from the date such notice is given or deemed given. Executive may terminate his employment under this Agreement with or without Good Reason (as defined above). If such termination is with Good Reason, Executive shall give the Company written notice, which shall identify with reasonable specificity the grounds for Executive's resignation. 4.4 Date of Termination. "Date of Termination" shall mean the earlier of (a) the expiration of the Term, and (b) if Executive's employment is otherwise terminated whether by Executive or by Pivotal or PHC, the date on which Executive's employment with the Company actually terminates. 4.5 No Event of Default under Transaction Documents. Any termination of this Agreement by Pivotal, PHC or Executive (whether with or without Cause and whether with or without Good Reason) shall not independently constitute an event of default for purposes of the Transaction Documents, and no independent action initiated by Executive, PHC or Pivotal for a breach of the terms and conditions of this Agreement shall give rise to a separate cause of action under the Transaction Documents except the rights specifically set forth in the Notes. 5. Compensation Upon Termination. 5.1 As a Result of Death, Disability, Cause or Resignation. (a) Death or Disability. Subject to Executive's continuing compliance with the terms of this Agreement, if Executive's employment under this Agreement is terminated prior to the expiration of the Term by reason of his death or disability, then Executive (or in the case of his death, his personal representative) shall be entitled to receive the the amount of his Accrued Obligations (as defined below), such amount to be paid in accordance with the Company's ordinary and customary payroll practices. As used in this paragraph, "Accrued Obligations" means, as of the Date of Termination, (i) any payments which Executive may be entitled to receive pursuant to any Company employee benefits plan or program, (ii) any earned but unpaid Base Salary as of the date of such termination, or (iii) any accrued and unpaid expense reimbursements or auto allowance pursuant to Sections 2.4 and/or 2.5, (iv) any accrued or earned and unpaid Bonus pro-rated through the Date of Termination. -- 131 -- (b) Termination for Cause; Resignation Without Good Reason. If Executive's employment under this Agreement is terminated prior to the expiration of the Term by reason of his termination by the Company for Cause or his resignation without Good Reason, then Executive shall solely be entitled to receive the following benefits: (i) any benefits which Executive may be entitled to receive pursuant to any Company employee benefits plan, (ii) any earned, but unpaid Base Salary, and (iii) any accrued but unpaid expense reimbursements, subject to Section 2.4, or auto allowance pursuant to Section 2.5. 5.2 By Executive for Good Reason or the Company other than for Cause. If, prior to scheduled expiration of the Term, the Company terminates Executive's employment without Cause, or Executive terminates his employment for Good Reason, Executive shall be entitled to receive the Accrued Obligations described in Section 5.1(a). 5.3 No Mitigation. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Section 5 by seeking other employment or otherwise, and, except as otherwise expressly provided in Sections 5.1 or 5.2, the amounts of compensation or benefits payable or otherwise due to Executive under this Section 5 or other provisions of this Agreement shall not be reduced by compensation or benefits received by Executive from any other employment he shall choose to undertake following termination of his employment under this Agreement. 6. Miscellaneous. 6.1 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of Executive and the successors and assigns of the Company. 6.2 Notices. All notices or other communications hereunder shall be made in writing and shall be deemed duly given (a) when personally delivered to the intended recipient (or an officer of authorized representative of the intended recipient), (b) on the day of transmittal when sent by facsimile with confirmation of receipt if sent prior to 5:00 pm, or on the immediately following day if sent after 5:00 pm, (c) on the first business day after the date sent when sent by a nationally recognized overnight courier service, or (d) three business days after it is sent by first class U.S. mail, postage prepaid, to the intended recipient at the address set forth below: -- 132 -- (a) to PHC or Pivotal, to it at: PHC, Inc. 200 Lake Street, Suite 102 Peabody, MA 01960 Attention: Bruce A. Shear, President Facsimile No.: (978) 536-2677 with a copy to: Arent Fox Kintner Plotkin & Kahn, PLLC 1050 Connecticut Avenue, NW Washington, DC 20036-5339 Attention: J. Aaron Ball, Esq. Facsimile No.: (202) 857-6395 (b) to Executive, at the address set forth in the Purchase Agreement. Any party may change the address to which notices and communications hereunder are to be delivered by giving the other parties notice in the manner set forth herein. 6.3 Construction. As used in this Agreement, unless the context otherwise requires: (i) references to "Section" are to a section of this Agreement; (ii) all "Exhibits" referred to in this Agreement are to Exhibits attached to this Agreement and are incorporated into this Agreement by reference and made a part of this Agreement; (iii) "include", "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import; (iv) the headings of the various sections and other subdivisions of this Agreement are for convenience of reference only and shall not modify, define or limit any of the terms or provisions of this Agreement; and (v) "knowledge" of a person means the actual knowledge of such person and the knowledge that a prudent individual could be expected to discover or otherwise become aware of in the course of conducting a reasonable investigation concerning the existence of the matters addressed. 6.4 Assignment. This Agreement shall not be assignable by Executive. 6.5 Execution in Counterparts. This Agreement may be executed in two or more counterparts, and by facsimile signature, each of which shall constitute an original, but all of which together shall constitute but a single instrument. 6.6 Jurisdiction and Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona applicable to agreements made and to be performed in Arizona. Any and all disputes arising out of, related or pertaining to this Agreement shall be resolved in accordance with the Arbitration provisions set forth in Section 10.12 of the Purchase Agreement. 6.7 Severability. If any provision of this Agreement, or the application of any provision to any person or circumstance, shall for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and the application of that provision to other persons or circumstances shall not be affected but shall be enforced to the full extent permitted by law. -- 133 -- 6.9 Complete Agreement; Modification and Termination. This Agreement contains a complete statement of all the arrangements among the parties with respect to its subject matter, supersedes all existing agreements among them concerning that subject matter and may be modified, waived or terminated only by a written instrument signed by the parties. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. PHC, Inc. By: /a/ Bruce A. Shear ______________________ Name: Bruce A. Shear Title: President Pivotal Research Centers, L.L.C. By: /a/ Bruce A. Shear ______________________ Name: Bruce A. Shear Title: President EXECUTIVE /s/ Louis C. Kirby ______________________ Louis C. Kirby -- 134 -- Exhibit A Executive Job Description 1. Oversee Business Development Activities for Pivotal, including soliciting studies in core indication areas, identifying and providing recommendations for new indications, promoting Pivotal as a research center, sharing Pivotal study leads for distribution to other Clinical Research Services sites within the PHC system; and nurturing and building industry relationships. 2. Participate in direct patient care as an Investigator. Advise on clinical operations at all Clinical Research Services sites, and provide or assist with additional clinical staff training, as necessary. 3. Assist with Clinical Research Services within the PHC system, including evaluating study capabilities of existing investigators; identifying physician candidates at each site; mentoring physicians in business development; identifying key industry meeting and speaking engagements in which Pivotal investigators are introduced to sponsors and key industry people. 4. Participate and provide input to corporate strategic planning activities. -- 135 -- EX-10 10 ex10_34.txt COLUMBO EMPLOYMENT AND NON-COMPETE AGREEMENT Exhibit 10.34 COLOMBO EMPLOYMENT AND NON-COMPETE AGREEMENT The parties to this Employment Agreement (this "Agreement"), dated as of April, 2004, are PHC, Inc., a Massachusetts corporation ("PHC,") and its subsidiary Pivotal Research Centers, LLC, an Arizona limited liability company ("Pivotal," together with PHC, the "Company"), and Michael Colombo (the "Executive"). RECITALS: A. PHC is a Massachusetts corporation engaged in the business of providing behavioral health services and Clinical Research Services. B. PHC currently conducts Clinical Research Services through operating divisions and subsidiaries (including but not limited to Pioneer Pharmaceutical Research, Inc. ("PPR"), a wholly owned subsidiary of PHC) at facilities located in Michigan, Nevada and Utah. C. Pivotal is a nationally recognized provider of Clinical Research Services to Pharmaceutical Companies with clinical research facilities located in Peoria, Arizona and Mesa, Arizona. D. Executive has served as an executive officer of Pivotal prior to its acquisition by PHC on the date of this Agreement. E. Company desires to have Executive serve as the Chief Executive Officer of Pivotal, and lead all of PHC's Clinical Research Services (including but not limited to the activities conducted by Pivotal and PPR), with Executive reporting directly to the CEO of PHC, and Executive desires to provide such services to Company, subject to the terms and conditions set forth below. AGREEMENT Now, therefore, with reference to the foregoing recitals, all of which are incorporated herein by this reference and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment, Term and Duties. 1.1 Employment. Pivotal hereby agrees to employ Executive as the Chief Executive Officer of Pivotal. PHC hereby agrees to employ Executive as the Chief Executive Officer of PHC divisions, subsidiaries or affiliates engaged in the Clinical Research Services business. During the Term, Executive shall have direct management responsibility and authority over all PHC staff conducting Clinical Research Services across all PHC divisions, subsidiaries or affiliates (including, but not limited to, PPR and Pivotal). For purposes hereof, the "Business" means the business of providing Clinical Research Services to Pharmaceutical Companies. The parties understand and acknowledge that PHC's current corporate structure as it relates to Clinical Research Services, including the structure that will exist 136 immediately Post-Closing, may need to be modified over time to improve the operational efficiency of the Business, and all parties understand and agree that such restructuring shall in all cases be consistent with Executive's role as the CEO of the Business with direct management responsibility and authority over all PHC staff conducting Clinical Research Services across all PHC divisions, subsidiaries or affiliates. 1.2 Term. The term of Executive's employment under this Agreement shall commence on the date of this Agreement and shall continue through December 31, 2006, unless sooner terminated pursuant to Section 4 hereof (the "Initial Term"). Thereafter, this Agreement shall automatically and without further action be renewed for successive one-year periods (each, a "Renewal Term") on the same terms and conditions unless sooner terminated pursuant to Section 4 hereof or by either party not less than 60 days prior to the expiration of the Initial Term or any Renewal Term. As used herein, "Term" shall mean the Initial Term and any Renewal Term. 1.3 Duties. During the Term, Executive shall report directly to the CEO of PHC and perform the duties set forth in attached Exhibit A; provided, however, that Executive shall, at the direction of the CEO of PHC, perform other services and allot a portion of his time to such other responsibilities as may be required from time to time, related to Clinical Research Services as may be assigned from time to time by the CEO of PHC. 1.4 Best Efforts. Executive shall devote his best efforts in promoting the Company's interests, and performing his duties and responsibilities. Executive shall devote his full working time to the business and affairs of the Company. Executive's services under this Agreement shall be performed primarily at Pivotal's offices located at the Peoria Location and the Mesa Location or at such other primary office as determined mutually by the CEO of PHC and Executive, subject to reasonable travel requirements on behalf of the Company. 1.5 Defined Terms. Any capitalized terms not defined herein shall have the meaning set forth in that certain Membership Interest Purchase Agreement (the "Purchase Agreement") between PHC, Pivotal, Louis C. Kirby and Carol Colombo, and Anthony Bonacci of even date herewith. 2. Compensation. 2.1 Base Salary. During the Term, as compensation for the services rendered by Executive to the Company, Pivotal and PHC shall pay to Executive a single base salary at an annual rate of not less than $150,000 (the "Base Salary"). The Base Salary shall be payable in accordance with Pivotal's regular payroll practices (but no less frequently than monthly) less federal and state income tax withholding, other deductions required by law and other normal deductions. The Base Salary shall be subject to adjustment from time to time (but to no less than $150,000) by the Board of Directors (the "Board") in its discretion. The Board 137 shall review Executive's Base Salary no less frequently than annually to determine whether or not to make any adjustment in light of the duties, responsibilities and performance of Executive and the performance of the Company. 2.2 Incentive Compensation. During the Term, Executive shall be entitled to receive incentive compensation (a "Bonus") based on Adjusted EBITDA (as defined below) of the named operations as follows: (a) Pivotal Business Bonus. If the Adjusted EBITDA of the Then Pivotal pays to Executive: Pivotal Business is: in excess of $730,000 but less $15,000 Bonus less federal and than $800,000 state income tax withholding, other deductions required by law and other normal deductions ("Pivotal Bonus A"). in excess of $800,000 $25,000 Bonus less federal and state income tax withholding, other deductions required by law and other normal deductions ("Pivotal Bonus B"). In the event Executive is eligible for Pivotal Bonus B, Executive will be awarded Pivotal Bonus B and shall not receive Pivotal Bonus A. (b) Clinical Research Services Business Bonus. If the Adjusted EBITDA of Then Pivotal pays to Executive: all PHC's Clinical Research Services business (including but not limited to Pivotal, and PPR) is: in excess of $800,000 $25,000 plus 5% of amounts in excess of $800,000 but less than $1,200,000, less federal and state income tax withholding, other deductions required by law and other normal deductions. ("Clinical Research Bonus A"). in excess of $1,200,000 Clinical Research Bonus A plus 3% of amounts of Adjusted EBITDA of all PHC's Clinical Research Services business in excess of $1,200,000, less federal and state income tax withholding, other deductions required by law and other normal deductions. 138 (c) For purposes of Section 2.2(a) and 2.3(a), the term "Adjusted EBITDA" shall have the meaning set forth in Note A (pertaining to the Pivotal Business). For purposes of Section 2.2(b) and 2.3(b), the term "Adjusted EBITDA" shall mean the sum of the Adjusted EBITDA as determined pursuant to Note A (pertaining to the Pivotal Business) and the Adjusted EBITDA as determined pursuant to Note C (pertaining to the Non-Pivotal Business). 2.3 Stock Options. In addition to and not in lieu of any compensation set forth elsewhere in this Agreement, Executive shall be granted options (the "Options") to purchase PHC Stock (the "Option Securities") under the terms and conditions of the PHC stock incentive plan in effect from time to time (the "Option Plan"), and according to a Stock Option Agreement authorized under the Option Plan. Upon the effective date of this Agreement, Executive shall receive options to purchase 20,000 shares of Option Securities. During the term hereof, Executive shall be granted options to purchase additional shares of Option Securities based on annual profits of the named operations as follows: (a) Adjusted EBITDA of PHC awards to Executive an Pivotal Business: option to purchase: in excess of $800,000 10,000 additional shares of PHC Stock (b) Adjusted EBITDA of all PHC awards to Executive an PHC PHC divisions, option to purchase: subsidiaries and affiliates engaged in the Business (including but not limited to the Company, Pivotal and PPR) In excess of $800,000 20,000 additional shares of PHC but less than $1,200,000 Stock In excess of $1,200,000 50,000 additional shares of PHC Stock (c) The number of shares of the Option Securities into which the Options are exercisable shall be adjusted based on stock splits, dividends, recapitalizations and other events as set forth in the Option Agreement and the Option Plan. All Options issued to Executive shall be exercisable at a price equal to the Closing Stock Price (as defined in the Purchase Agreement), subject to adjustment based on stock splits, dividends, recapitalizations and other similar events all in accordance with normal business practices. All of such Options shall be for a term of at least five (5) years from the date of issuance, and all of such Options shall vest immediately upon issuance. 139 2.4 Employee Benefits. During the Term, Executive, subject to eligibility and other terms, shall be entitled to participate in any employee benefits plans and programs from time to time established by the Company including, without limitation, any group health plans, insurance plans, life insurance plans, profit sharing, vacation, pension and other benefit plans adopted by the Company. During the Term, Executive shall be entitled to participate in and receive benefits as a senior executive under all employee benefit plans, programs and arrangements, including any stock-based compensation or incentive plan, retirement plan, profit sharing plan, savings plan, life insurance plan, health insurance plan, accident or disability insurance plan. Executive shall be entitled to vacation commensurate with vacation available to other executives of the Company. The Company acknowledges that (i) Executive is pursuing an advanced educational degree, (ii) Executive's course work will conclude in April, 2004, (iii) Executive is required to attend all day classes every other Friday, and (iv) Executive will be required to attend a program in China in March that will require Executive to miss six consecutive days of work. Subject to his continuing duties and obligations hereunder, Executive is authorized to take a reasonable amount of time off from work to complete his degree during the time period set forth above, and none of the time spent by Executive in school or at the program in China shall be deemed to be vacation days or count against Executive's paid time off. 2.5 Expense Reimbursement. The Company shall promptly pay all reasonable expenses which are actually incurred by Executive on behalf of the Company incident to the discharge and performance of Executive's duties hereunder including, but not limited to, business expenses for travel, as evidenced by vouchers and such other reasonable supporting materials as the Company may require. Executive shall properly account for all expenses and shall maintain such records with respect thereto as are in accordance with the policies and practices determined by the Board in effect from time to time. 2.6 Auto Allowance. During the Term, Executive shall be entitled to an automobile allowance of twenty-six payments of Four Hundred Dollars ($400.00) during any given calendar year of the Term in accordance with Pivotal's customary payroll practices. Such auto allowance shall be in addition to other compensation paid to Executive. 3. Covenants of Executive. In order to induce the Company to enter into this Agreement, Executive hereby covenants as follows: 3.1 Inventions and Innovations. Executive agrees that all right, title and interest in and to any innovation, design, technique, process, idea, product, system, program, machine, method or improvement which are or have been developed or created in whole or in part by Executive at any time and at any place during the term of his employment by the Company and related to or usable in 140 connection with the business activities of the Company shall be and remain forever the sole and exclusive property of the Company unless otherwise agreed to in writing between the parties. Executive further agrees to promptly reveal all information relating to the same to the Board and to cooperate with the Company and execute such documents as may be necessary in the event that the Board desires to seek protection on behalf of the Company thereafter. 3.2 Covenant Not To Compete. In consideration of the consummation of the transactions contemplated under this Agreement, Executive hereby covenants and agrees that for the period beginning on the date hereof and ending one (1) year after the Date of Termination, Executive will not, alone or in association with others, either as a principal, agent, direct or indirect owner, shareholder, partner, joint venturer or member, officer, director, employee, lender, investor, consultant, manager, or in any other capacity: (a) Recruit or hire any employee of the Company, or otherwise attempt to solicit or induce any employee of the Company to leave the employment of the Company. (b) Solicit any customer or Prospective Customer of the Company or otherwise interfere with the business relationships between the Company, its customers, Prospective Customers, suppliers and others with whom the Company conducts its Clinical Research Services business. (c) Perform any service for any customer or Prospective Customer of the Company which is competitive in any manner with Clinical Research Services which the Company may perform for such customers or Prospective Customers, regardless of whether the Company has or is now providing such Clinical Research Services. (d) Executive shall not directly or indirectly solicit for employment on Executive's own behalf, or on behalf of any other enterprise, any individual who is or has been an employee, agent or independent contractor of the Company in a capacity related or pertaining to Clinical Research Services. This covenant not to compete shall in no way restrict the rights of Executive to hold 5% or less of the equity securities of any corporation whose equity securities are listed on a national securities exchange or are regularly traded in the over-the-counter market and for which quotations are available on the National Association of Securities Dealers Automated Quotation System. 3.3 Confidentiality. Executive acknowledges that, by virtue of his involvement with the Company, he has been, and in the future will be, exposed to and has had access, and, in the future will have access, to trade secrets, processes, computer programs, financial data and information, marketing information, customer information, pricing information, customer lists, information 141 relating to the business or operations of the Company and any other information, software, equipment or processes which are used in connection with or relate to the Company or its members, managers, employees, customers or other vendors or which are otherwise proprietary to or in the possession of the Company ("Confidential Information") except where such Confidential Information (i) was or becomes generally available to the public other than as a result of a disclosure by Company or its affiliates to one or more unauthorized parties, (ii) is required by law to be disclosed or (iii) is made generally available to the public by the Company. Executive further acknowledges that his expertise, knowledge and experience in, of and with the Company would enable him to use such information to benefit individuals or entities other than the Company. Executive hereby covenants and agrees as follows: (a) During the Term and at all times thereafter, the Confidential Information shall be kept confidential by Executive, will not be used in any manner which is detrimental to the Company or its shareholders, members, managers or employees, and will be safeguarded by Executive from unauthorized disclosure. Executive also agrees that Executive will disclose to the Person or Persons designated by the Company all Confidential Information. (b) Following the expiration of the Term, Executive will return to the Company any Confidential Information currently in his possession or control or which may subsequently come into his possession or control, will not retain any copies, including non-conforming copies, thereof, including, without limitation, all analyses, compilations, studies or other documents in whatever form, including magnetic media, prepared by Executive or for Executive's use containing or reflecting any Confidential Information. Executive shall not disclose to the Company, use in the Company's business, or cause the Company to use, any confidential or proprietary information or materials of any third party. 3.4 Enforcement by Injunction. Executive acknowledges that the protections of the Company set forth in Sections 3.1, 3.2 and 3.3 of this Agreement are of vital concern to the Company, that monetary damages for any violation thereof would not adequately compensate the Company and that the Company is engaged in a highly competitive business. Accordingly, Executive agrees that the restrictions set forth in Sections 3.1, 3.2 and 3.3 are reasonable and that, in addition to any other remedy, the Company shall be entitled to enforce such Sections by injunction whether or not Executive's employment hereunder has terminated. Executive hereby waives any requirement of a bond for such enforcement by injunction. 3.5 Early Termination of Restrictive Provisions. The restrictive 142 covenant set forth in Section 3.2 of this Agreement shall terminate immediately upon the occurrence of (i) any termination of Executive not for Cause, (ii) any termination of Kirby under the Kirby Employment Agreement not for Cause, or (ii) an "Event of Default" under any Note which is due to PHC's failure or refusal to pay amounts due to Sellers thereunder which such failure or failures continue for an aggregate period of not less than six (6) months during the Terms of any such Notes. 3.6 Partial Enforcement. If any term or condition of this Agreement shall be invalid or unenforceable to any extent or in any application, then such term or condition shall automatically, and without any further action, be reformed so as to retain the fullest extent of any restriction therein permitted by law and the remainder of this Agreement, and such term or condition, except to such extent or in such application, shall not be affected thereby, and each and every term and condition of this Agreement shall be valid and enforced to the fullest extent and in the broadest application permitted by law. 3.7 Cumulative Rights. Each and all of the various rights, powers and remedies of the Company as set forth in this Agreement shall be considered as cumulative, with and in addition to any other rights, powers or remedies of such parties, and no one of them is exclusive of the others or is exclusive of any other rights, powers and remedies allowed by law or in equity. The exercise, partial exercise or non-exercise of any rights, powers or remedies shall constitute neither the election thereof nor the waiver of any other rights, powers or remedies. All rights, powers and remedies of the parties hereto shall survive the termination of this Agreement. 3.8 Merger or Reorganization. The Company may assign its rights under this Agreement in accordance with Section 10.10 of the Purchase Agreement. 3.9 Enforcement. Executive agrees and warrants that the covenants contained herein are reasonable, that valid consideration has been and will be received therefore and that the agreements set forth herein are the result of arms-length negotiations between the parties hereto. Executive recognizes that the provisions of this Article 3 are important to the continuing welfare of the Company, and that money damages are an inadequate remedy for any violation thereof. Accordingly, in the event of any such violation by Executive, Pivotal or PHC, in addition to any other remedies they may have, shall have the right to institute and maintain a proceeding to compel specific performance thereof or to issue an injunction restraining any action by Executive in violation of this Article 3. 4. Termination of Employment. 4.1 Death or Disability. Executive's employment under this Agreement shall terminate upon his death or Disability. Executive shall be deemed to be Disabled in the good faith determination of the 143 Board. At any time and from time to time, upon reasonable request therefore by the Company, Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Company shall promptly give Executive notice of any such determination of Executive's Disability and of the decision of the Company to terminate Executive's employment by reason thereof. In the event of Disability, until the Date of Termination the Base Salary payable to Executive under Section 2.1 shall be reduced dollar-for-dollar by the amount of disability benefits, if any, paid to Executive in accordance with any disability policy or program of the Company. "Disability" shall mean the inability of Executive, by reason of any medically determinable physical or mental impairment for a period of 90 days during any 12 month period, regardless of the Executive's presence or absence at his place of employment, to carry out and perform the duties and obligations ordinarily required of Executive. 4.2 Termination by the Company. (a) With or Without Cause. The Company may terminate Executive's employment under this Agreement with or without Cause. "Cause" means, (i) commission of any dishonest act by Executive in connection with Executive's performance of activities including, without limitation, but not limited to, an act of fraud, embezzlement or willful breach of a fiduciary duty to the Company, (ii) drunkenness or intoxication while engaged in Company business or the use of drugs or alcohol in a manner which adversely affects performance of the Executive's activities, (iii) diversion of any corporate opportunity of the Company for Executive's direct or indirect benefit, (iv) commission by Executive of any act of sexual harassment, discrimination or other violation of any similar statute, ordinance, law or regulation regarding human rights, (v) any act or omission by Executive which causes the disqualification, expiration or termination of the Company's license which is issued by any governmental or quasi governmental authority under any statute governing the business or operations of the Company and which disqualification, expiration or termination has a Material Adverse Effect upon the Company's ability to conduct business, (vi) the breach by Executive of Article 3 of this Agreement, or (vii) Executive's failure to use commercially reasonable efforts to perform his duties under this Agreement and Executive's failure to cure such non-performance within thirty (30) calendar days after receipt of written notice from the Company specifying the nature of such failure, or if such failure is not capable of being cured within thirty (30) calendar days, Company's acceptance, in writing, of a written plan of action submitted to the Company, within ten (10) calendar days of receipt of such notice from the Company, that sets forth a reasonable plan for Executive's cure of the failure, provided, however, that two or more occurrences of Executive's failure to use commercially reasonable efforts 144 to perform his duties under this Agreement during the term of this Agreement shall, at Company's option, constitute an immediate termination for Cause. 4.3 Termination by Executive. Upon thirty days prior written notice Executive may terminate his employment under this Agreement with or without Good Reason (as defined below). If such termination is with Good Reason, Executive shall give the Board written notice, which shall identify with reasonable specificity the grounds for Executive's resignation. For purposes of this Agreement, "Good Reason" shall mean any of the following: (i) a reduction in Executive's compensation in violation of Section 2.1 of this Agreement, which reduction is accomplished without the prior written consent of Executive, (ii) a material diminution in Executive's duties and responsibilities under this Agreement for a period of one month or more other than by virtue of Executive's Disability, which material diminution is accomplished without the prior written consent of Executive, or the mutual written consent of Executive and Company, or the unilateral conduct of Executive, (iii) the failure to pay any of Executive's compensation when due (including any Bonus), except in the case of Executive's breach of this Agreement or any other agreement between Executive, the Company or its affiliates, (iv) any material breach of, or material failure of the Company to perform, any material provision of this Agreement including, but not limited to, the Bonus provisions contained in Sections 2.2 and 2.3, and the failure of such breaching party to cure such breach or non-performance within the applicable "Cure Period", or (v) any failure by PHC to fund the Company's working capital requirements in accordance with the terms and conditions and in the amount set forth in Section 3.5 of the Purchase Agreement, which failure would materially impair Executive's ability to perform the duties set forth in attached Exhibit A. For purposes of this Agreement, the term "Cure Period" shall mean a period of time that commences upon the giving of written notice by a non-defaulting party to the defaulting party(ies) that a breach or failure to perform has occurred and expires ten (10) calendar days from the date such notice is given or deemed given. 4.4 Date of Termination. "Date of Termination" shall mean the earlier of (a) the expiration of the Term, and (b) if Executive's employment is otherwise terminated whether by Executive or by the Board, the date on which Executive's employment with the Company actually terminates. 4.5 No Event of Default under Transaction Documents. Any termination of this Agreement by the Company or Executive (whether with or without Cause and whether with or without Good Reason) shall not independently constitute an event of default for purposes of the Transaction Documents, and no independent action initiated by Executive, PHC or Pivotal for a breach of the terms and conditions of this Agreement shall give rise to a separate cause of action under the Transaction Documents except the rights specifically set forth in the Notes. 145 5. Compensation Upon Termination. 5.1 As a Result of Death, Disability, Cause or Resignation. (a) Death or Disability. Subject to Executive's continuing compliance with the terms of this Agreement, if Executive's employment under this Agreement is terminated prior to the expiration of the Term by reason of his death or disability, then Executive (or in the case of his death, his personal representative) shall be entitled to receive the amount of his Accrued Obligations (as defined below), such amount to be paid in accordance with the Company's ordinary and customary payroll practices. As used in this paragraph, "Accrued Obligations" means, as of the Date of Termination, (i) any payments which Executive may be entitled to receive pursuant to any Company employee benefits plan or program, (ii) any earned but unpaid Base Salary as of the date of such termination, (iii) any accrued and unpaid expense reimbursements or auto allowance pursuant to Sections 2.5 and/or 2.6, and (iv) any accrued or earned and unpaid Bonus pro-rated through the Date of Termination. (b) Termination for Cause; Resignation Without Good Reason. If Executive's employment under this Agreement is terminated prior to the expiration of the Term by reason of his termination by the Company for Cause or his resignation without Good Reason, then Executive shall solely be entitled to receive the following benefits: (i) any benefits which Executive may be entitled to receive pursuant to any Company employee benefits plan, (ii) any earned, but unpaid Base Salary, and (iii) any accrued but unpaid expense reimbursements, subject to Section 2.5, or auto allowance pursuant to Section 2.6. 5.2 By Executive for Good Reason or the Company other than for Cause. (a) Benefits. If, prior to scheduled expiration of the Term, the Company terminates Executive's employment without Cause, or Executive terminates his employment for Good Reason, Executive shall be entitled to receive the Accrued Obligations described in Section 5.1(a) and, subject to Section 5.2(b), the following additional benefits (such additional benefits, the "Post-Termination Benefits"): (i) In the event the Company terminates the Executive's employment without Cause or the Executive terminates his employment for Good Reason, then, provided Executive continues to comply with the terms of Section 3 of this Agreement, the Company shall pay to Executive his Base Salary, payable in accordance with Pivotal's regular payroll practices (but no less frequently than monthly) less federal and state income tax withholding, other deductions required by law and other normal deductions, for a period of six (6) months following 146 the Date of Termination. In addition, Executive shall have the right to select an executive placement firm to provide executive placement services to Executive and the Company shall retain and pay directly all costs up to $10,000 for such executive placement services until the earlier to occur of (i) the date on which Executive starts new, full time employment, or (ii) six months from the Date of Termination. (b) Conditions to Receipt of Post-Termination Benefits under Section 5.2(a). As a condition to receiving any Post-Termination Benefits to which Executive would otherwise be entitled under Section 5.2(a), Executive shall execute a release (the "Release"), in a form and substance reasonably satisfactory to the Board, of any claims, whether arising under Federal, state or local statute, common law or otherwise, against the Company and its direct or indirect subsidiaries, and their respective officers, directors and stockholders which arise or may have arisen on or before the date of the Release, other than any claims arising under any of the Transaction Documents or any rights to indemnification from the Company and its direct or indirect subsidiaries pursuant to any provisions of Company's (or any of its subsidiaries') certificate of incorporation or by-laws or any directors and officers liability insurance policies maintained by the Company. If Executive fails or otherwise refuses to execute a Release within a reasonable time after the Company's request to do so, Executive will not be entitled to any Post-Termination Benefits. In addition, if, following a termination of employment that gives Executive a right to the payment of Post-Termination Benefits, Executive engages in any activities that violate the covenants in Section 3, Executive shall have no further right or claim to any Post-Termination Benefits and shall promptly repay any Post-Termination Benefits previously received (such repayment to be in addition to any other rights or remedies available to Company in respect of such violation). 5.3 No Mitigation. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Section 5 by seeking other employment or otherwise, and, except as otherwise expressly provided in Sections 5.1 or 5.2, the amounts of compensation or benefits payable or otherwise due to Executive under this Section 5 or other provisions of this Agreement shall not be reduced by compensation or benefits received by Executive from any other employment he shall choose to undertake following termination of his employment under this Agreement. 6. Miscellaneous. 6.1 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of Executive and the successors and assigns of the Company. 147 6.2 Notices. All notices or other communications hereunder shall be made in writing and shall be deemed duly given (a) when personally delivered to the intended recipient (or an officer of authorized representative of the intended recipient), (b) on the day of transmittal when sent by facsimile with confirmation of receipt if sent prior to 5:00 pm, or on the immediately following day if sent after 5:00 pm, (c) on the first business day after the date sent when sent by a nationally recognized overnight courier service, or (d) three business days after it is sent by first class U.S. mail, postage prepaid, to the intended recipient at the address set forth below: (a) to PHC or the Company, to it at: PHC, Inc. 200 Lake Street, Suite 102 Peabody, MA 01960 Attention: Bruce A. Shear, President Facsimile No.: (978) 536-2677 with a copy to: Arent Fox Kintner Plotkin & Kahn, PLLC 1050 Connecticut Avenue, NW Washington, DC 20036-5339 Attention: J. Aaron Ball, Esq. Facsimile No.: (202) 857-6395 (b) to Executive at: Michael J. Colombo 4328 East Bramble Circle Mesa, AZ 85206 Any party may change the address to which notices and communications hereunder are to be delivered by giving the other parties notice in the manner set forth herein. 6.3 Construction. As used in this Agreement, unless the context otherwise requires: (i) references to "Section" are to a section of this Agreement; (ii) all "Exhibits" referred to in this Agreement are to Exhibits attached to this Agreement and are incorporated into this Agreement by reference and made a part of this Agreement; (iii) "include", "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import; (iv) the headings of the various sections and other subdivisions of this Agreement are for convenience of reference only and shall not modify, define or limit any of the terms or provisions of this Agreement; and (v) "knowledge" of a person means the actual knowledge of such person and the knowledge that a prudent individual could be expected to discover or otherwise become aware of in the course of conducting a reasonable investigation concerning the existence of the matters addressed. 148 6.4 Assignment. This Agreement shall not be assignable by Executive. 6.5 Execution in Counterparts. This Agreement may be executed in two or more counterparts and by facsimile signature, each of which shall constitute an original, but all of which together shall constitute but a single instrument. 6.6 Jurisdiction and Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona applicable to agreements made and to be performed in Arizona. Any and all disputes arising out of, related or pertaining to this Agreement shall be resolved in accordance with the Arbitration provisions set forth in Section 10.12 of the Purchase Agreement. 6.7 Severability. If any provision of this Agreement, or the application of any provision to any person or circumstance, shall for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and the application of that provision to other persons or circumstances shall not be affected but shall be enforced to the full extent permitted by law. 6.9 Complete Agreement; Modification and Termination. This Agreement contains a complete statement of all the arrangements among the parties with respect to its subject matter, supersedes all existing agreements among them concerning that subject matter and may be modified, waived or terminated only by a written instrument signed by the parties. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. PHC, Inc. By: /s/ Bruce A. Shear ______________________________________ Bruce A. Shear Title: President EXECUTIVE /s/ Michael Colombo ______________________________________ Michael Colombo 149 A-1 Exhibit A Executive Job Description 1. Responsibilities The Executive shall be responsible for management of all PHC staff conducting Clinical Research Services (including within Pivotal, PPR, Inc., and any PHC operating divisions) and all other employees associated with the Clinical Research Services Business. Efforts of the Executive will be focused towards the following: o Manage Growth o Implement Best Practices across all sites conducting clinical research o Identify and implement strategies to improve operational efficiency and patient recruitment o Assess, present and pursue growth opportunities using either Greenfield or acquisition approaches o Develop staff to ensure a robust long-term focused, high performance organization o Develop business strategy and annual goals for the clinical research organization 2. Reporting Relationship The Executive will report directly to the CEO of PHC and the Board. All employees conducting Clinical Research Services full time will have a direct reporting relationship into the clinical research organization managed by Executive. Any PHC staff whose time is divided between providing Clinical Research Services and providing other services to PHC or its subsidiaries or affiliates will have a direct reporting relationship into the clinical research organization when they are performing tasks contracted to them by the Pivotal Business. Compensation for part time staff will be negotiated prior to acceptance of any new protocols for work to be performed on that protocol. 3. Accountability The Executive will be accountable directly to the CEO of PHC. The Executive is responsible for all financial and operational performance measures defined above. The Executive will provide weekly written performance reports (5-15) to the CEO of PHC. The Executive will support any Board presentations or meetings as requested by the CEO of PHC. Any and all foreseen difficulties associated with meeting monthly performance targets will be identified to the CEO of PHC. 150 4. Authority Subject to the authority of the Board, the Executive will have full authority to manage and run clinical research activities across all PHC subsidiary sites. Subject to the authority of the Board, the Executive will have authority to conduct clinical research operations autonomously at all PHC sites. 151 EX-10 11 exh10_35.txt 1ST AMEND. MEMBERSHIP PURCHASE COLOMBO AGREEMENT Exhibit 10.35 FIRST AMENDMENT TO MEMBERSHIP PURCHASE AGREEMENT & COLOMBO EMPLOYMENT AGREEMENT & NOTE C Dated APRIL 30, 2004 The parties to this First Amendment to Membership Purchase Agreement and Colombo Employment Agreement and Note C (the "Agreement") are PHC, Inc., a Massachusetts corporation ("PHC" or "Buyer"), Pivotal Research Centers, L.L.C., an Arizona limited liability company ("Pivotal"), Louis C. Kirby ("Kirby"), Anthony A. Bonacci ("Bonacci") and Carol A. Colombo ("Columbo") (Kirby, Bonacci and Colombo may be collectively referred to herein as the "Sellers") and Michael J. Colombo ("MColumbo"). This Amendment shall amend that certain Membership Purchase Agreement between Buyer, Pivotal and Sellers dated April 30, 2004 (the "Agreement"), the Colombo Employment Agreement (as that term defined in the Agreement) and Note C (as that term is defined in the Agreement). All capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Membership Purchase Agreement or the Notes, as applicable. For purposes of this Amendment, "CEO" means the Chief Executive officer of Pivotal and the CEO of PHC divisions, subsidiaries and/or affiliates conducting Clinical Research Services. MColumbo is the CEO under the terms of the Colombo Employment Agreement. Except as specifically amended hereby, all of the terms of the Agreement and the Colombo Employment Agreement shall remain in full force and effect. The Agreement is hereby amended as follows: 1. Financial Control Over Clinical Research Services. Except to the extent prohibited by all applicable laws, Buyer hereby agrees that all routine accounting and financial functions relating to Clinical Research Services, including but not limited to maintaining all books and records relating to Clinical Research Services, maintaining depository bank accounts, payroll input, receipt and deposit of payment for accounts receivable, and writing checks for immediate needs associated with providing Clinical Research Services, will be performed in Arizona under the authority of the CEO, and reported to Buyer's corporate office on a schedule established by Buyer's. All accounting and financial functions for Clinical Research Services shall be performed in accordance with industry appropriate processes and procedures shall comply with applicable Law, as approved by Bruce Shear on behalf of Buyer. The CEO will oversee all of the above referenced accounting and financial controls related to Clinical Research Services and such oversight is hereby added to and included within the definition of MColombo's material duties under the Colombo Employment Agreement. Notwithstanding the above, Buyer shall retain the right to issue from its corporate office checks for payables related to Clinical Research Services. With respect to the Clinical Research Services payables, Buyer's corporate office will take all reasonable and necessary measures to ensure that payables are paid when due. To ensure prompt payment of payables, Buyer hereby agrees to the following procedures: (i) if the CEO authorizes an expenditure related to Clinical Research Services, it will be paid by Buyer's corporate office without delay; (ii) payroll for employees performing Clinical Research Services will be paid as scheduled bi-weekly in the amount specified by the CEO, (iii) Buyer will not adjust the amount 152 of or delay the issuance of bonus checks to Clinical Research Services employees; (v) cash advances for travel will be approved by the CEO and processed by Buyer's corporate office in an expeditious manner; (vi) cash reimbursements for travel will be paid within two weeks of receipt by Buyer's corporate office of an expense report, provided such travel reimbursements have been reviewed and approved by the CEO, and (vii) Louis Kirby, Shannon Bird, Mike Colombo, shall each be issued a corporate credit card, which they shall be responsible to use in a commercially reasonable manner and only for company business, provided, however that any failure to use the cards in a commercially reasonable manner may result in the termination such privilege for the offending party. Airline travel shall be booked through PHC's corporate office. 2. Full Operational Control over Clinical Research Services. Buyer agrees that all operational control related to Clinical Research Services shall be maintained by CEO, which shall specifically include, but not be limited to, full authority and control over: (i) all employees performing Clinical Research Services, (ii) the employee compensation structure put in place annually by the CEO for Clinical Research Services employees, which compensation structure shall be within industry market ranges unless otherwise approved by Buyer, provided Buyer shall have the right to review and approve compensation structure for any executive level employees proposed to be hired by the CEO related to Clinical Research Services, and (iii) hiring and firing personnel performing Clinical Research Services, with all such activities being added to and included within the definition of MColombo's material duties under the Colombo Employment Contract. 3. Financial Reporting. Buyer shall provide to Sellers, through the CEO, a monthly financial statement relating to all Clinical Research Services and Buyer shall provide Sellers, upon receipt of written request, with access to the information used in or underlying such financial reports (this request, if made, will be made to PHC's CEO, who will fulfill such request). 4. Note C. With respect to Note C, the definition of Adjusted EBITDA is hereby modified to exclude any of Buyer's intra-company or related company debt, including but not limited to debt attributed to PPR. Adjusted EBITDA also shall not include any corporate overhead charges on the Non-Pivotal Business in excess of $50,000 per annum, and no direct third party costs incurred and paid by Buyer's corporate office on behalf of Non-Pivotal Business shall exceed the market rate at which such services could be obtained from unrelated third parties. If the Non-Pivotal Business pays any inter-company or related company debt, or any corporate overhead charges in excess of $50,000 per annum, or incurs any direct costs at prices in excess of prevailing market rates, then all such amounts shall be added back into the Adjusted EBITDA. 5. Insurance. The undersigned parties agree that the Landmark Professional Liability Insurance Policy (the "Landmark Policy") will be prorated as of Closing with Sellers responsible only for costs related to the period of coverage from 2/15/04 to 2/28/04, and (ii) no portion of the Landmark Policy, including retroactive coverage, will be charged to Sellers or offset against amounts owed to Sellers. 153 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be signed on the date and year first above written. PHC, INC., A MASSACHUSETTS CORPORATION By: /s/ Bruce A. Shear, President PIVOTAL RESEARCH CENTERS, L.L.C. /s/ Louis C. Kirby MICHAEL J COLOMBO /s/ Michael J. Colombo SELLERS: /s/ Louis C. Kirby 5633 North Royal Circle Paradise Valley, AZ 85253 /s/ Carol A. Colombo 2525 E. Camelback Road, Suite 840 Phoenix, AZ 85016 /s/ Anthony A. Bonacci 2525 E. Camelback Road, Suite 840 Phoenix, AZ 85016 154 -----END PRIVACY-ENHANCED MESSAGE-----