-----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, IGcfIrEqRloSz0x20Cr9rtEN4pkNelCBnY6BodyGArVzQUEkfJ0Bs7Cqy/98R4YJ 2bu+weX8WUdmse6BkVcyJA== 0001243432-06-000032.txt : 20060522 0001243432-06-000032.hdr.sgml : 20060522 20060522134742 ACCESSION NUMBER: 0001243432-06-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060522 DATE AS OF CHANGE: 20060522 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHC INC /MA/ CENTRAL INDEX KEY: 0000915127 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 042601571 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22916 FILM NUMBER: 06857897 BUSINESS ADDRESS: STREET 1: 200 LAKE ST STE 102 CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 9785362777 MAIL ADDRESS: STREET 1: 200 LAKE ST STREET 2: STE 102 CITY: PEABODY STATE: MA ZIP: 01960 10-Q 1 q10_0506.txt THIRD QUARTER 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2006. | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ___________ Commission file number 0-22916 PHC, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2601571 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Lake Street, Suite 102, Peabody MA 01960 (Address of principal executive offices) (Zip Code) 978-536-2777 (Registrant's telephone number) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer _____ Accelerated filer ______ Non accelerated filer X Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares outstanding of each class of common equity, as of May 4, 2006: Class A Common Stock 17,674,666 Class B Common Stock 776,962 -- 1 -- PHC, Inc. PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements. Condensed Consolidated Balance Sheets - March 31, 2006 (unaudited) and June 30, 2005. Condensed Consolidated Statements of Operations (unaudited) - Three and nine months ended March 31, 2006 and March 31, 2005. Condensed Consolidated Statements of Cash Flows (unaudited)- Nine months months ended March 31, 2006 and March 31, 2005. Notes to Condensed Consolidated Financial Statements - March 31, 2006. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk. Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits Signatures -- 2 -- PART I. FINANCIAL INFORMATION Item 1. Financial Statements PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, June 30, ASSETS 2006 2005 ___________ ___________ (unaudited) Current assets: Cash and cash equivalents $ 957,437 $ 917,630 Accounts receivable, net of allowance for doubtful accounts of $3,117,247 at March 31,2006 and $1,956,984 at June 30, 2005 6,601,905 6,265,381 Pharmaceutical receivables 1,977,983 1,414,340 Prepaid expenses 521,297 146,988 Other receivables and advances 612,196 638,654 Deferred income tax asset 1,415,344 1,375,800 ___________ ___________ Total current assets 12,086,162 10,758,793 Accounts receivable, non-current 45,000 65,000 Other receivable 97,350 84,422 Property and equipment, net 1,865,042 1,516,114 Deferred financing costs, net of amortization of $110,910 at March 31, 2006 and $76,234 June 30, 2005 126,262 145,938 Customer relationships, net of amortization of $230,000 at March 31, 2006 and $140,000 at June 30, 2005 2,170,000 2,260,000 Goodwill 2,704,389 2,648,209 Other assets 506,139 417,172 ___________ ___________ Total assets $19,600,344 $17,895,648 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $1,618,948 $ 907,569 Current maturities of long-term debt 881,832 769,599 Revolving credit note 2,040,605 2,385,629 Deferred revenue 225,290 85,061 Current portion of obligations under capital leases 59,265 29,777 Accrued payroll, payroll taxes and benefits 1,414,659 1,411,653 Accrued expenses and other liabilities 763,093 1,063,189 ___________ ___________ Total current liabilities 7,003,692 6,652,477 Long-term debt 1,281,275 1,900,022 Obligations under capital leases 75,446 12,210 Deferred tax liability 244,874 229,000 ___________ ___________ Total liabilities 8,605,287 8,793,709 ___________ ___________ Stockholders' equity: Preferred Stock, 1,000,000 shares authorized, none issued or outstanding -- -- Class A common stock, $.01 par value, 30,000,000 shares authorized, 17,617,764 and 17,490,818 shares issued at March 31, 2006 and June 30, 2005, respectively 176,178 174,908 Class B common stock, $.01 par value, 2,000,000 shares authorized, 776,962 and 776,991 issued and outstanding at March 31, 2006 and June 30, 2005, respectively, each convertible into one share of Class A common Stock 7,769 7,770 Additional paid-in capital 23,623,983 23,377,059 Treasury stock, 199,098 shares and 181,738 shares of Class A common stock at March 31, 2006 and June 30, 2005 respectively, at cost (191,700) (155,087) Accumulated deficit (12,621,173) (14,302,711) ___________ ___________ Total stockholders' equity 10,995,057 9,101,939 Total liabilities and stockholders' equity $19,600,344 $17,895,648 =========== =========== See Notes to Condensed Consolidated Financial Statements -- 3 -- PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended March 31, March 31, 2006 2005 2006 2005 ________________________________________________ Revenues: Patient care, net $7,292,804 $6,734,949 $20,471,140 $18,895,774 Pharmaceutical studies 1,523,277 1,103,205 3,913,370 3,384,347 Contract support services 1,137,878 925,528 3,216,788 2,510,277 ___________ ___________ ___________ ___________ Total revenues 9,953,959 8,763,682 27,601,298 24,790,398 ___________ ___________ ___________ ___________ Operating expenses: Patient care expenses 3,787,166 3,533,279 10,341,470 9,541,581 Patient care expenses, pharmaceutical 552,477 444,999 1,626,465 1,247,106 Cost of contract support services 713,438 520,475 1,898,300 1,595,478 Provision for doubtful accounts 334,248 217,756 1,466,903 800,503 Administrative expenses 2,815,164 2,410,474 8,193,940 7,008,636 Administrative expenses, pharmaceutical 638,486 653,827 1,810,776 2,049,492 ___________ ___________ ___________ ___________ Total operating expenses 8,840,979 7,780,810 25,337,854 22,242,796 ___________ ___________ ___________ ___________ Income from operations 1,112,980 982,872 2,263,444 2,547,602 ___________ ___________ ___________ ___________ Other income (expense): Interest income 11,281 15,004 49,542 49,535 Other income 25,309 31,568 57,357 58,060 Interest expense (153,594) (148,988) (483,150) (491,840) ___________ ___________ ___________ ___________ Total other expenses, net (117,004) (102,416) (376,251) (384,245) ___________ ___________ ___________ ___________ Income before provision for taxes 995,976 880,456 1,887,193 2,163,357 Provision for income taxes 45,427 -- 205,655 98,469 ___________ ___________ ___________ ___________ Net income $ 950,549 $ 880,456 $ 1,681,538 $2,064,888 =========== =========== =========== =========== Basic net income per common share $ 0.05 $ 0.05 $ 0.09 $ 0.12 =========== =========== =========== =========== Basic weighted average number of shares outstanding 18,187,750 17,648,412 18,145,789 17,474,155 =========== =========== =========== =========== Fully diluted net income per common share $ 0.05 $ 0.05 $ 0.09 $ 0.11 =========== =========== =========== =========== Fully diluted weighted average number of shares outstanding 19,212,589 18,690,012 19,242,777 18,234,480 =========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements. -- 4 -- PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended March 31 2006 2005 ___________ ____________ Cash flows from operating activities: Net income $1,681,538 $2,064,888 Adjustments to reconcile net income to net cash provided by (used in)operating activities: Depreciation and amortization 543,991 324,397 Non-cash interest expense 41,796 41,796 Deferred income tax provision (23,670) -- Non-cash stock-based compensation 118,286 78,656 Changes in: Accounts receivable (866,637) (2,313,451) Prepaid expenses and other current assets (374,309) (133,921) Other assets (103,277) (144,057) Accounts payable 711,379 52,777 Accrued expenses and other liabilities (156,861) 199,942 ___________ ____________ Net cash provided by operating activities 1,572,236 171,027 ___________ ____________ Cash flows from investing activities: Acquisition of property and equipment (753,933) (359,407) Costs related to business acquisition -- (62,258) ___________ ____________ Net cash used in investing activities (753,933) (421,665) ___________ ____________ Cash flows from financing activities: Revolving debt, net (345,024) 806,709 Proceeds from borrowings on long-term debt 7,309 1,406,201 Principal payments on long-term debt (462,895) (1,986,847) Deferred financing costs (15,000) (164,348) Costs related to issuance of capital stock -- (30,000) Issuance of common stock 73,727 190,854 Purchase of treasury stock (36,613) (13,880) ___________ ____________ Net cash (used in) provided by financing activities (778,496) 208,689 ___________ ____________ Net increase (decrease) in cash and cash equivalents 39,807 (41,949) Beginning cash and cash equivalents 917,630 594,823 ___________ ____________ Ending cash and cash equivalents $ 957,437 $ 552,874 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 483,150 $ 485,659 Income taxes 253,109 118,550 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Pivotal Acquisition Note A earn out consideration recorded $ -- $1,169,832 Issuance of common stock in cashless exercise of warrants 24,242 14,250 Issuance of common stock in cashless exercise of options 18,577 -- Value of warrants issued in connection with the Pivotal acquisition 51,860 -- See Notes to Condensed Consolidated Financial Statements. -- 5 -- PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements March 31, 2006 Note A - The Company PHC, Inc. (the "Company") is a national health care company, which operates subsidiaries specializing in behavioral health services including the treatment of substance abuse, which includes alcohol and drug dependency and related disorders and the provision of psychiatric services. The Company also conducts pharmaceutical research studies, operates help lines for employee assistance programs, call centers for state and local programs and provides management, administrative and online behavioral health services. The Company primarily operates under four business segments: Behavioral health treatment services, including two substance abuse treatment facilities: Highland Ridge Hospital, located in Salt Lake City, Utah, which also treats psychiatric patients, and Mount Regis Center, located in Salem, Virginia, and eight psychiatric treatment locations which include Harbor Oaks Hospital, a 64-bed psychiatric hospital located in New Baltimore, Michigan, Detroit Behavioral Institute, a 50-bed psychiatric facility dedicated to adjudicated juveniles located in Detroit, Michigan and six outpatient behavioral health locations (one in New Baltimore, Michigan operating in conjunction with Harbor Oaks Hospital, two in Las Vegas, Nevada operating as Harmony Healthcare and three locations operating as Pioneer Counseling Center in the Detroit, Michigan metropolitan area); Pharmaceutical study services, including four clinical study sites: two in Arizona, in Peoria and Mesa, one in Royal Oak, Michigan and one in Midvale, Utah. These research sites conduct studies of the effects of specified pharmaceuticals on a controlled population through contracts with major manufacturers of the pharmaceuticals. All of the Company's research sites operate as Pivotal Research Centers; Call center and help line services (contract services), including two call centers: one operating in Midvale, Utah and one in Detroit, Michigan. The Company provides help line services through contracts with major railroads, a smoking cessation contract with a major defense contractor and a call center contract with Wayne County Michigan. The call centers both operate under the name Wellplace; and Behavioral health administrative services, including delivery of management and administrative and online services. The parent company provides management and administrative services for all of its subsidiaries and online services for its behavioral health treatment subsidiaries and its call center subsidiaries. It also provides behavioral health information through its website Wellplace.com. Note B - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending June 30, 2006. The accompanying financial statements should be read in conjunction with the June 30, 2005 consolidated financial statements and footnotes thereto included in the Company's 10-K filed on September 28, 2005. The Company bills for its behavioral healthcare services at its inpatient and outpatient facilities using different software platforms for each type of service; however, in all cases the charges are contractually adjusted at the time of billing using adjustment factors based on agreements or contracts with the insurance carriers and the specific plans held by the individuals. This method may still require additional adjustment based on ancillary services provided and deductibles and copays due from the individuals which are estimated at the time of admission based on information received from the individual. Adjustments to these estimates are recognized as adjustments to revenue during the period identified, usually when payment is received. The Company's policy is to collect estimated co-payments and deductibles at the time of admission. Payments are made by way of cash, check or credit card. If the patient does not have sufficient resources to pay the estimated co-payment in advance, the Company's policy is to allow payment to be made in three installments one third due upon admission, one third due upon discharge and the balance due 30 days after discharge. At times the patient is not physically or mentally stable enough to comprehend or agree to any financial -- 6 -- arrangement. In this case the Company will make arrangements with the patient once his or her condition is stabilized. At times, this situation will require the Company to extend payment arrangements beyond the three payment method previously outlined. Whenever extended payment arrangements are made, the patient, or the individual who is financially responsible for the patient, is required to sign a promissory note to the Company, which includes interest on the balance due. Pharmaceutical study revenue is recognized only after a pharmaceutical study contract has been awarded and the patient has been selected and accepted based on study criteria and billable units of service are provided. Where a contract requires completion of the study by the patient, no revenue is recognized until the patient completes the study program. Contract support service revenue is a result of fixed fee contracts to provide telephone support. Revenue for these services is recognized ratably over the service period. The Company's days sales outstanding ("DSO") are significantly different for each type of service and each facility based on the payors for each service. Overall, the DSO for the combined operations of the Company were 92 days for the nine months ended March 31, 2006 and 90 days the fiscal year ended June 30, 2005. The table below shows the DSO by segment for the same periods. Period Treatment Pharmaceutical Contract End Services Services Services 03/31/2006 87 139 46 06/30/2005 89 114 62 This increase in the Pharmaceutical Services DSO's is related to the high DSO's normally associated with research receivables coupled with the recent start up of a large research contract. Contract Services DSO's fluctuate dramatically by the delay in payment of a few days for any of our large contracts. There was such a delay in payments for the Michigan call center at the end of fiscal 2005, artificially inflating the DSO's for the period. Note C- Stock Based Compensation The Company has three active stock plans: a stock option plan, an employee stock purchase plan and a non-employee directors' stock option plan. The stock option plan provides for the issuance of a maximum of 1,300,000 shares of Class A common stock of the Company pursuant to the grant of incentive stock options to employees or nonqualified stock options to employees, directors, consultants and others whose efforts are important to the success of the Company. Subject to the provisions of this plan, the compensation committee of the Board of Directors has the authority to select the optionees and determine the terms of the options including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option will not be less than the market price of the Class A common stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options. The employee stock purchase plan provides for the purchase of Class A common stock at 85 percent of the fair market value at specific dates, to encourage stock ownership by all eligible employees. A maximum of 500,000 shares may be issued under this plan. The non-employee directors' stock option plan provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board. Under the plan a maximum of 350,000 shares may be issued. Each outside director is granted an option to purchase 20,000 shares of Class A common stock annually at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date. The Company issues stock options to its employees and directors and provides employees the right to purchase stock pursuant to stockholder approved stock option and stock purchase plans. Effective July 1, 2005, the Company adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), using the Statement's modified prospective application method. Prior to July 1, 2005, the Company followed Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock compensation. -- 7 -- Under the provisions of SFAS No. 123R, the Company recognizes the fair value of stock compensation in net income, over the requisite service period of the individual grantees, which generally equals the vesting period. All of the Company's stock compensation is accounted for as an equity instrument and there have been no liability awards granted. Any income tax benefit related to stock compensation will be shown under the financing section of the Cash Flow Statement. Based on experience the Company has not adjusted the compensation expense for estimated forfeitures. Any forfeitures in the future will be recognized when they occur. At June 30, 2005, the Company accelerated the vesting on all previously granted options. Therefore, as of the date of adoption there is no unrecognized expense of these options and the expense recorded in the nine months ended March 31, 2005 is for options issued and vested during that period. The unrecognized expense of awards not yet vested will be recognized in net income in the periods in which they vest. Under the provisions of SFAS 123R, the Company recorded $27,413 of stock-based compensation on its consolidated condensed statement of operations for the three months ended March 31, 2006 and $112,625 for the nine months ended March 31, 2006, which is included in administrative expenses as follows: Three Months Ended Nine Months Ended March 31, 2006 March 31, 2006 Directors fees $21,000 $ 21,000 Employee compensation 6,413 91,625 _________ ________ Total $27,413 $112,625 ========= ======== Based on the Company's historical voluntary turnover rates for individuals in the positions who received options in the period, there was no forfeiture rate assessed. It is assumed these options will remain outstanding for the full term of issue. Under the true-up provisions of SFAS 123R, a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated. SFAS 123R requires the presentation of pro forma information for the comparative period prior to the adoption as if all of the Company's employee stock options had been accounted for under the fair value method of the original SFAS 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation to the prior-year period. Three Months Ended Nine Months Ended March 31, 2005 March 31, 2005 Net income, as reported $ 880,456 $2,064,888 Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (23,200) (105,850) Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects $ 857,256 $1,959,038 ========= ========== Net income per share: Basic - as reported $ 0.05 $ 0.12 ========= ========== Basic - pro forma $ 0.05 $ 0.11 ========= ========== Diluted - as reported $ 0.05 $ 0.11 ========= ========== Diluted - pro forma $ 0.05 $ 0.11 ========= ========== -- 8 -- The Company had the following activity in its stock option plans for the nine months ended March 31, 2006: Number Weighted-Average Intrinsic Value of Exercise Price at Shares Per Share March 31, 2006 __________ ________________ ______________ Balance - June 30, 2005 1,138,250 $0.85 Granted 345,000 $2.44 Exercised (47,250) $0.83 Expired (30,000) $1.73 __________ ________________ ______________ Balance - March 31, 2006 1,406,000 $1.22 $ 1,518,480 ========== The total intrinsic value of options exercised during the nine-months ended March 31, 2006 was $79,967. The following summarizes the activity of the Company's stock options that have not vested for the nine months ended March 31, 2006. Number Weighted- of Average Shares Fair Value __________ __________ Nonvested at July 1, 2005 0 $0.00 Granted 258,750 $1.19 Expired 0 $0.00 Vested 0 $0.00 _________ Nonvested at March 31, 2006 258,750 $1.19 ========= The compensation cost related to the fair value of these shares of $308,000.00 will be recognized when these options vest. The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted after the adoption of SFAS 123R. The weighted-average fair values of the options granted under the stock option plans for the three months and nine months ended March 31, 2006 was $1.29 and $1.19, respectively using the following: Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended March 31, March 31, March 31, March 31, 2006 2005 2006 2005 _________ _________ _________ _________ Average risk-free interest rate 4.50% 4.00% 4.44% 4.44% Expected dividend yield None None None None Expected life 8.52 years 8.64 years 5.87 years 5.69 years Expected volatility 50.0% 47.0% 47.8% 50.7% The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the options. The risk-free interest rate is the U.S. Treasury rate on the date of grant. The expected life was calculated using the Company's historical experience for the expected term of the option. -- 9 -- Note D - Business Segment Information The Company's behavioral health treatment services have similar economic characteristics, services, patients and clients. Accordingly, all behavioral health treatment services are reported on an aggregate basis under one segment. The Company's segments are more fully described in Note A above. Residual income and expenses from closed facilities are included in the administrative services segment. The following summarizes the Company's segment data: Treatment Pharmaceutical Contract Administrative Services Study Services Services Services Eliminations Total __________________________________________________________________________ For the three months ended: March 31, 2006 Revenues - external customers $7,292,804 $1,523,277 $1,137,878 $ -- $ -- $ 9,953,959 Revenues - intersegment 16,600 -- 22,615 816,000 (855,215) -- Net income (loss) 1,129,901 317,240 416,891 (913,483) -- 950,549 Capital Expenditures 52,939 14,738 53,474 5,006 -- 126,157 Depreciation & Amortization 121,764 42,738 19,304 13,513 -- 197,319 Interest Expense 123,801 15,074 1,246 13,473 -- 153,594 Income tax expense 39,000 -- 6,303 124 -- 45,427 March 31, 2005 Revenues - external customers $ 6,734,949 $1,103,205 $ 925,528 $ -- $ -- $ 8,763,682 Revenues - intersegment 5,940 -- 15,437 690,000 (711,377) -- Net income (loss) 1,186,896 59,042 399,053 (764,535) -- 880,456 Capital Expenditures 46,065 5,194 794 -- -- 52,053 Depreciation & Amortization 65,098 35,979 966 12,829 -- 114,872 Interest Expense 115,830 2,337 -- 30,821 -- 148,988 Income tax expense (7,600) -- 6,000 1,600 -- -- For the nine months ended: March 31, 2006 Revenues - external customers $20,471,140 $3,913,370 $3,216,788 $ -- $ -- $27,601,298 Revenues - intersegment 34,250 -- 66,895 2,448,000 (2,549,145) -- Net income (loss) 2,382,277 407,712 1,287,953 (2,396,404) -- 1,681,538 Capital Expenditures 510,642 41,029 138,618 63,644 -- 753,933 Depreciation & Amortization 313,555 123,548 38,551 68,337 -- 543,991 Interest Expense 379,651 64,577 3,675 35,247 -- 483,150 Income tax expense 171,231 3,840 26,860 3,724 -- 205,655 Identifiable Assets 10,247,509 6,165,910 734,846 2,452,079 -- 19,600,344 Goodwill 969,099 1,735,290 -- -- -- 2,704,389 -- 10 -- Note D - Business Segment Information (continued): Treatment Pharmaceutical Contract Administrative Services Study Services Services Services Eliminations Total __________________________________________________________________________ March 31, 2005 Revenues - external customers $18,895,774 $3,384,347 $2,510,277 $ -- $ -- $24,790,398 Revenues - intersegment 5,940 -- 40,132 2,034,000 (2,080,072) -- Net income (loss) 3,182,988 211,794 896,799 (2,226,693) -- 2,064,888 Capital Expenditures 293,881 10,137 1,836 50,161 -- 356,015 Depreciation & Amortization 169,157 105,785 2,829 46,626 -- 324,397 Interest Expense 349,559 46,955 -- 85,326 -- 481,840 Income tax expense 76,400 -- 18,000 4,069 -- 98,469 For the period ended June 30, 2005: Identifiable assets 9,333,260 5,596,917 669,229 2,296,242 -- 17,895,648 Goodwill 969,099 1,679,110 -- -- -- 2,648,209
Note E - Debt covenants For the quarter ended March 31, 2006, the Company was not in compliance with one of its long term debt covenants related to the Harbor Oaks operations. The Company continues to make progress in recovering from the software failure at this facility, which delayed billing and postponed collection effort while the system was being recovered and the water damage at the facility which slowed admissions and reduced revenue. CapitalSource, the Company's lender, has provided the Company with a waiver of this covenant for the period. Note G - Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 (R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123 (R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro-forma disclosure is no longer an alternative. The Company implemented SFAS No. 123 (R) on July 1, 2005. As a result of its implementation, the Company expensed $27,413, $15,375 and $69,837 in compensation cost in the quarters ended March 31, 2006, December 31, 2005 and September 30, 2005, respectively, based on the Black-Scholes value of the 85,000 options issued in the quarter ended March 31, 2006, 30,000 options issued in the quarter ended December 31, 2005 and 230,000 options issued in the quarter ended September 30, 2005. Transactions involving the employee stock purchase plan are not recorded until the stock is issued as they are immaterial. In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections," which replaces APB Opinion No. 20 "Accounting Changes," and FASB Statement No. 3 "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS No. 154 shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS No. 154 was issued. At the present time, we do not believe that adoption of SFAS No. 154 will have a material effect on our financial position, results of operations or cash flows. Note H - Subsequent Events On April 20, 2006, in conjunction with the agreement the Company entered into with Medical Information Technologies, Inc., ("Meditech"), as previously disclosed, the Company signed a Master Lease Agreement with Bank of America to finance the acquisition of the software and the required hardware which will provide the Company with enhanced billing, collection and clinical reporting capabilities. -- 11 -- The agreement provides separate components for hardware and software: * Under the first component Bank of America has agreed to purchase hardware that is necessary for the Company to use the Meditech software. This hardware is expected to be delivered in August 2006. The Company has agreed to lease the hardware from Bank of America with 36 payments beginning in July 2006. Scheduled lease payments on the hardware are $6,065.11 with the final payment made in advance upon the signing of the lease. The lease includes an option for the Company to purchase the hardware at fair market value at the lease termination. Based on required disbursements by Bank of America in the amount of $200,000 to purchase the hardware, and the expected fair market value at lease termination, the lease payments over the term are equivalent to financing the purchase of the hardware at an annual interest rate of 6.13%. * Under the second component Bank of America has agreed to disburse $462,431 to Meditech to purchase software that the Company would otherwise be obligated to purchase under its agreement with Meditech. The schedule of Bank of America's purchase is based on the software delivery and implementation plan included in the Meditech agreement with the Company. The Company has entered into a capital lease with Bank of America to lease the software for a total of 60 payments beginning in October 2006. Scheduled payments under the lease begin with four payments of $3,000 followed by 56 payments of $9,868.71 with the final payment made in advance upon the signing of the lease. The Company has an option to purchase the software for one dollar at lease termination. The lease payments over the term are equivalent to financing the purchase of the software at an annual interest rate of 8.03%. The Company expects full implementation of the software at its treatment facilities by March 2007. -- 12 -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act") and are subject to the Safe Harbor provisions created by the statute. Generally words such as "may", "will", "should", "could", "anticipate", "expect", "intend", "estimate", "plan", "continue", and "believe" or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements. Overview The Company presently provides behavioral health care services through two substance abuse treatment centers, two psychiatric hospitals and six outpatient psychiatric centers (collectively called "treatment facilities"). The Company's revenue for providing behavioral health services through these facilities is derived from contracts with managed care companies, Medicare, Medicaid, state agencies, railroads, gaming industry corporations and individual clients. The profitability of the Company is largely dependent on the level of patient census and the payor mix at these treatment facilities. Patient census is measured by the number of days a client remains overnight at an inpatient facility or the number of visits or encounters with clients at outpatient clinics. Payor mix is determined by the source of payment to be received for each client being provided billable services. The Company's administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases. Although the Company has changed the focus and reduced expenses of its internet operation, Behavioral Health Online, Inc. continues to provide behavioral health information through its web site at Wellplace.com but its primary function is technology and internet support for the Company's other subsidiaries and their contracts. As such, the expenses related to Behavioral Health Online, Inc. are included as corporate expenses. Contract Support services are provided by the Company through two call centers located in Utah and Michigan. Services provided include employee assistance programs for major railroads, smoking cessation services, credentialing services for professionals and mental health registration and reference services for the residents of Wayne County, Michigan. The Company's research division, Pivotal Research Centers, Inc., contracts with major manufacturers of pharmaceuticals to assist in the study of the effects of certain pharmaceuticals in the treatment of specific illness through its clinics in Arizona, Michigan and Utah. The healthcare industry is subject to extensive federal, state and local regulation governing, among other things, licensure and certification, conduct of operations, audit and retroactive adjustment of prior government billings and reimbursement. The extent of any future regulatory changes and their impact on the Company's business is unknown. The current administration has put forth proposals to mandate equality in the benefits available to those individuals suffering from mental illness (The Parity Act). If passed, this legislation will improve access to and reimbursement for the Company's programs. Managed care has had a profound impact on the Company's operations, in the form of shorter lengths of stay, extensive certification of benefits requirements and, in some cases, reduced payment for services. As part of the Government Medicare Program's newly implemented prospective payment system, reimbursement rates for behavioral health care have increased. When fully implemented, this increase should have a positive impact on performance at the Company's one Medicare facility, Harbor Oaks Hospital. The Company is exploring the possibility of becoming a Medicare provider at its other in-patient facilities. Critical Accounting Policies The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including but not limited to those related to revenue recognition, accounts receivable reserves, income tax valuation allowances, and the impairment of goodwill and other intangible assets. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the -- 13 -- results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Revenue recognition and accounts receivable: Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare. Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due to periodic changes in the regulatory environment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between the amounts provided and subsequent settlements are recorded in operations in the year of settlement. When amounts are due as a result of cost report settlements, they are recorded and listed separately on the consolidated balance sheets as "Other receivables, third party". The provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable. The allowance for doubtful accounts does not include the contractual allowances. All revenues from treatment services reported by the Company are shown net of estimated contractual adjustments and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made to either increase or decrease revenue in the period the payment is received in accordance with the AICPA "Audit and Accounting Guide for Health Care Organizations." Based on amounts recorded as adjustment to reserves for the period listed and the company's current DSO's for the treatment segment of 87 days, the Company estimates adjustments to revenue recorded in the periods presented for services provided and revenues booked in prior periods at: $372,000 Fiscal year ended June 30, 2005 $486,000 For the nine months ended March 31, 2006 The increase for the current nine months over last year is primarily attributable to the new rates under the Medicare prospective payment system mentioned above, which provided higher reimbursement than the revenues booked. Revenues for the current year are also increased by cost report settlements for prior years. No cost report settlement was received in the fiscal year ended June 30, 2005; however, a Medicare cost report settlement of $158,100 was recorded during the period ended March 31, 2006. Presented below is a breakdown of net revenue by payor for the periods presented. Net Revenue by Payor (in thousands) For the three For the nine For the fiscal months ended months ended year ended 03/31/2006 06/30/2005 Amount Percent Amount Percent Amount Percent ______ ____ _______ ____ _______ ____ Private Pay $ 326 5 $ 922 5 $ 1,212 5 Commercial 4,569 64 13,044 64 17,608 67 Medicare 227 3 671 3 999 4 Medicaid 2,013 28 5,676 28 6,268 24 ______ ____ _______ ____ _______ ____ Net Revenue * $7,135 * $20,313 $26,087 ====== ======= ======== * excludes Medicare cost report settlement revenue of $158,100 The Company currently has one "at-risk" contract. The contract calls for the Company to provide for all of the inpatient and outpatient behavioral health needs of the insurance carrier's enrollees in Nevada for a fixed monthly fee per member per month. Revenues are recorded monthly based on this formula and the expenses related to providing the services under this contract are recorded as incurred. The Company provides most of the outpatient care directly and, through utilization review, monitors closely, and pre-approves all inpatient and outpatient services not provided directly. The contract is considered "at-risk" because the payments to third-party providers for services rendered could equal or exceed the total amount of the revenue recorded. -- 14 -- Pharmaceutical study revenue is recognized only after a pharmaceutical study contract has been awarded and the patient has been selected and accepted based on study criteria and billable units of service are provided. Where a contract requires completion of the study by the patient, no revenue is recognized until the patient completes the study program. Contract support service revenue is a result of fixed fee contracts to provide telephone support. Revenue for these services is recognized ratably over the service period. Allowance for doubtful accounts: The provision for bad debts is calculated based on a percentage of each aged accounts receivable category beginning at 0-5% on current accounts and increasing incrementally for each additional 30 days the account remains outstanding until the account is over 360 days outstanding, at which time the provision is 80-100% of the outstanding balance. These percentages vary by facility based on each facility's experience in and expectations for collecting older receivables. The Company compares this required reserve amount to the current "allowance for doubtful accounts" to determine the required bad debt expense for the period. This method of determining the required "Allowance for doubtful accounts" has historically resulted in an allowance for doubtful accounts of 20% or greater of the total outstanding receivables balance. The following is a breakdown of receivables by payor net of all allowances for the periods presented. Accounts Receivable Aging (Net of allowance for bad debts - in thousands) For the Nine Months Ended March 31, 2006 __________________________________________ Over Over Over Over Over Over Over Payor Current 30 60 90 120 150 270 360 Total _______________________________________________________________________________ Private Pay $ 143 $ 115 $121 $ 67 $ 67 $ 473 $ 74 $ 30 $ 1,090 Commercial 1,609 721 422 226 175 680 47 120 4,000 Medicare 68 26 15 17 31 54 -- -- 211 Medicaid 696 87 81 81 62 339 -- -- 1,346 ______ _____ ____ ____ ____ ______ ____ ____ ______ Total $2,516 $ 949 $639 $391 $335 $1,546 $121 $150 $6,647 Fiscal Year Ended June 30, 2005 Over Over Over Over Over Over Over Payor Current 30 60 90 120 150 270 360 Total _______________________________________________________________________________ Private Pay $ 247 $ 139 $ 98 $ 64 $ 75 $154 $127 $ 32 $ 936 Commercial 1,708 645 389 239 216 379 208 26 3,810 Medicare 121 16 7 -- -- 1 -- -- 145 Medicaid 556 277 94 74 96 342 -- -- 1,439 ______ _____ ____ ____ ____ ______ ____ ____ ______ Total $2,632 $1,077 $588 $377 $387 $876 $335 $ 58 $6,330 Income Taxes: The Company follows the liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. The Company's policy is to record a valuation allowance against deferred tax assets unless it is more likely than not that such assets will be realized in future periods. The Company considers estimated future taxable income or loss and other available evidence when assessing the need for its deferred tax valuation allowance. During the fiscal year ended June 30, 2005, the Company recognized a tax benefit of approximately $209,000, related to a decrease in its valuation allowance, based on budgeted taxable income for the next fiscal year. The Company's policy is to recognize tax benefit for only the next fiscal year based on the uncertainties surrounding the healthcare industry. Valuation of Goodwill and Other Intangible Assets Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions. The values the Company records for goodwill and other intangible assets represent fair values calculated by independent third-party appraisers. Such valuations require the Company to provide significant estimates and assumptions, which are derived from -- 15 -- information obtained from the management of the acquired businesses and the Company's business plans for the acquired businesses. Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to: (i) future expected cash flows from services to be provided, customer contracts and relationships, and (ii) the acquired market position. These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur. If estimates and assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets may indicate impairment which will require the Company to record an impairment charge in the period in which the Company identifies the impairment. The Company uses an outside valuation expert to assess the value of intangibles annually and will continue to do so unless circumstances require an earlier evaluation. The Company currently amortizes goodwill allocated to customer relationships acquired in the acquisition of Pivotal using the straight line method. Since there is no true "consumption" of the relationship that can be defined, the Company believes the straight line method of amortization best reflects the use of the intangible asset. Results of Operations The following table sets forth for the periods indicated, our operating results (dollars in thousands): Selected Statements of Income Data: For the three months ended For the nine months ended March 31, March 31, 2006 2005 2006 2005 Amount % Amount % Amount % Amount % ____________________________________________________________________ Revenue $ 9,954 100.0 $8,764 100.0 $27,601 100.0 $24,790 100.0 Cost and Expenses: Patient care expenses 4,340 43.6 3,978 45.4 11,968 43.4 10,789 43.6 Contract expenses 713 7.2 521 5.9 1,898 6.9 1,595 6.4 Administrative expenses 3,454 34.7 3,064 35.0 10,005 36.3 9,058 36.5 Provision for bad debts 334 3.4 218 2.5 1,467 5.3 801 3.2 Interest expense 154 1.5 149 1.7 483 1.7 492 2.0 Other (income) expenses, net (37) (0.4) (46) (0.5) (107) (0.4) (108) (0.4) Total Expenses 8,958 90.0 7,884 90.0 25,714 93.2 22,627 91.3 Income before provision for taxes 996 10.0 880 10.0 1,887 6.8 2,163 8.7 Provision for income taxes 45 0.5 -- 0.0 205 0.7 98 0.4 Net income 951 9.5 880 10.0 1,682 6.1 2,065 8.3
Results of Operations Total net revenue from operations increased 13.6% to $9,953,959 for the three months ended March 31, 2006 from $8,763,682 for the three months ended March 31, 2005 and 11.3% to $27,601,298 for the nine months ended March 31, 2006 from $24,790,398 for the nine months ended March 31, 2005. Net patient care revenue increased 8.3% to $7,292,804 for the three months ended March 31, 2006 from $6,734,949 for the three months ended March 31, 2005 and 8.3% to $20,471,140 for the nine months ended March 31, 2006 from $18,895,774 for the nine months ended March 31, 2005. This increase in revenue is due to a 14.5% increase in patient days, primarily due to a 4.0% increase in patient days at our substance abuse facilities for the three months ended March 31, 2006 over the same period last year and the addition of the 20 new beds at our Detroit facility. Two of the key indicators of profitability of inpatient facilities are patient days, or census, and payor mix. Patient days is the product of the number of patients times length of stay. Increases in the number of patient days results in higher census, which coupled with a more favorable payor mix (more patients with higher paying insurance contracts or paying privately) usually results in higher profitability. Therefore, patient census and payor mix are monitored very closely. -- 16 -- Revenue from pharmaceutical studies increased 38.1% to $1,523,277 for the three months ended March 31, 2006 from $1,103,205 for the three months ended March 31, 2005 and increased 15.6% to $3,913,370 for the nine months ended March 31, 2006 from $3,384,347 for the same period last year. This increase in revenue is due primarily to a large research contract signed and started in this quarter. This kind of fluctuation in revenue is expected in the pharmaceutical research business. We cannot always predict study starts or delays but attempt to keep an adequate backlog of studies and resources to affect a more stable revenue flow from research. Contract support services revenue provided by Wellplace increased 22.9% to $1,137,878 for the three months ended March 31, 2006 from $925,528 for the three months ended March 31, 2005 and increased 28.1% to $3,216,788 for the nine months ended March 31, 2006 from $2,510,277 for the nine months ended March 31, 2005. This increase in revenue is primarily due to the start-up of a new smoking cessation contract in October 2005. Patient care expenses increased by 7.2% to $3,787,166 for the three months ended March 31, 2006 from $3,533,279 for the three months ended March 31, 2005 and 8.4% to $10,341,470 for the nine months ended March 31, 2006 from $9,541,581 for the nine months ended March 31, 2005. The increases in expenses for the quarter is due primarily to the increase in patient days noted above with the primary increases in expenses directly related to patient census such as payroll, food, hospital supplies and lab fees. During the second quarter of fiscal 2006, the Company also opened the second phase of the new inpatient program, Detroit Behavioral Institute, at the Detroit Medical Center and has experienced increased patient care revenue and expected increased patient care and administrative expenses related to the start up and new operations. Patient care expenses related to our pharmaceutical research division increased 24.1% to $552,477 for the three months ended March 31, 2006 from $444,999 for the three months ended March 31, 2005 and 30.4% to $1,626,465 for the nine months ended March 31, 2006 from $1,247,106 for the nine months ended March 31, 2005. This is due to the increased number of patient vists, with increases in payroll, medical consultants and patient stipends related to increased visits. Contract support services expenses increased 37.1% to $713,438 for the three months ended March 31, 2006 from $520,475 for the three months ended March 31, 2005 and 19.0% to $1,898,300 for the nine months ended March 31, 2006 from $1,595,478 for the nine months ended March 31, 2005. This increase is primarily due to the addition of a new call center contract, which required increased staff and improved technology to adequately support the services required by the contracts. This resulted in increased payroll, rent, telephone expenses and increased depreciation on new equipment and the build-out of the new space. Provision for doubtful accounts increased 53.5% to $334,248 for the three months ended March 31, 2006 from $217,756 for the three months ended March 31, 2005 and 83.3% to $1,466,903 for the nine months ended March 31, 2006 from $800,503 for the nine months ended March 31, 2005. The increase in the provision for doubtful accounts is attributable to the accounts receivable software failure at Harbor Oaks, which is our largest in-patient facility. The software conversion, required by this software crash, slowed the billing process and diverted staff attention from collections while we reentered the receivables into the new software. Since the Company's policy is to maintain reserves based on the age of its receivables, this delay in the billing and collection process increased the amount and age of the Company's receivables thereby increasing the reserves required by formula and the provision for doubtful accounts. The system is now operating and we expect the reserve requirement will decrease in future quarters as collection activity has now returned to normal. The percentage of bad debt expense to net patient care revenue decreased from 9.8% for the quarter ended September 30, 2005, to 7.4% for the quarter ended December 31, 2005 to 4.6% for the current quarter ended March 31, 2006. Administrative expenses increased 16.8% to $2,815,164 for the quarter ended March 31, 2006 from $2,410,474 for the quarter ended March 31, 2005 and 16.9% to $8,193,940 for the nine months ended March 31, 2006 from $7,008,636 for the nine months ended March 31, 2005. These changes are a result of the increased administrative payroll and employee benefits partially related to the set up and opening of Detroit Behavioral Institute and pre-construction expenses for the Las Vegas hospital. Administrative payroll increased 42.7% for the quarter ended March 31, 2006 and 19.6% for the nine months ended March 31, 2006. Fees and licenses decreased 12.9% for the quarter but increased 105.9% for the nine months ended March 31, 2006, due to fees related to the JACAHO accreditation at Harbor Oaks and Highland Ridge and a Quality Assurance fee assessed in Michigan. Director fees increased 160.0% for the quarter ended March 31, 2006 and 93.7% for the nine months ended March 31, 2006 due to the recognition of expense for options issued as required by SFAS No.123R (see Note C - Stock based Compensation on page nine of this report). Accounting fees increased 20% for the quarter ended March 31, 2006 and 72.7% for the nine months ended March 31, 2006 due to increased audit and review costs and more frequent audits required by the Company's agreement with CapitalSource, the Company's primary lender. Rent expense increased 13.9% for the quarter ended March 31, 2006 and 12.0% for the nine months ended March 31, 2006 due to routine lease payment increases called for by existing leases. Insurance expense increased approximately 6.5% for the quarter ended March 31, 2006 and 10.5% for the nine months ended March 31, 2006. Administrative expenses related to the research division decreased 2.4% to $638,486 for the three months ended March 31, 2006 from $653,827 for the three months ended March 31, 2005 and 11.7% to $1,810,776 for the nine months ended March 31, 2006 from $2,049,492 for the nine months ended March 31, 2005. This -- 17 -- decrease is primarily due to the reduction in salary expenses related to the elimination of the Nevada location and the reduction in the accrued bonuses and a decrease in insurance expense. The environment the Company operates in today makes collection of receivables, particularly older receivables, more difficult than in previous years. Accordingly, the Company has increased staff, standardized some procedures for collecting receivables and instituted a more aggressive collection policy. During the previous two quarters, the previously mentioned receivables software and hardware failure at our largest facility resulted in a delay of billing and collections while the systems were restored. Largely as a result of this delay and the increase in revenue, the Company's gross accounts receivable from patient care have increased 17.8% over the past nine months with corresponding increases in the aging of these receivables. Interest income decreased 24.8% to $11,281 for the three months ended March 31, 2006 from $15,004 for the three months ended March 31, 2005 and remained stable at approximately $49,500 for the nine months ended March 31, 2006 and March 31, 2005. This decrease is a result of increased collections at the time of admission leaving fewer accounts on payment plans and lower interest income on the payment plans. Although patients requiring credit to pay for services have always signed an agreement to pay which included finance charges, in an effort to encourage payment at the time of service, over the last couple of years the Company implemented the policy to charge interest on patient accounts to discourage long term credit for services. Other income decreased 19.8% to $25,309 for the three months ended March 31, 2006 from $31,568 for the three months ended March 31, 2005 and 1.2% to $57,357 for the nine months ended March 31, 2006 from $58,060 for the nine months ended March 31, 2005. This change is due to a reduced number of requests for medical records which makes up the majority of other income. Interest expense increased 3.1% to $153,594 for the three months ended March 31, 2006 from $148,988 for the three months ended March 31, 2005 and decreased 1.8% to $483,150 for the nine months ended March 31, 2006 from $491,840 for the same period last year. These changes are minimal and are primarily due to the changes in the prime rate which is the basis for interest on our primary long term and revolving debt and the booking of the interest on Promissory Note A of the Pivotal acquisition during the quarter ended December 31, 2005. The Note was contingent on the profitable operations of Pivotal from the acquisition through December 31, 2005; therefore, the Note was not recorded and no interest was accrued until the certainty of profitability could be determined. Acquisition earnings for the year ended December 31, 2005 resulted in a negative adjustment of approximately $200,000, which was recorded on April 1, 2006. The Company's provision for income taxes of $205,655 for the nine month period ended March 31, 2006 is significantly below the Federal statutory rate of 34% primarily due to the availability of net operating loss carry-forwards. Total income tax expense for the quarter represents state income taxes for certain subsidiaries with no available net operating loss carry-forwards. The Company has provided a significant valuation allowance against its deferred tax asset due to the volatility of the healthcare industry. Liquidity and Capital Resources The Company's net cash provided by operating activities was $1,572,236 for the nine months ended March 31, 2006 compared to $171,027 for the same period last year. Cash flow from operations in the nine months ended March 31, 2006 consists of net income of $1,681,538 plus depreciation and amortization of $543,991, non-cash interest expense of $41,796, non-cash stock based compensation of $118,286 and a $711,379 increase in accounts payable, offset by a $23,670 increase in deferred tax asset, a $866,637 increase in accounts receivable, $374,309 increase in prepaid expenses, $103,277 increase in other assets and a $156,861 decrease in accrued expenses and other liabilities. Cash used in investing activities in the nine months ended March 31, 2006 consisted of $753,933 in capital expenditures compared to $359,407 in capital expenditures and $62,258 in business acquisitions in the same period last year. -- 18 -- Cash used in financing activities in the nine months ended March 31, 2006 primarily consisted of $800,610 in net debt repayment, $15,000 in deferred financing costs and $36,613 used to purchase treasury stock, offset by $73,727 from the issuance of common stock. A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of March 31, 2006, accounts receivable from patient care, net of allowance for doubtful accounts, increased 5.0% to $6,646,905 on March 31, 2006 from $6,330,381 on June 30, 2005. This increase is due to increases in patient care revenues and the residual increase from the previously mentioned system failure at our largest facility, which delayed billing and collections for several months. We have seen some progress on the collection of these old accounts and will continue to review the status of old accounts daily. The Company monitors increases in accounts receivable closely and, based on the aging of the receivables outstanding, is confident that the increase is not indicative of a payor problem. Over the years, we have increased staff, standardized some procedures for determining insurance eligibility and collecting receivables and established a more aggressive collection policy. The increased staff has allowed the Company to concentrate on current accounts receivable and resolve any issues before they become uncollectible. The Company's collection policy calls for earlier contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process. Our collectors will also seek assistance through every legal means, including the State Insurance Commissioner's office, when appropriate, to collect claims. Our collectors also focus on collecting required patient co-payments at the time of admission whenever possible, therefore eliminating the requirement for costly patient billing, statements and follow-up. At the same time, the Company continues to closely monitor reserves for bad debt based on potential insurance denials and past difficulty in collections. Contractual Obligations The Company's future minimum payments under contractual obligations related to capital leases, operating leases and term notes as of March 31, 2006 are as follows (in thousands): YEAR OPERATING ENDING TERMS NOTES CAPITAL LEASES * LEASES TOTAL March 31 Principal Interest Principal Interest 2007 $ 798 $110 $ 59 $ 9 $1,426 $2,402 2008 681 48 58 4 1,236 2,027 2009 297 22 10 1 1,213 1,543 2010 55 17 4 1 1,147 1,224 2011 213 13 4 -- 621 851 2012 49 9 -- -- -- 58 Thereafter 70 4 -- -- -- 74 Total $2,163 $223 $135 $15 $5,643 $8,179 *see Note H - Subsequent events on page 11 of this report for details on a master lease entered into subsequent to Quarter end. In addition to the above, the Company is also subject to three contingent notes with a total face value of $2,500,000 as part of the Pivotal acquisition. Of these notes, two totaling $1,500,000, one for $1,000,000 and one for $500,000, bear interest at 6% per annum. These notes are subject to additional adjustment based on the earnings of the acquired operations. Since adjustment can be positive or negative based on earnings, with no ceiling or floor, the liability for only one of these notes was recorded as of March 31, 2006. This treatment is in accordance with SFAS No. 141, "Business Combinations" which states that contingent consideration should be recognized only when determinable beyond a reasonable doubt. Payments on the $1,000,000 note began on January 1, 2005. The above table includes the outstanding balance on this note of $852,157 which represents the earn out for the Pivotal acquisition through December 31, 2004 net of payments made through March 31, 2006. The earn-out for the period ended December 31, 2005 required a negative adjustment to the note of approximately $200,000 and was recorded on April 1, 2005. No payment is due on the $500,000 note as earn-out requirements have not been attained. The final note for $1,000,000 does not bear interest, is also subject to adjustment based on earnings but has a minimum value of $200,000 to be paid in PHC, Inc. Class A common stock on March 31, 2009. This minimum liability has been recorded with imputed interest of 6% and $164,647 is included in the schedule above. In October 2004, the Company entered into a revolving credit, term loan and security agreement with CapitalSource Finance, LLC to replace the Company's primary lender and provide additional liquidity. Each of the Company's material -- 19 -- subsidiaries, other than Pivotal Research Centers, Inc, is a co-borrower under the agreement. The agreement includes a term loan in the amount of $1,400,000 and an accounts receivable funding revolving credit agreement with a maximum loan amount of $3,500,000, including $900,000 available as an overline for growth. The term loan note carries interest at prime plus 3.5%, but not less than 9%, with twelve monthly principal payments of $25,000, 12 monthly principal payments of $37,500, and eleven monthly principal payments of $50,000 beginning November 1, 2004 with balance due at maturity, on October 1, 2007 and is included in the above table at its March 31, 2006 balance of $761,408. The revolving credit note carries interest at prime plus 2.25%, but not less than 6.75% paid through lock box payments of third party accounts receivable. The revolving credit term is three years, renewable for two additional one-year terms. The balance on the revolving credit agreement as of March 31, 2006 was $2,040,605. down from $2,385,629 on June 30, 2006. For additional information regarding this transaction, see the Company's report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2004. On the term loan and the revolving credit note, each 25 basis point increase in the prime rate will affect an annual increase in interest expense of approximately $7,100. For the quarter ended March 31, 2006, the Company was not in compliance with financial covenants of this agreement primarily due to the software failure at the Harbor Oaks facility, which delayed billing and postponed collection effort while the system was being recovered. CapitalSource, the Company's lender, has provided the Company with a waiver of these covenants for the period. The Company has operated ongoing operations profitably for twenty-one consecutive quarters with the exception of the litigation settlement and related legal costs incurred in the third quarter of fiscal year 2004. While it is difficult to project, if the current positive business environment towards behavioral health treatment and new business opportunities continue, we are confident that we will see continued improved results. Off Balance Sheet Arrangements The Company has no off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company. Item 3. Quantitative and Qualitative Disclosure About Market Risk The market price of our common stock could be volatile and fluctuate significantly in response to various factors, including: o Differences in actual and estimated earnings and cash flows; o Operating results differing from analysts' estimates; o Changes in analysts' earnings estimates; o Quarter-to-quarter variations in operating results; o Changes in interest rates effecting the interest expense of the company o Changes in market conditions in the behavioral health care industry; o Changes in market conditions in the research industry; o Changes in general economic conditions; and o Fluctuations in securities markets in general. Our interest expense is sensitive to changes in the general level of interest rates. With respect to our interest-bearing liabilities, all of our long-term debt outstanding is subject to rates at prime plus 2.25% and prime plus 3.5%, which makes interest expense increase with increases in the prime rate. On these notes, each 25 basis point increase in the prime rate will result in an annual increase in interest expense of approximately $7,100. Failure to meet targeted revenue projections could cause us to be out of compliance with covenants in our debt agreements. (For additional information see Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures -- 20 -- We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the SEC's Rules and Forms and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures to meet the criteria referred to above. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective. Subsequent to quarter end we became aware of a loss from a theft of funds by an individual in our smallest in-patient facility who had responsibility for the collection of patient payments. We immediately began an investigation to determine the extent of the theft and to gauge the adequacy of our internal controls. We do not believe the total amount of the theft is material; we have, however, taken an additional provision for bad debt of $20,000 as a precaution. While our investigation is being conducted, in order to avoid any similar event, we have strengthened our internal controls at that facility by establishing dual responsibility for processing of patient payments and making bank deposits. This is already the practice at our other facilities. At the conclusion of our investigation, we may implement additional measures beyond those we have taken since the discovery of the theft, to mitigate the risk of a similar event. Change in Internal Controls Except as noted above, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. -- 21 -- PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company's annual meeting of stockholders was held on December 20, 2005. In regards to the election of class B directors, with regards to which (i) proxies were solicited pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, (ii) there was no solicitation in opposition to the management's nominees as listed on the proxy statement. Because sufficient proxies related to class A shares were not received to hold the vote on the election of the class A directors and the approval of the new employee stock plan to replace the plan which expired in October 2005 and the increase in the annual grant of options to board members, the meeting was adjourned and re-convened on January 31, 2006 at which time the nominated class A directors were elected and the 2005 Employee Stock Purchase Plan and the change in the 2005 Non-Employee Director Stock Option Plan (the "Plan") were approved. Under the new Employee Stock Purchase Plan 500,000 shares of Class A Common Stock are available for issuance to eligible employees. (a) Annual Meeting of Shareholders, December 20, 2005 and re-convened on January 31, 2006 (b) Directors elected to serve one year terms: Bruce A. Shear William F. Greico David E. Dangerfield Donald E. Robar Howard W. Phillips (c) (1) Election of Class B directors on December 20, 2005 to serve one year terms Bruce A. Shear 721,756 for 0 withheld William F. Grieco 721,756 for 0 withheld David E. Dangerfield 721,756 for 0 withheld Election of Class A directors to serve one year terms: Donald E. Robar 14,855,563 for 51,920 withheld Howard W. Phillips 14,855,573 for 51,910 withheld (2) Proposal to approve a new employee stock purchase plan to replace the current plan, which expired on October 18, 2005. 8,443,149 for 729,778 against 16,850 abstained 9,326,486 broker non-vote (3) Proposal to approve the increase in the grant of options to directors under the Non-Employee Director option plan from 10,000 to 20,000. 8,163,804 for 995,573 against 30,400 abstained 9,189,777 broker non-vote Item 6. Exhibits Exhibit List Exhibit No. Description 10.49 Agreement to purchase licensed software by and between PHC, Inc., and Medical Information Technology, Inc., dated March 31, 2006. -- 22 -- 10.50 Master lease agreement by and between PHC, Inc., and Banc of America Leasing & Capital, LLC, dated April 20, 2006, effective April 1, 2006. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -- 23 -- Signatures 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 thereunto duly authorized. PHC, Inc. Registrant Date: May 22, 2006 /s/ Bruce A. Shear __________________________ Bruce A. Shear President Chief Executive Officer Date: May 22, 2006 /s/ Paula C. Wurts __________________________ Paula C. Wurts Treasurer Chief Financial Officer -- 24 -- EX-31 2 ex31_1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 PHC, INC. CERTIFICATION OF CHIEF EXECUTIVE OFFICER Section 302 Certification I, Bruce A. Shear, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PHC, Inc., a Massachusetts corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrants internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially effected or is reasonably likely to materially effect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information: and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 22, 2006 by: /s/ BRUCE A. SHEAR __________________________ Bruce A. Shear Chief Executive Officer -- 25 -- EX-31 3 exh31_2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 PHC, INC. CERTIFICATION OF CHIEF FINANCIAL OFFICER Section 302 Certification I, Paula C. Wurts, certify that: 1. I have reviewed this quarterly report on Form 10-Q of PHC, Inc., a Massachusetts corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrants internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially effected or is reasonably likely to materially effect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: May 22, 2006 by: /s/ PAULA C. WURTS __________________________ Paula C. Wurts Chief Financial Officer -- 26 -- EX-32 4 ex32_1.txt CERTIFICATION OF CEO AND CFO Exhibit 32.1 WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER The undersigned hereby certify that, to the best of the knowledge of the undersigned, the Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 filed by PHC, Inc. with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer. Date: May 22, 2006 By: /s/ Bruce A. Shear __________________________ Bruce A. Shear, President and Chief Executive Officer Date: May 22, 2006 By: /s/ Paula C. Wurts __________________________ Paula C. Wurts, Treasurer and Chief Financial Officer -- 27 -- EX-10 5 ex10_49.txt AGREEMENT BETWEEN MEDICAL INFORMATION TECH & PHC 10.49 Medical Information Technology, Inc. Health Care Information System Software Agreement AGREEMENT made this 31st of March, 2006 by and between MEDICAL INFORMATION TECHNOLOGY, INC., a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts and having its principal place of business at MEDITECH Circle, Westwood, Massachusetts 02090 (hereinafter called MEDITECH) and PHC Inc. d/b/a! Pioneer Behavioral Health, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts and having its principal place of business at 200 Lake Street, Peabody, MA 01960 (hereinafter called Customer). WHEREAS MEDITECH has developed and continues to enhance a version of computer software designed to operate in a "client-server" environment, which version, together with any physical embodiment thereof and related documentation (incorporated in this Agreement as Exhibits II through V), are together hereinafter called LICENSED SOFTWARE, and WHEREAS Customer desires to obtain from MEDITECH the right to use such LICENSED SOFTWARE in its operations at the facility(ies) listed in Article II, . NOW THEREFORE, the parties hereto hereby agree as follows: ARTICLE I - GENERAL TERMS & CONDITIONS A. RESPONSIBILITIES AND WARRANTlES OF MEDITECH 1. MEDITECH agrees to deliver, implement and service the LICENSED SOFTWARE all as more fully described in this Agreement. Subject to the terms and conditions hereof and upon payment in full to MEDITECH of the license and implementation fees for each line item of LICENSED SOFTWARE listed in Article II, MEDITECH hereby grants to Customer a non-exclusive, perpetual license to use each such line item. MEDITECH warrants that the LICENSED SOFTWARE shall have capabilities equal to the capabilities described in Exhibits II through V and will operate in substantial conformity with such descriptions when delivered to Customer and installed on Customer's MEDITECH-approved computer network (the major components of which are recited on Exhibit I hereof). 2. MEDITECH warrants to Customer that it is the developer and sole owner of the LICENSED SOFTWARE. In the event of any suit or claim against Customer by any third party for damages and/or injunctive relief contesting ownership of the LICENSED SOFTWARE by MEDITECH and/or Customer's rights under this Agreement, MEDITECH agrees at its own expense to defend Customer against such suit or claim and to hold Customer harmless from the expenses of such defense and from any court-awarded judgments resulting from such suit or claim, provided that Customer furnishes written notice to MEDITECH of the commencement of such suit or the presentation of such claim within fifteen (15) days of notice thereof to Customer. Further, if, because of such suit or claim, the LICENSED SOFTWARE is held to constitute an infringement of any United States copyright or patent and use of the LICENSED SOFTWARE by Customer is thereby enjoined, MEDITECH shall, at its own expense, either procure for Customer the right to continue using the LICENSED SOFTWARE or replace the same with a non-infringing product, substantially conforming to that described herein, or modify the same so that it shall be non-infringing, provided that the service described in Article IV has not been terminated. 3. MEDITECH acknowledges that certain material which will come into its possession or knowledge in connection with this Agreement includes confidential or proprietary information of Customer or Customer's patients (hereinafter called" Protected Information"), disclosure of which to third parties may be damaging to Customer. MEDITECH agrees to hold all Protected Information in confidence, to use it only in connection with performance under this Agreement and to disclose it only to those of its employees that require access thereto for such performance or as may otherwise be required by law. In addition, MEDITECH shall use appropriate safeguards to prevent other use or disclosure of Protected Information and shall promptly report to Customer any other use or disclosure of Protected Information of which it becomes aware. MEDITECH shall ensure that any agents of MEDITECH, including but not limited to subcontractors, to whom it provides Protected Information agree to the same restrictions and conditions as apply to MEDITECH with respect to such Protected Information. Upon the written request of the United States Department of Health and Human Services, MEDITECH shall make its internal practices, books and records relating to the use and disclosure of Protected Information provided to MEDITECH by Customer available to the Secretary of Health and Human Services (or his or her designee or duly authorized representative), at MEDITECH' s Massachusetts facility and at times convenient for MEDITECH, to the extent required for determining compliance with Federal privacy and security regulations. Upon Customer's written request MEDITECH shall return to Customer (when reasonably possible) or destroy any Protected Information. -- 28 -- B. RESPONSIBILITIES OF CUSTOMER 1. Customer shall pay to MEDITECH the line item fee (license fee plus implementation fee) for each line item of LICENSED SOFTWARE as follows: 10% due upon execution of this Agreement 40% due upon software delivery 40% due 90 days following software delivery 10% due 180 days following software delivery Each payment for each line item will be separately due and payable without regard to other line items. In the event a payment due MEDITECH under this Paragraph is delinquent for a period of sixty (60) days from its due date, and MEDITECH so notifies Customer in writing, and the delinquency is not cured within thirty (30) days thereafter, then, upon MEDITECH' s written notice, Customer will cease to use the LICENSED SOFTWARE until such time as all payments then due are paid. Such cessation of use shall not relieve Customer of any obligations under this Agreement, including the obligation to make all payments specified herein. 2. During the period in which MEDITECH makes available the service described in Article IV, Customer will pay to MEDITECH the monthly service fees stated in Article II. These fees will commence upon the attainment of Live Status for each line item of LICENSED SOFTWARE. "Live Status" is defined for each line item as the date on which such line item is used in Customer's daily operations utilizing real patient/hospital data. Thirty-six (36) months after the date of this Agreement these fees may be increased by MEDITECH at any time by providing thirty (30) days written notice of such increase to Customer. Any increases shall be limited to six percent (6%) cumulative per year during the 24-month period following the initial 36-month period recited herein. Service fee invoices are issued on the first of each month in which the service is to be made available, with payment terms of net fifteen (15) days. If payment of any service fee invoice is delinquent for a period of forty-five (45) days from its due date, MEDITECH's obligations stated in Article IV may be suspended until all delinquencies have been cured to the satisfaction of MEDITECH. 3. Customer agrees to limit access to the LICENSED SOFTWARE to those of its staff and employees who must have access thereto to properly use the same in Customer's operations. Further, Customer agrees to notify MEDITECH promptly and fully in writing of the circumstances concerning any possession, use or study of the LICENSED SOFTWARE by any person, corporation or other entity (other than Customer's staff and employees) including, but not limited to, the name(s) and address(es) of such person(s), corporation(s), or other entities. Customer agrees that it will not, at any time, without written permission of MEDITECH, copy, duplicate, or permit others to copy or duplicate the LICENSED SOFTWARE, except to the extent required for the creation of backup copies of the LICENSED SOFTWARE as described in Exhibits II through V. 4. Customer acknowledges that certain material which will come into its possession or knowledge in connection with this Agreement includes confidential or proprietary information of MEDITECH (including, without limitation, the terms and conditions of this Agreement), disclosure of which to third parties may be damaging to MEDITECH. Customer agrees to hold all such material in confidence, to use it only in connection with performance under this Agreement and to release it only to those persons that require access thereto for such performance or as may otherwise be required by law. In addition, Customer shall use appropriate safeguards to prevent other use or -- 29 -- disclosure of confidential or proprietary information of MEDITECH and shall promptly report to MEDITECH any other use or disclosure of such information of which it becomes aware. 5. If customer is a tax-exempt entity, then, upon execution of this Agreement, Customer will provide to MEDITECH a copy of its current tax exemption certificate for each applicable taxing authority which has approved Customer's tax-exempt status. If Customer is not a tax-exempt entity, Customer acknowledges that it (and not MEDITECH) shall be responsible for the payment of any and all taxes (including, but not limited to, sales, use, and excise taxes) imposed by the applicable taxing authorities to which Customer is subject. 6. Not later than sixty (60) days prior to the earliest delivery date listed in Article II, Customer will install and connect to its computer network, at Customer's expense, a minimum of one BRI (ISDN) line (or other MEDITECH-approved connectivity solution) as well as a separate telephone line (equipped with an RAS modem for emergency use only), in conformity with MEDITECH' s specifications, and will provide MEDITECH with access thereto for the resolution of system problems in accordance with the applicable sections of Article III and IV. Customer shall maintain such ISDN service (or other MEDITECH-approved connectivity solution) and provide MEDITECH with access thereto until such time as the service described in Article IV is terminated for all line items of LICENSED SOFTWARE. C. RESTRICTIONS ON TRANSFER The LICENSED SOFTWARE shall at all times remain the property of MEDITECH and the license of use granted herein specifically excludes any right of reproduction, sale, lease, sublicense, or other transfer or disposition of the LICENSED SOFTWARE by Customer except as otherwise expressly stated herein. The rights granted hereunder are granted to Customer only and are not assignable to any other person, corporation or entity, except that, upon the transfer by sale, merger, or corporate re-organization, of substantially all of the assets of Customer to a successor organization, this Agreement and the rights and obligations of Customer hereunder may be assigned to such successor. Customer agrees to notify MEDITECH promptly in writing of the transfer to such successor and of the assumption by such successor of Customer's obligations and responsibilities as described in this Agreement. D. LIMITATION OF LIABILITY Customer acknowledges that the LICENSED SOFTWARE provided by MEDITECH constitutes part of a hospital information system to be used by Customer, its staff and employees in the performance of their professional responsibilities and is in no way intended to replace their professional skill and judgement. Customer agrees that it is solely responsible for the care of its patients and that the use of the LICENSED SOFTWARE for any purpose related to such care cannot in any way be controlled by MEDITECH. Customer is responsible for verifying the accuracy and completeness of any medical or other similar information contained in, entered into, or used in connection with the LICENSED SOFTWARE. Customer agrees to hold MEDITECH harmless from any liability arising from improper or flawed operation or use of the LICENSED SOFTWARE. In no event will MEDITECH be liable for any consequential damages, lost profits or lost revenues sustained by Customer, or for any suit or claim or demand against Customer by any other party, except as stated in Article I(A)(2), above. E. SUCCESSORS AND ASSIGNS This Agreement shall be binding upon and inure to the benefit of the heirs, successors, and permitted assigns of the parties hereto. F. LEGAL CONSTRUCTION The validity and effect of this Agreement shall be determined in accordance with the laws of the Common-wealth of Massachusetts. - 30 - ARTICLE II - DELIVERY The LICENSED SOFTWARE listed below is being licensed to Customer to service the specific information-processing needs of the following inpatient facility(ies): 1) Detroit Behavioral Institute, operating at 4707 St. Antoine Street, 2 South, Detroit, MI 48201 2) Harbor Oaks Hospital, operating at 35031 23 Mile Road, New Baltimore, MI 48047 3) Harmony Healthcare, operating at 1701 W. Charleston Boulevard, Suite 300, Las Vegas, NV 89102 4) Highland Ridge Hospital, operating at 7309 S. 180 W., Midvale, UT 84047 5) Mount Regis Center, operating at 405 Kimball Avenue, Salem, VA 24153 6) Pioneer Counseling Center, operating at 28511 Orchard Lake Road, Suite A, Farmington Hills, MI 48334 7) Harbor Oaks Hospital (outpatient only), operating at 33497 23 Mile Road, Chesterfield Twp, MI 48047 8) Harmony Healthcare (outpatient only), operating at 2700 E. Sunset Road, Suite D35, Las Vegas, NV 89120 9) Pioneer Counseling Center, operating at 36250 Dequindre, Suite 310, Sterling Heights, MI 48310 10) Pioneer Counseling Center, operating at 43900 Garfield, Suite 222, Clinton Twp, M1 48038 11) PHC Inc. d/b/a Pioneer Behavioral Health, operating at 200 Lake Street, Peabody, MA 01960 Any use of the LICENSED SOFTWARE beyond the restrictions set forth in this Agreement will require payment of additional fees to MEDITECH which will be determined in accordance with MEDITECH's standard rates. MEDITECH agrees to deliver the LICENSED SOFTWARE, including associated documentation, to Customer on or about the specified delivery dates for use at the above facility(ies). Additional copies of documentation will be provided by MEDITECH at its then standard rates; in the alternative, Customer may reproduce copies of the documentation so long as access to any such copies is restricted in accordance with this Agreement. "Project Start" listed below is defined as the month Customer and MEDITECH jointly begin implementation of each line item of LICENSED SOFTWARE via one or more of the following: conference calls, training site visits, training visits to MEDITECH, or web demonstrations. "Delivery Date" listed below is defined for each line item of LICENSED SOFTWARE as the date on which MEDITECH provides Customer with the physical embodiment of the line item, enabling such line item to be installed on Customer's computer network. LICENSED SOFTWARE Project Delivery License Implementation Item Service LINE ITEMS Start Date Fee Fee Fee Fee Exhibits _________________________________________________________________________________________________________________________ Behavioral Health Suite (1) 09/30/2006 10/31/2006 87,000 78,520 165,520 870 II Administrative Xfer: MT B/ AR to OV GL 11/30/2006 11/30/2006 16,875 16,875 169 II Xfer: MT B/AR to OV AP 11/30/2006 11/30/2006 15,750 15,750 158 II Behavioral Health Clinical Suite (2) 03/31/2007 04/30/2007 87,000 102,680 189,680 870 III Scheduling & Referral Management 10/31/2006 12/31/2006 26,100 19,026 45,126 261 IV Corporate Management 09/30/2006 10/31/2006 17,400 12,080 29,480 174 V Software _________________________________________________________________________________________________________________________ Totals 462,431 2,502 _________________________________________________________________________________________________________________________
Notes: (1) Includes the following software components: Registration, Billing/Accounts Receivable, Bill/Remit to 3rd Party, Trust Accounting, EPI/Medical Records, Case Mix/ Abstracting, Risk Management and Legal Status & Tracking. Also includes one Medical - 31 - Records Conversion, one Demographic Recall Conversion, and one Billing! Accounts Receivable Conversion (Balance Forward only). Conversions are dependent on conversion from a single other vendor system database. Conversion from multiple other vendor system databases will require payment of additional fees to MEDITECH. (2) Includes the following software components: Enterprise Medical Record, Order Entry, Treatment Planning (PCS), and Care Manager. ARTICLE III - IMPLEMENTATION A. IMPLEMENTATION PERIOD "Implementation Period" is defined for each line item of LICENSED SOFTWARE as the period commencing on execution of this Agreement and ending upon the attainment of Live Status for such line item. As detailed in the attached Schedule A, during this period MEDITECH will provide support and assistance to Customer and Customer will make available sufficient resources so that the joint goal of a successful implementation of the LICENSED SOFTWARE at Customer's sites is achieved. One combined implementation of the LICENSED SOFTWARE will be provided at a single location for the facilities listed in Article II. B. IMPLEMENTATION SUPPORT 1. As stated in Schedule A, MEDITECH will provide implementation support to ensure successful implementation of the LICENSED SOFTWARE. If this support is determined to be insufficient, MEDITECH will provide additional support at no additional cost (other than travel and out-of-pocket expenses). 2. Subsequent to execution of this Agreement MEDITECH and Customer will each assign Project Coordinator(s) who will be the other's main contact during the implementation process. The Coordinators will schedule an Orientation Meeting to occur at Customer's site. At this meeting the relationship between MEDITECH and Customer will be detailed through the development of a firm schedule for all implementation tasks; actual dates will be finalized by Customer's personnel working with members of the MEDITECH Implementation Team and will follow the delivery dates recited in Article II and the "go-live" time frame described in Schedule A. C. CORRECTION OF PROGRAM ERRORS At no additional cost to Customer MEDITECH agrees to correct, during normal business hours, any program errors reported by Customer. Program errors are defined as failures of the LICENSED SOFTWARE to operate in substantial conformity with the descriptions of such operation in Exhibits II through V. Any modifications of the LICENSED SOFTWARE made by anyone other than MEDITECH shall relieve MEDITECH of all obligations under this Paragraph. D. EXPENSES In connection with the support and assistance described herein, Customer agrees to reimburse MEDITECH for MEDITECH's actual and reasonable travel and out-of-pocket expenses, including the costs of coach-class air transportation, motor vehicle transportation, food and lodging (and reasonable incidentals incurred in association therewith), and for dial-up telephone expenses. These expenses will be billed to Customer separately, as incurred, with payment terms of net thirty (30) days. MEDITECH will itemize each invoice by category for each major type of expense. In addition, for various line items of LICENSED SOFTWARE, Customer's personnel may visit MEDITECH's facility for training as stated in Schedule A. Travel and out-of-pocket expenses incurred by Customer during such visits shall be borne by Customer. - 32 - ARTICLE IV - SERVICE The service described herein shall commence upon the attainment of Live Status for each line item listed in Article II and will continue indefinitely until either MEDITECH or Customer terminates same by providing sixty (60) days written notice to the other. Termination of service by either party eliminates the duties and obligations of both parties detailed in this Article, in Article I(A)(2) and in Article I(B)(2) of this Agreement. MEDlTECH agrees that it will make available the service set forth in this Article and will provide such service to Customer for a period of five (5) years from the date of this Agreement so long as Customer pays the monthly service fees specified in Article II, with any increases as are permitted under this Agreement. This provision shall supercede the sixty (60) day termination provision granted to MEDlTECH herein. A. ROUTINE/EMERGENCY SERVICE MEDITECH will make available to Customer both routine and emergency service via telephone contact for the purpose of resolving system problems originating in the LICENSED SOFTWARE or Customer's computer network, which will be addressed as follows: 1. If the problems result from program errors in the LICENSED SOFTWARE, MEDlTECH shall correct such program errors and shall exercise its best efforts to assure that the same is accomplished as expeditiously as possible. Program errors are defined as failures of the LICENSED SOFTWARE to operate in substantial conformity with descriptions of such operation in Exhibits II through V. 2. If the problems originate from incorrect use of the LICENSED SOFTWARE or from a computer equipment malfunction which results in data base errors which may require MEDITECH's assistance for correction, MEDITECH will generally provide such assistance, however, depending on the efforts to be expended, MEDITECH reserves the right to charge Customer for the associated consulting time. Incorrect use of the LICENSED SOFTWARE is defined as data processing procedures not in conformity with such procedures as described in Exhibits II through V. 3. If the problems originate in Customer's computer network or in software not covered by this Article or result from modifications to the LICENSED SOFTWARE made by anyone other than MEDlTECH, MEDlTECH's responsibility shall be limited to providing assistance and advice to enable Customer to determine appropriate remedial action to be taken by Customer or others (not by MEDITECH) to resolve such problems. Routine service shall be available between 8:30 a.m. and 5:30 p.m., Monday through Friday, Eastern Time, excluding Federal holidays. For those line items of LICENSED SOFTWARE which have been transferred to the MEDITECH Client Services Division, the hours will be extended until 10:00 p.m. Emergency service will be available at any other time and at no additional cost for any line items that have attained Live Status. B. EDUCATIONAL SERVICE 1. After the Implementation Period for each line item of LICENSED SOFTWARE, if Customer requests additional training in the use of such LICENSED SOFTWARE, MEDlTECH shall provide this training at MEDlTECH's then standard rates. Further, MEDITECH regularly conducts workshops and seminars to continue to educate its customers in the use of the LICENSED SOFTWARE. Customer shall be entitled to attend these workshops and seminars at no additional cost (other than its own travel and out-of-pocket expenses). In addition, so long as the service described in this Article has not been terminated, Customer shall automatically be a member of the MEDITECH Information Exchange Customer Program. 2. Upon Customer's written request and at no additional cost to Customer, MEDITECH's Client Services Division will perform Operational Assessments (for various associated software modules). MEDlTECH will review Customer's use of the LICENSED SOFTWARE, make recommendations for any necessary improvements, and provide Customer with a detailed written report of its findings and recommendations. MEDITECH will perform Operational Assessments not more frequently than once per year, following the attainment of Live Status for all LICENSED SOFTWARE line items. In the event that an Operational Assessment is performed at Customer's site, Customer will be responsible for MEDITECH's travel and out-of-pocket expenses. - 33 - C. ENHANCEMENT SERVICE At no additional cost MEDITECH shall make available to Customer all enhancements of the LICENSED SOFTWARE, when applicable, which MEDITECH makes generally available to its other customers. MEDITECH acknowledges that Federal and State governments may mandate compliance by Customer with various regulatory requirements, some of which may necessitate modifications to the LICENSED SOFTWARE. Therefore, MEDITECH will, as far as technically feasible and within a reasonable period of time, modify the specific software capabilities of the LICENSED SOFTWARE documented within the attached Exhibits II through V so that Customer may comply with mandated Federal and State requirements to which it is subject. (NOTE: MEDITECH reserves the right to charge Customer for additional functional capabilities beyond that documented in Exhibits II through V, however, MEDITECH will exercise its best efforts to minimize any such charges). D. EXPENSES In connection with the service described herein, if travel to Customer's site is necessary, Customer agrees to reimburse MEDITECH for any actual and reasonable travel and out-of-pocket expenses, however, no travel will be initiated without Customer's prior approval. Customer also agrees to reimburse MEDITECH for the reasonable costs of dial-up telephone expenses. These expenses will be billed to Customer separately, as incurred, with payment terms of net thirty (30) days. E. CUSTOMIZATION SERVICE If customization of the LICENSED SOFTWARE beyond that described in Exhibits II through V is requested by Customer and assented to by MEDITECH, which assent will not be unreasonably withheld, then: 1. Customer, with advice from MEDITECH, will specify in writing all parameters necessary for MEDITECH to modify the LICENSED SOFTWARE and MEDITECH will furnish to Customer a written price quotation for such customization; and 2. If Customer assents to such price quotation, then Customer and MEDITECH will enter into a separate agreement for delivery to Customer of the requested customization. ARTICLE V - OTHER TERMS & CONDITIONS A. NON-ASSIGNMENT MEDITECH agrees that it will not assign or subcontract any of its installation obligations to a third party during the course of implementation of the LICENSED SOFTWARE at Customer's sites. B. NON-SOLICITATION Each party agrees that during a twelve (12) month period commencing on the date of this Agreement it shall not solicit for the purpose of employment employees of the other party. C. In the performance of the work, duties and obligations devolving upon it under this Agreement, it is mutually understood and agreed that MEDITECH is at all times acting and performing as an independent contractor and nothing in the Agreement is intended nor shall be construed to create between Customer and MEDITECH an employer/employee relationship or a joint venture relationship. As an independent contractor, MEDITECH will not be eligible for workers' compensation insurance, unemployment compensation, health insurance or other employee benefits provided by Customer to its employees. MEDITECH will be responsible for payment of any and all taxes in connection with wages paid by MEDITECH. D. NOTICES Unless otherwise expressly agreed, any notice required to be given pursuant to the terms of this Agreement shall be in writing and shall be sent registered mail, return receipt requested, to the parties at the addresses as follows: If to MEDITECH: Legal Department Medical Information Technology, Inc. MEDITECH Circle Westwood, MA 02090 - 34 - If to Customer: Bruce A. Shear PHC Inc. d/b/a Pioneer Behavioral Health 200 Lake Street, Suite 102 Peabody, MA 01960 Any notice hereunder shall be considered to be given upon receipt thereof by the party to be served. Any party hereto may change its address or contact person for the purpose of this Agreement by giving the other party fifteen (15) days written notice of such changes. E. SEVERABILITY If any term or provision of this Agreement shall be found to be illegal or unenforceable then, notwithstanding, this Agreement shall remain in full force and effect and such term or provision shall be deemed stricken. F. HEADINGS The headings in this Agreement are for convenience only and shall not affect, in any way, the meaning or interpretation of this Agreement. G. MEDITECH has provided to Customer a separate Business Associate Agreement and a separate Security Rule Agreement that comply with the requirements of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) as they pertain to Customer's relationship with MEDITECH and software licensed from MEDITECH. ARTICLE VI - ENTIRE AGREEMENT This Agreement, including Exhibits I through V and Schedule A, is the entire agreement between the parties hereto with reference to the subject matter hereof. Warranties, expressed or implied, regarding the LICENSED SOFTWARE are exclusively as stated herein; any and all prior or contemporaneous warranties, representations, understandings or agreements are specifically and intentionally excluded. This Agreement may not be modified or amended except by an Amendment in writing between the parties. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement shall not prevent a subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. - 35 - In witness whereof each party has executed this Agreement as a sealed instrument this ____ day of March, 2006. Customer PHC, Inc. d/b/a/ Pioneer Behavioral Health By: /s/ Paula C. Wurts Name: Paula C. Wurts Title: CFO MEDITECH Medical Information Technology, Inc. By: ___________________________________________________ Name: Howard Messing Title: President & Chief Operating Officer - 36 - EXHIBIT I COMPUTER NETWORK CONFIGURATION Computer network configuration to be determined by Customer in conjunction with MEDITECH and subject to MEDITECH's approval. Prior to placing a firm order for the components of the computer network configuration, Customer will provide to MEDITECH for review and final approval a written description of the components it intends to order, including computers, network, non-MEDITECH software, etc. SCHEDULE A IMPLEMENTATION AND STAFFING GUIDE (document provided under separate cover) - 37 - EX-10 6 ex10_50.txt MASTER LEASE BANK OF AMERICA & PHC Exhibit 10.50 MASTER LEASE No. 16378-00900 Dated: As of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") Located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. AGREEMENT TO LEASE PROPERTY. Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor the personal property ("Equipment") described in any schedule of Equipment executed by the parties substantially in the applicable form attached hereto as Exhibit A ("Equipment Schedule"), or in such other form as the parties may agree in writing. Each Equipment Schedule shall, except as otherwise may be agreed in writing, incorporate the terms of this Master Lease-Finance Agreement (hereinafter "Master Lease"). Each Equipment Schedule shall, together with the incorporated terms of this Master Lease, constitute a separate lease agreement ("Lease"). If there is a conflict between the language of this Master Lease and the language of an Equipment Schedule, the latter shall prevail with respect to the Lease comprising the Master Lease and such Equipment Schedule, 2. TERM. This Master Lease shall commence on the date set forth above. Each Lease shall continue for the period described in the Equipment Schedule applicable thereto (hereinafter the "Term"); provided that if the Lease does not require the Lessee to purchase the Equipment at the end of the Term stated in the Equipment Schedule, the Lease shall not terminate at the end of such Term unless either Lessor or Lessee has delivered to the other at least one hundred and eighty (180) days prior written notice of such termination, failing which the Term will extend automatically until a period of one hundred and eighty (180) days has elapsed from the date when written notice of termination was delivered by either party to the other. Any such automatic extension shall be deemed included in and part of the Term of the Lease, and Lessee shall continue to pay the periodic rentals and comply with all other terms and conditions of the Lease until the Lease terminates. 3. ACCEPTANCE. Lessee shall inspect the Equipment immediately upon its delivery and installation at Lessee's premises. If Lessee determines that the Equipment has been delivered, installed, and is operating according to the manufacturer's or supplier's specifications. Lessee shall promptly execute and deliver to Lessor a certificate of acceptance of such Equipment prepared by Lessor substantially in the form attached hereto as Exhibit B (hereinafter "Certificate of Acceptance"). The description of Equipment contained or incorporated by reference in any Certificate of Acceptance executed by Lessee, shall be deemed to be incorporated in the Equipment description in the Equipment Schedule. If there is a conflict between a description in an Equipment Schedule and a description in an executed Certificate of Acceptance, the latter shall prevail, and the Equipment Schedule description shall be deemed to be amended or supplemented accordingly. Lessee authorizes Lessor to make and initial, on behalf of both Lessor and Lessee, amendments or additions to the description of Equipment contained in the Equipment Schedule to ensure that such description is complete, fair and accurate, including but not limited to amendments or additions relating to invoice or serial numbers, or, with Lessee's consent, to the cost of items of Equipment. Lessor shall not pay for any item of Equipment under a Lease if Lessee is in default of any of its obligations thereunder. 4. RENT. Lessee shall pay all rentals pursuant to the applicable Equipment Schedule (the "Rent") on or before the due dates thereof for the entire Term of each Lease. All Rents shall be deemed earned in full when paid, 5. OBLIGATION TO PAY RENT UNCONDITIONAL. Each lease is a net lease and is non-cancelable for its entire term. Lessee's obligation to pay Rent and all other sums under each Lease, and the rights of Lessor or its assigns in and to such payments, shall be absolute and unconditional, and shall not be subject to any abatement, reduction, setoff, defense, counterclaim or - 38 - recoupment due or alleged to be due to, or by reason of, any past, present or future claims which Lessee may have against Lessor or its assigns, or any manufacturer or supplier of the Equipment, or against any other person, for any reason whatsoever including, without limitation, any reason relating to the fitness, design, quality, materials, workmanship, or condition of the Equipment, or to its merchantability, or to its fitness, capacity or durability for any particular purpose, or to any latent or patent defect in the Equipment, or to any actual or alleged patent, copyright, or trade secret infringement relating to the Equipment, or to the Equipment's compliance with the requirements of any applicable law, rule, specification or contract. 6. TITLE. Lessee shall have no right, title or interest in the Equipment, except as expressly set forth in the Lease. All Equipment shall remain personal property and title thereto shall at all times remain in the Lessor or its assigns exclusively. All documents of title and evidences of delivery shall be delivered to Lessor. Lessee hereby assigns to Lessor all and any right, title, and interest it has or may have in and to the Equipment, and in and to Lessee's rights, but not obligations, under any contract or document relating to the Equipment, as of the date of such contract or document, including without limitation any purchase order or invoice for the Equipment. Lessee will not change or remove any insignia or lettering on the Equipment indicating Lessor's ownership thereof. Upon Lessor's request. Lessee shall affix to the Equipment in a prominent place, labels, plates or other markings stating that the Equipment is owned by Lessor. Lessor is hereby irrevocably authorized and appointed by Lessee as its attorney-in-fact to execute, file and record on Lessee's behalf and at Lessee's expense, any financing statement or other instrument recording or giving notice pursuant to applicable law of the interest which Lessor may now have or hereafter may acquire in any Equipment or Lease, including without limitation any financing statement or fixture filing under the Uniform Commercial Code ("UCC"), and any amendment, assignment, termination or continuation thereof. Lessee furthermore agrees to execute and deliver any statement or instrument reasonably required by Lessor for such purpose. Lessee shall, at Lessee's expense, protect and defend Lessor's title against all persons claiming against or through Lessee, and shall at all times keep the Equipment free from any legal process or encumbrances whatsoever, including but not limited to liens, levies and attachments, and shall give Lessor immediate written notice of any threatened or actual legal process or encumbrance affecting or relating to the Equipment, and shall indemnify Lessor from any loss caused thereby. If a Lease is for any reason held not to be a true lease but a lease intended as security. Lessee shall be deemed to have granted Lessor a first security interest in the Equipment and the proceeds thereof, the Lease, and any related collateral. 7. WARRANTY AND LIMITATION OF LIABILITY. Lessor warrants and represents that as long as Lessee shall not be in default of any of the provisions of the Lease, neither Lessor, nor any assignee or secured party of Lessor will disturb Lessee's use or possession of the Equipment and Lessee's unrestricted use thereof for its intended purpose. LESSOR MAKES NO OTHER WARRANTY EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER. LESSEE ACKNOWLEDGES THE FOLLOWING: (A) LESSEE HAS INDEPENDENTLY AND WITHOUT RECEIPT OF OR RELIANCE UPON ANY WARRANTY, REPRESENTATION OR INFORMATION OF ANY KIND FROM LESSOR IN RELATION THERETO, SELECTED BOTH THE EQUIPMENT AND THE SUPPLIER OF THE EQUIPMENT, WHICH IS OF THE SIZE, DESIGN. CAPACITY, AND DESCRIPTION SELECTED BY LESSEE; (B) LESSOR IS NOT THE MANUFACTURER, SUPPLIER OR DISTRIBUTOR OF THE EQUIPMENT, NOR THE AGENT OF ANY OF THEM, NOR ARE ANY OF THEM LESSOR"S AGENT FOR ANY PURPOSE; (C) LESSOR HAS NOT MADE AND DOES NOT MAKE ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, OF ANY KIND WHATSOEVER WITH RESPECT TO THE EQUIPMENT, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OR REPRESENTATION RELATED TO: (1) THE FITNESS. DESIGN QUALITY, MATERIALS, WORKMANSHIP OR CONDITION OF THE EQUIPMENT, OR ITS - 39 - MERCHANTAB1LITY OR ITS FITNESS, CAPACITY OR DURABILITY FOR ANY PARTICULAR PURPOSE; (2) ANY LATENT DEFECTS IN THE EQUIPMENT; (3) ANY PATENT, COPYRIGHT, OR TRADE SECRET INFRINGEMENT; AND (4) THE EQUIPMENT'S COMPLIANCE WITH THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATION OR CONTRACT PERTAINING THERETO. LESSEE WILL HAVE THE BENEFIT OF ANY MANUFACTURER'S WARRANTIES ON THE EQUIPMENT. LESSOR SHALL HAVE NO LIABILITY TO LESSEE FOR ANY CLAIM, LOSS OR DAMAGES. INCLUDING WITHOUT LIMITATION ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, PUNITIVE OR EXEMPLARY DAMAGES, CAUSED OR ALLEGED TO BE CAUSED DIRECTLY, INDIRECTLY, INCIDENTALLY OR CONSEQUENTIALLY BY THE EQUIPMENT, BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN, BY ANY CAUSE OR INCIDENT WHATSOEVER IN CONNECTION THEREWITH, WHETHER ARISING IN STRICT LIABILITY. NEGLIGENCE, CONTRACT, EQUITY OR OTHERWISE. OR IN ANY WAY RELATED TO OR ARISINGOUT OF THE LEASE. The parties Intend the Lease to be a "Finance Lease" as defined in Article 2A-103(g) of the UCC; provided that If contrary to such intention the Lease does not constitute a Finance Lease, the Lease shall nevertheless bind the parties fully pursuant to its terms. Lessee has either (a) reviewed and approved any written "Supply Contract" with the "Supplier" (as such terms are defined in the UCC) of the Equipment, or (b) Lessor has Informed or advised Lessee in writing, either previously or by the Lease, (i) of the identity of the Supplier (unless Lessee itself selected the Supplier and directed Lessor to acquire the Equipment from such supplier), (ii) that Lessee may have rights under the Supply Contract, and (iii) that Lessee may contact the Supplier for a description of any such rights. Without limiting the foregoing. Lessee shall look solely and exclusively to the supplier or manufacturer of the Equipment, not to Lessor, for the rights and benefits under any applicable supplier's or manufacturer's warranties, express or implied, relating to the Equipment. To the extent, if any, that the rights and benefits under such warranties may vest in Lessor and may be assignable, such rights and benefits are hereby assigned by Lessor to Lessee, without any recourse whatsoever to Lessor. Lessee shall at its sole expense take all reasonable action to enforce such warranties where available to Lessee. 8. INDEMNITY. Lessee agrees to defend, indemnify and hold Lessor harmless from any and all claims, losses, liabilities (including contract, negligence, tort and strict liability), damages and/or legal proceedings, groundless or otherwise, including any liability for legal costs, fees and expenses, relating to or arising from any Lease or Equipment, including, without limitation, the Equipment's quality, design, manufacture, durability, materials, selection, purchase, delivery, possession, condition, fitness or suitability for any purpose, compliance with any law, regulation or specification, use, operation, maintenance, or return. The liabilities indemnified against by Lessee shall include, without limitation, any actual or alleged liability based on any theory arising in contract, negligence, tort, or equity, including but not limited to any theory of strict liability or products liability. Lessee's obligations hereunder will survive the Term of the Lease with respect to acts or events occurring or alleged to have occurred prior to termination of the Lease or the return of the Equipment to Lessor. 9. INSTALLATION, MAINTENANCE AND REPAIR. (a) Lessee shall at its expense; (i) be responsible for the delivery, installation, maintenance, service and repair of the Equipment; (ii) use the Equipment only in the regular and lawful course of Lessee's business, within its normal capacity, without abuse, and in a manner contemplated by the manufacturer; (iii) not make any modification, alteration or addition to the Equipment (other than the addition of normal operating accessories or controls! without the consent of Lessor, which shall not be unreasonably withheld; (iv) protect the Equipment from deterioration; and (v) maintain in force a standard maintenance agreement with the manufacturer or other party reasonably acceptable to Lessor, for the repair, service and maintenance of the Equipment in good operating condition, repair and appearance, reasonable wear and tear excepted. Nothing herein shall absolve Lessee from its obligation to furnish a certificate from the manufacturer - 40 - of the Equipment upon surrender of the Equipment pursuant to Section 14. (b) Lessee shall not affix the Equipment to realty in such manner as to change its nature to real property or to cause it to become a fixture pursuant to applicable law. Lessee agrees that the Equipment shall remain personal property at all times regardless of how attached or installed, shall remain at the location shown in the Equipment Schedule and shall not be removed therefrom without the written consent of Lessor. All modifications, repairs, alterations, additions, operating accessories and controls shall accrue to the Equipment and become the property o-f Lessor. Lessor shall have the right, during Lessee's normal business hours, and subject to any applicable laws and regulations, to enter upon the premises where the Equipment is located in order to inspect, observe, or remove the Equipment or otherwise to protect Lessor's interest therein, and Lessee shall cooperate in affording Lessor the opportunity to do so. 10. TAXES. All taxes, assessments, license fees, and other charges or levies, including, without limitation, any personal property tax, sales tax or use tax, imposed or assessed by any lawful authority upon or against either Lessee or Lessor (except for Federal or State income taxes or franchise taxes payable by Lessor), relating to the ownership, possession, rental or use of the Equipment during the Term of the Lease, shall be paid by Lessee before the same shall become delinquent. To the extent possible under any applicable law relating to personal property taxes. Lessee shall include the Equipment on personal property tax returns which shall be timely filed by Lessee, and Lessee shall timely pay any such taxes payable with respect to the Equipment. If Lessor is required to file such returns, Lessee will promptly furnish to Lessor any information which Lessor reasonably requires to make and file such returns in a timely manner. If Lessee fails to pay any taxes, assessments, fees or other charges or levies for which it is liable pursuant to this Section, Lessor may pay all or any part thereof, and Lessee shall immediately reimburse Lessor in full for the amount so paid by Lessor. Lessee authorizes Lessor to add to the amount of any Rent, any sales or use tax, or similar charges or levies, that may be imposed on or measured by such Rent. 11. INSURANCE. Lessee shall at all times maintain, at its own expense: (a) all-risk insurance covering physical loss of or damage to the Equipment from every insurable cause whatsoever for an amount no less than the higher of the "Casualty Loss Value", as that term is defined in Section 12 hereunder, or the full replacement value of the Equipment; and (b) comprehensive general liability and umbrella liability insurance covering all insurable exposures for bodily injury and property damage relating to the Equipment and/or its use and/or operation (including, without limitation, contractual liability and products liability), in such amounts, against such risks, and with such insurers, as shall be satisfactory to Lessor. Lessor shall with respect to each policy of insurance referred to herein, be named as an additional insured and loss payee pursuant to a - 41 - standard long form endorsement to such policy. Each such policy and/or endorsement shall provide that (i) the coverages afforded thereby to Lessor shall not be canceled or materially changed for any reason without at least thirty (30) days' prior written notice to Lessor; (ii) Lessor's coverage under and interest in the policy shall not be invalidated or otherwise adversely affected by any breach by Lessee or others of any warranty, declaration, representation or condition contained in such policy. Lessor is hereby irrevocably authorized to file any claim or proof of loss under or in connection with any insurance policy maintained by Lessee pursuant to this Section 11. 12. LOSS OR DAMAGE. Lessee shall bear the entire risk of any destruction or loss of or damage to the Equipment or any item thereof for any reason whatsoever, including without limitation, theft, governmental taking, war, strike or Act of God. Lessee shall promptly notify Lessor of any Loss or Damage, and no such event shall relieve Lessee of its obligation to pay the full Rent or any other obligation under the Lease. In the event of any Loss or Damage, Lessee shall at its expense, subject to the option and direction of Lessor: (a) repair any damaged Equipment to the same good condition and repair it was in prior to the Damage; or (b) replace any Equipment which Lessor determines has been damaged beyond repair, or which has been lost, with like Equipment, free of any liens or encumbrances, in good condition and repair; or (c) pay to Lessor upon written demand an amount (hereinafter the "Casualty Loss Value") equal to the sum of: (i) any Rent or other amounts then due under the Lease; (ii> the present value, based on an discount rate of 5% per annum, of any future unpaid Rent payments for the balance of the Term of the Lease; and (iii) the present value, based on a discount rate of 5% per annum, of the amount of any purchase option or requirement stated in the Lease or, where such options or requirements are not so stated, the amount of the fair market value of all the Equipment at the end of the Term of the Lease. For the purposes of this Section and any Lease, the fair market value of Equipment shall be the amount which an end user thereof, negotiating at arm's length, would pay at retail for such Equipment assuming that it was already installed and operational at the location where it will be used. The Lease shall terminate upon payment of the Casualty Loss Value, whereupon all Lessor's right, title, and interest in the Equipment shall vest in Lessee or Lessee's insurer according to their respective interests, "as is, where is" in the then condition and location of the Equipment, and without warranty, express or implied. The proceeds, if any, received by Lessor from any all-risk insurance maintained at Lessee's expense pursuant to Section 11 hereof, shall be applied by Lessor to reimburse Lessee for expenses incurred at Lessor's option and direction in the repair or replacement of lost or damaged Equipment pursuant to this Section, or shall be remitted in full to Lessee if Lessee has upon Lessor's demand paid the Casualty Loss Value. 13. ASSIGNMENT. (a) Lessor may transfer, assign, and sell, and/or grant a security interest in, all or any portion of its right, title, and interest in and to the Equipment, the Lease and/or the Rents or other amounts payable thereunder, to a third party (hereinafter an "Assignee"), and any reference in such Lease to "Lessor" shall thereupon also be deemed to be reference to Assignee. Lessee hereby: (i) consents to any such transfer, assignment, sale and/or grant; (ii) agrees to promptly execute and deliver any instrument as may reasonably be requested by Assignee from time to time to give effect to such transfer, assignment, sale and/or grant, including an acknowledgment by Lessee of its continuing unconditional obligations under the Lease as set forth in Section 5 hereof; and (iii) acknowledges that any such transfer, assignment, sale and/or grant shall not materially change Lessee's duties or obligations under the Lease nor materially increase the burdens or risks imposed on Lessee, or obligate Assignee to perform the obligations, if any, of Lessor under the Lease, except that Assignee shall allow Lessee quiet enjoyment of the Equipment for so long as Lessee complies with all the provisions of the Lease, and shall pursuant to the Lease apply any proceeds which Assignee may receive from insurance maintained by Lessee at Lessee's expense pursuant to Section 11. (b) Lessee's obligation to pay, and Assignee's right to receive, the Rents and other sums due under a Lease, shall be absolute and unconditional as more fully set forth in Section 5 hereof, and, without limitation, shall be unaffected by any failure by Lessor to perform any obligation under the Lease, without prejudice to such recourse, if any, which Lessee separately may have against Lessor arising from such failure. (c) LESSEE SHALL NOT WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR: (i) ASSIGN OR IN ANY WAY DISPOSE OF ALL OR ANY PART OF ITS RIGHTS OR OBLIGATIONS UNDER THE LEASE; OR (ii) ENTER INTO A SUBLEASE OF ALL OR ANY PART OF THE EQUIPMENT. 14. SURRENDER OF EQUIPMENT. Lessee shall upon termination of a Lease return the Equipment to Lessor at Lessee's expense, subject to the following: (a) not less than thirty (30) days before such return. Lessee shall provide Lessor with a written inventory of the Equipment, including model and serial numbers, details of current manuals, and with all other technical data in Lessee's possession required for the set-up and operation of the Equipment; (b) not less than ten (10) days before such return. Lessee shall provide - 42 - Lessor with a certificate by the manufacturer or a qualified equipment maintenance provider acceptable to Lessor, to the effect that the Equipment has been properly inspected, examined and tested, is in good operating condition, repair and appearance, reasonable wear and tear excepted, and will be eligible upon re-sale or re-lease by Lessor, for the manufacturer's standard maintenance agreement for Equipment of comparable age and type; (c) the Equipment shall be returned in the same good order and condition in which it is required to be certified, as set forth above, and will be thoroughly cleaned and cosmetically acceptable for immediate installation in a similar environment; (d) the Equipment shall be returned to the location designated by Lessor within the continental United States; (e) if Lessee for any reason fails to return the Equipment to Lessor within ten (10) days of termination of the Lease, Lessee shall pay as liquidated damages an amount equal to one hundred and five percent (105%) of the monthly rental payment set forth in the Lease for each month or part thereof that elapses before the Equipment is received by Lessor, without prejudice to Lessor's right, without notice, demand, or legal process, (except as applicable law may require), to enter into the premises where the Equipment is then located and to repossess and remove it, without liability to Lessee for injury or loss suffered through or caused thereby, and all rights of Lessee in the Equipment so repossessed shall terminate absolutely; (f) the provisions of this Section 14 shall not apply if Lessee duly purchases the Equipment from Lessor pursuant to its rights at the end of the Term of any Lease. 15. OTHER COVENANTS AND WARRANTIES OF LESSEE. (a) Lessee shall promptly pay all costs, expenses and obligations of every kind and nature incurred in connection with the use or operation of the Equipment which may arise or become due during the Term of the Lease, whether or not specifically mentioned herein. (b) The information, statements and financial reports submitted by Lessee to Lessor from time to time are material inducements to the execution by Lessor of any Lease thereafter executed between Lessor and Lessee. Lessee warrants that such information, statements and reports will be true and correct in all material respects as of the date submitted. (c) Lessee shall during the Term of any Lease furnish to Lessor: (i) within one hundred and twenty (120) days after the end of each fiscal year of Lessee, the complete audited financial statements of Lessee as at the end of such fiscal year and for the period then ended; (ii) within sixty (60) days after the end of each quarter of each fiscal year of Lessee, interim financial statements reflecting the financial condition of Lessee as at the end of such quarter and the results of its operations and cash flows for the period then ended, prepared in accordance with generally accepted accounting principles, and certified as such by Lessee; and (iii) such other financial information regarding the business affairs and financial condition of Lessee as Lessor may reasonably request from time to time. (d) If any Rent or other payment is not paid by Lessee within ten (10) days of its due date under a Lease, Lessee shall, in addition to such Rent, immediately be liable to pay liquidated damages in an amount equal to the lesser of: (i) five percent (5%) of such late payment, or (ii) the maximum liquidated damages, late charge, or equivalent such charge, as the applicable law allows in such circumstances. Such liability shall be in addition to any other amounts payable by Lessee as a result of the exercise by Lessor of any of its other remedies under a Lease. (e) Lessee warrants that this Master Lease and any Lease hereunder is and shall be duly authorized, and that no provision herein or in any Lease is or shall be inconsistent with Lessee's charter, by-laws, or any loan or credit agreement or other instrument to which Lessee is a party or by which Lessee or its property may be bound or affected. (f) Lessee, if a corporation or other form of organization, shall not merge or consolidate with any other person or entity, or change its identity, without Lessor's written consent, which shall not be unreasonably withheld. 16. PERFORMANCE BY LESSOR OF LESSEE'S OBLIGATIONS. If Lessee fails to comply with any of the provisions of a Lease, Lessor shall have the right, but not the obligation, to effect such compliance on behalf of Lessee. In that event, all monies spent and all liabilities and expenses incurred by Lessor in effecting such compliance will immediately be due and payable by Lessee to Lessor. 17. DEFAULT. The occurrence of any one of the following events shall constitute an Event of Default under a Lease: (a) Any default by Lessee in the due and timely payment of Rent or any other amount due under such Lease, which continues for five (5) days after receipt of written notice thereof from Lessor; (b) Lessee's breach of any warranty hereunder, or its failure to furnish and maintain insurance pursuant to Section 11 hereof; (c) Any default by Lessee in the performance of any other covenant, term or condition hereunder, which default continues for ten (10) days after receipt of written notice thereof from Lessor; (d) Lessee's insolvency or any assignment by Lessee for the benefit of its creditors; - 43 - (e) Any application by Lessee for, or Lessee's consent to, the appointment of a receiver, trustee, conservator or liquidator of Lessee or of all or a substantial part of its assets, or the appointment of such receiver, trustee, conservator or liquidator without the application or consent of Lessee; (f) The filing of a petition by or against Lessee under the Bankruptcy Act or any amendment thereto (including, without limitation, a petition for reorganization, arrangement or extension) or under any other insolvency law or laws providing for the relief of debtors, unless: (i) Lessee promptly and diligently prosecutes an action to dismiss such petition; and (ii) such petition is dismissed within thirty (30) days of such filing; (g) Lessee's abandonment of, or attempt without Lessor's prior written consent to remove, sell, assign, transfer, sublet or part with the possession of, any item of Equipment or any of its rights or obligations under a Lease; or, (hi Any representation or warranty made by Lessee in this Master Lease, or in any Equipment Schedule, or in any document furnished by Lessee to Lessor or Assignee in connection with this Master Lease or any Equipment Schedule or with respect to the acquisition or use of the Equipment, which is untrue in any material respect. (i) The bankruptcy of any guarantor of Lessee's obligations under such Lease, or any attempt by such guarantor to renounce or repudiate any of its guaranty obligations relating to such Lease. 18. REMEDIES. If an Event of Default occurs under a Lease, Lessor may with respect to such Lease elect to do one or more of the following, all of which are hereby authorized by Lessee: (a) Cause Lessee, immediately upon written demand, to pay to Lessor, as liquidated damages and not as a penalty, the "Default Value", which shall be the sum of: (i) the Casualty Loss Value of the Equipment on the date of such Event of Default; and (ii) any and all costs and expenses incurred by Lessor in connection with the enforcement of any of Lessor's remedies hereunder, including all expenses of repossessing, storing, shipping, repairing and selling the Equipment, and all legal and administrative costs and expenses related thereto, including reasonable in-house administrative and legal costs, and the costs and attorneys' fees of outside counsel; b) Unless and until the Default Value has been paid in full. Lessor may: (i) cause Lessee, upon written demand of Lessor and at Lessee's expense, promptly to return the Equipment to Lessor in accordance with Section 14 hereof, or may without demand or legal process, except as may be required by applicable law, enter into the premises where the Equipment may be found and take possession of and remove such Equipment, without liability for injuries suffered through or loss caused by such repossession, and may ship, store and/or repair such Equipment, whereupon all rights of Lessee in such Equipment shall terminate absolutely; and (ii) upon return or repossession of the Equipment may, in Lessor's reasonable discretion, lease or sell such Equipment, with or without notice and by public auction or private bid, but subject to the requirements of any applicable law, and the proceeds of such lease or sale shall be applied to paying Lessor an amount equal to the Default Value, to the extent not previously paid by Lessee. If the sum of the lease or sale proceeds and any previous payments by Lessee towards the Default Value, is less than the Default Value, Lessee shall remain liable to pay such shortfall to Lessor. Any surplus remaining thereafter will be retained by Lessor. All remedies of Lessor hereunder are cumulative, are in addition to any other remedies provided for by law and may, to the extent permitted by law, be exercised concurrently or separately, and the exercise of any one remedy shall not be deemed to be an election of such remedy or to preclude the exercise of any other remedy. No failure on the part of Lessor to exercise, and no delay in exercising any right or remedy shall operate as a waiver thereof or modify the terms of any Lease, nor shall any single or partial exercise by Lessor of any right or remedy preclude any other or further exercise of the same or any other right or remedy. 19. LOAN EQUIPMENT SCHEDULES. (a) Lessor may from time to time agree to lend and advance funds to Lessee for the purpose of purchasing personal property, and to record the terms and conditions of such transaction {hereinafter a "Loan") in an Equipment Schedule which incorporates the terms and conditions of this Master Lease by reference. (b) If the parties conclude a Loan by means of such Equipment Schedule: (i) any reference in this Master Lease to Lessor and Lessee shall be deemed to be references to Lessor and Lessee in their respective capacities as Lender and Borrower pursuant to the Loan, and the terms and conditions of this Master Lease shall mutatis mutandis apply to the contractual rights and obligations of Lessor and Lessee pursuant to the Loan, including, without limitation. Lessee's unconditional obligation to pay periodic repayment amounts under the Loan subject to the same terms and conditions as apply to Lessee's obligation to pay Rent under a Lease; (ii) Lessee, in its capacity as Borrower, grants Lessor, in its capacity as Lender, a security interest in each item of personal property described as "Equipment" in any Equipment Schedule recording a Loan, as security for the due and timely fulfillment of all Lessee's obligations under such Loan. 20. MISCELLANEOUS. (a) Applicable Law; Consent to Jurisdiction; Waiver of Jury Trial. This Master Lease and any Lease shall be governed by and construed in accordance with the laws of the State of New Jersey. Lessee hereby consents to the non-exclusive jurisdiction of any State or Federal court of competent jurisdiction located within the State of New Jersey, for the adjudication of all and any lawsuits, claims, controversies or proceedings to which Lessor or its assigns may be a party, arising out of or in connection with any rights. obligations or interests under this Master Lease, any Lease, and/or any Equipment. Lessor and Lessee Each Irrevocably Waive All Right to Trial by Jury of Any Such Lawsuits, Claims, Controversies or Proceedings. (b) (b) Place and Time of Performance. Each Lease shall be deemed to have been formed and executed at Lessor's place of business in New Jersey. Lessee shall pay Rents and any other amounts payable under each Lease at such place, unless requested otherwise by Lessor or its assignee in writing. Time is of the essence in the performance of Lessee's obligations hereunder. (c) (c) Suspension of Obligations of Lessor. Prior to delivery of any item of Equipment hereunder, the obligations of Lessor hereunder shall be suspended to the extent that it is hindered or prevented from complying therewith because of labor disturbances, including strikes and lockouts, acts of God, fire, storms, accidents, failure of the manufacturer to deliver any item of Equipment, governmental regulations or interference, or any cause whatsoever not within the sole control of the Lessor. (d) (d) Partial Validity. If any provision hereof, or its application to any person or circumstances, shall to any extent be invalid or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby. (e) Notices. Any notice required or permitted to be given by the provisions hereof shall be delivered to a party at the address indicated above (or at such other address as a party shall specify to the other party in writing) by courier or by registered or certified mail. Proof of sending such notice shall be the responsibility of sender. (f) Amendments. This Master Lease and each Lease constitutes the entire agreement between Lessor and Lessee and may not be contradicted by evidence of prior, contemporaneous or subsequent oral discussions, negotiations or agreements of the parties. There is no understanding, oral or written, which is not contained herein or therein. This Master Lease and any Lease hereunder may not be amended except by a written instrument signed by Lessor and Lessee, except as otherwise permitted herein or in a lease. (g) (g) Successors; Survival of Covenants. This Master Lease and any Lease shall be binding on and inure to the benefit of the parties hereto and their permitted successors and assigns. All of Lessee's covenants under this Master Lease and Equipment Schedule(s) shall survive the delivery and return of the Equipment leased hereunder. (h) (h) Originality. This Master Lease and any Equipment Schedule or Certificate of Acceptance shall be executed with only one original, and only the transfer or assignment of an original Equipment Schedule shall be effective to transfer Lessor's rights under a Lease, or to perfect, by possession, a security interest therein. (i) Banc of America Leasing & Capital, LLC is a Delaware limited liability company. Executed as of the date first written above. LESSOR: Banc of America Leasing & Capital, LLC LESSEE: PHC, Inc. By: /s/ P. Wesley Yount, III By: /s/ Paula C. Wurts Name: P. Wesley Yount, III Name: Paula C. Wurts Title: Senior Vice President Title: CFO - 44 - EQUIPMENT SCHEDULE No. 001 Dated: As of April 1, 2006 Under: MASTER LEASE No. 16378-00900 dated as of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. EQUIPMENT DESCRIPTION AND LOCATION: See Attachment A. 2. COMMENCEMENT DATE: The date set forth in the Certificate of Lease Acceptance as the Lease Acceptance Date. 3. TERM: The lease Term commences on the Commencement Date and continues for 39 months thereafter. 4. RENT: 39 monthly payments due on the first day of each month, beginning on the Commencement Date, payable as follows: 3 consecutive monthly payments of $0.00, followed by 35 consecutive monthly payments of $6,065.11 followed by 1 consecutive monthly payment of $0.00. 5. EQUIPMENT ACCEPTANCE: It is anticipated that the Equipment will be delivered to and installed at the Equipment Location over a period of 5 months beginning on the Commencement Date. Lessee shall, as set forth in Attachment C, periodically execute and deliver to Lessor a Certificate of Equipment Acceptance, substantially in the form as Exhibit A hereto which shall: (a) detail those items of Equipment which have been delivered to and accepted by Lessee during the period since the last executed Certificate of Equipment Acceptance; and, (b) serve as authorization for Lessor to pay the Vendors the Cost of the Equipment listed therein. 6. EQUIPMENT CHANGES: See Attachment B. 7. PAYMENTS TO VENDORS: See Attachment C. 8. PURCHASE: At the end of such lease Term, provided Lessee is not in default of its obligations hereunder, Lessee shall have the option to purchase all, but not less than all, of the Equipment for its then Fair Market Value, which amount Lessee shall pay to Lessor on the last day of the Term hereof. The term "Fair Market Value" as used herein shall mean the purchase price that would be obtained in an arm's length transaction, assuming the Equipment is in good operating condition and fully installed on the premises where it is to be used. 9. MASTER LEASE: All the terms and conditions of the Master Lease are incorporated herein by reference as if such terms and conditions were set forth in this Equipment Schedule. Pursuant to Section 10 of the Master Lease, Lessee will file any personal property returns and pay all personal property taxes applicable with respect to the Equipment. Banc of America Leasing & Capital, LLC is a Delaware limited liability company. 10. ORIGINALITY: This is the only Original Equipment Schedule No. 001. All other copies of this Equipment Schedule No. 001 are xerographic copies only and have been marked as duplicates. Possession of this "Original" is required to perfect, by possession, a security interest in this - 45 - Equipment Schedule as chattel paper under the UCC. 11. Executed as of the date first written above. LESSOR: BANC OF AMERICA LEASING & CAPITAL, LLC LESSEE: PHC, Inc. By: /s/ P. Wesley Yount, III By: /s/ Paula C. Wurts Name: P. Wesley Yount, III Name: Paula C. Wurts Title: Senior Vice President Title: CFO - 46 - EQUIPMENT SCHEDULE No. 002 Dated: As of April 1, 2006 Under: MASTER LEASE No. 16378-00900 dated as of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. EQUIPMENT DESCRIPTION AND LOCATION: See Attachment A. 2. COMMENCEMENT DATE: The date set forth in the Certificate of Lease Acceptance as the Lease Acceptance Date. 3. TERM: The lease Term commences on the Commencement Date and continues for 66 months thereafter. 4. RENT: 66 monthly payments due on the first day of each month, beginning on the Commencement Date, payable as follows: Payments 1 - 6 @ $0.00, followed by payments 7 - 10 @ $3,000.00 followed by payments 11 - 65 @ $9,868.71 followed by payment 66 @ $0.00. 5. EQUIPMENT ACCEPTANCE: It is anticipated that the Equipment will be delivered to and installed at the Equipment Location over a period of 21 months beginning on the Commencement Date. Lessee shall, as set forth in Attachment C, periodically execute and deliver to Lessor a Certificate of Equipment Acceptance, substantially in the form as Exhibit A hereto which shall: (a) detail those items of Equipment which have been delivered to and accepted by Lessee during the period since the last executed Certificate of Equipment Acceptance; and, (b) serve as authorization for Lessor to pay the Vendors the Cost of the Equipment listed therein. 6. EQUIPMENT CHANGES: See Attachment B. 7. PAYMENTS TO VENDORS: See Attachment C. 8. PURCHASE: At the end of the Term hereof. Lessee shall, without notice or demand, purchase the Equipment for $1.00, which amount Lessee shall pay to Lessor on the last day of the Term hereof. 9. MASTER LEASE: All the terms and conditions of the Master Lease are incorporated herein by reference as if such terms and conditions were set forth in this Equipment Schedule. Pursuant to Section 10 of the Master Lease, Lessee will file any personal property returns and pay all personal property taxes applicable with respect to the Equipment. Banc of America Leasing & Capital, LLC is a Delaware limited liability company. 10. ORIGINALITY: This is the only Original Equipment Schedule No. 002. All other copies of this Equipment Schedule No. 002 are xerographic copies only and have been marked as duplicates. Possession of this "Original" is required to perfect, by possession, a security interest in this Equipment Schedule as chattel paper under the UCC. 11. Executed as of the date first written above. LESSOR: BANC OF AMERICA LEASING & CAPITAL, LLC LESSEE: PHC, Inc. By: ____________________________ By: ____________________ Name: ____________________________ Name: __________________ Title: ____________________________ Title:__________________ - 47 - ATTACHMENT A TO EQUIPMENT SCHEDULE No. 001 Dated: As of April 1, 2006 Under: MASTER LEASE No. 16378-00900 dated as of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. EQUIPMENT DESCRIPTION AND LOCATION: Location A: 200 Lake Street, Peabody, MA 01960 Equipment Make, (* = Taxable) Item No. Quantity Part No. Model and Description Total $ Cost____ ________________________________________________________________________________ Vendor: To be determined 001-01 1 Hardware $200,000.00 Location Total $200,000.00 Attachment Total $200,000.00 Together with all parts, accessories, attachments, substitutions, repairs, improvements and replacements, and any and all rights thereunder and proceeds thereof, including insurance proceeds. The above equipment will be more fully described in Certificates of Equipment Acceptance signed or to be signed by Lessee, each of which is incorporated into and made a part of the Equipment Schedule. 2. Executed as of the date first set forth above. LESSOR: BANC OF AMERICA LEASING & CAPITAL, LLC LESSEE: PHC, Inc. By: /s/ P. Wesley Yount, III By: /s/ Paula C. Wurts Name: P. Wesley Yount, III Name: Paula C. Wurts Title: Senior Vice President Title: CFO - 48 - ATTACHMENT A TO EQUIPMENT SCHEDULE No. 002 Dated: As of April 1, 2006 Under: MASTER LEASE No. 16378-00900 dated as of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 3. EQUIPMENT DESCRIPTION AND LOCATION: Location A: 200 Lake Street, Peabody, MA 01960 Equipment Make, (* = Taxable) Item No. Quantity Part No. Model and Description Total $ Cost____ ________________________________________________________________________________ Vendor: Meditech Vendor: Meditech 001-01 1 Software License Fee $250,125.00* Implementation $212,306.00 Location Total $462,431.00 Attachment Total $462,431.00 Together with all parts, accessories, attachments, substitutions, repairs, improvements and replacements, and any and all rights thereunder and proceeds thereof, including insurance proceeds. The above equipment will be more fully described in Certificates of Equipment Acceptance signed or to be signed by Lessee, each of which is incorporated into and made a part of the Equipment Schedule. 4. Executed as of the date first set forth above. LESSOR: BANC OF AMERICA LEASING & CAPITAL, LLC LESSEE: PHC, Inc. By: ____________________________ By: ____________________ Name: ____________________________ Name: __________________ Title: ____________________________ Title:__________________ - 49 - ATTACHMENT B TO EQUIPMENT SCHEDULE No. 001 Dated: As of April 1, 2006 Under: MASTER LEASE No. 16378-00900 dated as of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. EQUIPMENT CHANGES: It is anticipated that the Equipment listed in Attachment A to the Equipment Schedule shall be delivered to and installed at the locations set forth in said Attachment A over a period of 5 months beginning on the Commencement date. Changes to this Equipment will be permitted only as follows: (a) At any time before an item of Equipment is delivered to and accepted by Lessee, Lessee may, upon written approval of Lessor, which approval shall not be unreasonably withheld, substitute said Equipment with equipment of similar make, design, function and quality and of equal or lesser cost. (b) At any time before an item of Equipment is delivered to Lessee, Lessee may decide to reduce the Equipment listed in said Attachment A by one or more such items of Equipment. (c) If Lessee makes changes to the Equipment as allowed in (a) or (b) above, and, as a result of such changes, there is a reduction in the total cost of Equipment being leased under this Equipment Schedule (such reduced amount hereinafter the "Final Total Cost") then, on the date Lessee notifies Lessor in writing that Lessee has accepted the last item of Equipment which it intends to accept, Lessor shall, at Lessor's option, either: (i) adjust the remaining monthly lease rentals downwards to appropriately reflect the difference between the Final Total Cost and the Attachment Total set forth in said Attachment A, while at the same time maintaining Lessor's profit level; or, (ii) pay Lessee the difference between the Final Total Cost and the Attachment Total set forth in said Attachment A in the manner set for in the "Payments to Vendors" in Attachment C to this Equipment Schedule, as if Lessee was a Vendor of Equipment. 2. Executed as of the date first written above. LESSOR: BANC OF AMERICA LEASING & CAPITAL, LLC LESSEE: PHC, Inc. By: /s/ P. Wesley Yount, III By: /s/ Paula C. Wurts Name: P. Wesley Yount, III Name: Paula C. Wurts Title: Senior Vice President Title: CFO - 50 - ATTACHMENT B TO EQUIPMENT SCHEDULE No. 002 Dated: As of April 1, 2006 Under: MASTER LEASE No. 16378-00900 dated as of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. EQUIPMENT CHANGES: It is anticipated that the Equipment listed in Attachment A to the Equipment Schedule shall be delivered to and installed at the locations set forth in said Attachment A over a period of 21 months beginning on the Commencement date. Changes to this Equipment will be permitted only as follows: (a) At any time before an item of Equipment is delivered to and accepted by Lessee, Lessee may, upon written approval of Lessor, which approval shall not be unreasonably withheld, substitute said Equipment with equipment of similar make, design, function and quality and of equal or lesser cost. (b) At any time before an item of Equipment is delivered to Lessee, Lessee may decide to reduce the Equipment listed in said Attachment A by one or more such items of Equipment. (c) If Lessee makes changes to the Equipment as allowed in (a) or (b) above, and, as a result of such changes, there is a reduction in the total cost of Equipment being leased under this Equipment Schedule (such reduced amount hereinafter the "Final Total Cost") then, on the date Lessee notifies Lessor in writing that Lessee has accepted the last item of Equipment which it intends to accept, Lessor shall, at Lessor's option, either: (i) adjust the remaining monthly lease rentals downwards to appropriately reflect the difference between the Final Total Cost and the Attachment Total set forth in said Attachment A, while at the same time maintaining Lessor's profit level; or, (ii) pay Lessee the difference between the Final Total Cost and the Attachment Total set forth in said Attachment A in the manner set for in the "Payments to Vendors" in Attachment C to this Equipment Schedule, as if Lessee was a Vendor of Equipment. 2. Executed as of the date first written above. LESSOR: BANC OF AMERICA LEASING & CAPITAL, LLC LESSEE: PHC, Inc. By: ____________________________ By: ____________________ Name: ____________________________ Name: __________________ Title: ____________________________ Title:__________________ - 51 - ATTACHMENT C TO EQUIPMENT SCHEDULE No. 001 Dated: As of April 1, 2006 Under: MASTER LEASE No. 16378-00900 dated as of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. PAYMENT TO VENDORS: It is anticipated that the Equipment listed in Attachment A to this Equipment Schedule shall be delivered to and installed at the locations set forth in said Attachment A over a period of 5 months beginning on the Commencement Date and that Lessor shall, in accordance with the terms set forth, pay to the vendors of the Equipment ("Vendors") on the last day of each Payment Month, set forth in the Schedule of Payments listed below, the corresponding Payment Amount. Notwithstanding the foregoing: (a) Lessor shall make no payments to Vendors: (1) if Lessee is in default of its obligations hereunder; and (2) unless Lessee delivers to Lessor an executed Certificate of Equipment Acceptance ("CEA") prepared by Lessor detailing the Equipment which has been accepted by Lessee and the cost of such Equipment; and, (b) Lessor shall be allowed 15 days, from the date each CEA is received, to inspect the Equipment listed therein and thereafter shall pay the Vendors of such Equipment the cost of the Equipment on the later of either the last day of the month in which such CEA is received by Lessor or the 16th day following the date such CEA is received by Lessor; provided, however, that the total payments made hereunder: (1) through the last day before the last day of a particular Payment Month set forth in the Schedule of Payments listed below shall not exceed either: (i) the Cumulative Payment Amount corresponding to the preceding Payment Month; or (ii) the cumulative total of the Certificate of Acceptance Total set forth in all the CEA's executed by Lessee and delivered to Lessor (the "Cumulative CEA Cost" though that date; (2) through the last day of a particular Payment Month set forth in the Schedule of Payments listed below shall not exceed either: (i) the Cumulative Payment Amount corresponding to that Payment Month; or, (ii) the Cumulative CEA Cost through that date; (3) through the end of the Term hereof shall not exceed the Attachment Total set forth in Attachment A to this Equipment Schedule. (c) While Lessee is in default of any of its obligations under this Equipment Schedule, Lessor shall not be obligated to prepare, and Lessee shall not be capable for purposes hereof of executing, any CEA. 2. SCHEDULE OF PAYMENTS: Payment Month Payment Amount Cumulative Payment Amount 2006: April $ 0.00 $ 0.00 May $ 0.00 $ 0.00 June $ 0.00 $ 0.00 July $ 0.00 $ 0.00 August $200,000.00 $200,000.00 3. Executed as of the date first written above. LESSOR: BANC OF AMERICA LEASING & CAPITAL, LLC LESSEE: PHC, Inc. By: /s/ P. Wesley Yount, III By: /s/ Paula C. Wurts Name: P. Wesley Yount, III Name: Paula C. Wurts Title: Senior Vice President Title: CFO - 52 - ATTACHMENT C TO EQUIPMENT SCHEDULE No. 002 Dated: As of April 1, 2006 Under: MASTER LEASE No. 16378-00900 dated as of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. PAYMENT TO VENDORS: It is anticipated that the Equipment listed in Attachment A to this Equipment Schedule shall be delivered to and installed at the locations set forth in said Attachment A over a period of 21 months beginning on the Commencement Date and that Lessor shall, in accordance with the terms set forth, pay to the vendors of the Equipment ("Vendors") on the last day of each Payment Month, set forth in the Schedule of Payments listed below, the corresponding Payment Amount. Notwithstanding the foregoing: (a) Lessor shall make no payments to Vendors: (1) if Lessee is in default of its obligations hereunder; and (2) unless Lessee delivers to Lessor an executed Certificate of Equipment Acceptance ("CEA") prepared by Lessor detailing the Equipment which has been accepted by Lessee and the cost of such Equipment; and, (b) Lessor shall be allowed 15 days, from the date each CEA is received, to inspect the Equipment listed therein and thereafter shall pay the Vendors of such Equipment the cost of the Equipment on the later of either the last day of the month in which such CEA is received by Lessor or the 16th day following the date such CEA is received by Lessor; provided, however, that the total payments made hereunder: (1) through the last day before the last day of a particular Payment Month set forth in the Schedule of Payments listed below shall not exceed either: (i) the Cumulative Payment Amount corresponding to the preceding Payment Month; or (ii) the cumulative total of the Certificate of Acceptance Total set forth in all the CEA's executed by Lessee and delivered to Lessor (the "Cumulative CEA Cost" though that date; (2) through the last day of a particular Payment Month set forth in the Schedule of Payments listed below shall not exceed either: (i) the Cumulative Payment Amount corresponding to that Payment Month; or, (ii) the Cumulative CEA Cost through that date; (3) through the end of the Term hereof shall not exceed the Attachment Total set forth in Attachment A to this Equipment Schedule. (c) While Lessee is in default of any of its obligations under this Equipment Schedule, Lessor shall not be obligated to prepare, and Lessee shall not be capable for purposes hereof of executing, any CEA. 2. SCHEDULE OF PAYMENTS: Payment Month Payment Amount Cumulative Payment Amount 2006: April $ 0.00 $ 0.00 May $ 0.00 $ 0.00 June $ 0.00 $ 0.00 July $ 0.00 $ 0.00 August $ 0.00 $ 0.00 October $ 46,243.10 $ 46,243.10 November $ 78,000.00 $124,243.10 December $ 13,050.00 $137,293.10 2007: January $ 18,050.40 $155,343.50 February $ 78,000.00 $233,343.50 March $ 13,050.00 $246,393.50 April $ 18,050.40 $264,443.90 May $ 95,372.00 $359,815.90 June $ 3,262.50 $363,078.40 July $ 4,512.60 $367,591.00 August $ 75,872.00 $443,463.00 November $ 18,968.00 $462,431.00 6. Executed as of the date first written above. LESSOR: BANC OF AMERICA LEASING & CAPITAL, LLC LESSEE: PHC, Inc. By: ____________________________ By: ____________________ Name: ____________________________ Name: __________________ Title: ____________________________ Title:__________________ - 53 - CERTIFICATE OF LEASE ACCEPTANCE Dated: As of April 1, 2006 Under: MASTER LEASE No. 16378-00900 dated as of April 1, 2006 Between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. REPRESENTATIONS BY LESSEE: As of the Lease Acceptance Date set forth below, Lessee: (a) acknowledges that all or some of the Equipment listed in Attachment A to this Equipment Schedule has not yet, and may never be, delivered to Lessee; (b) represents and warrants to Lessor that this lease and Lessee's obligations under this Equipment Schedule, including Lessee's unconditional obligation to pay Rent for the Term of this Equipment Schedule, shall commence on the Lease Acceptance Date set forth below, and shall not be affected in any respect whatsoever by the failure of the Vendors to deliver the balance of the Equipment; and, (c) agrees to indemnify, defend and hold Lessor harmless from and against any and all losses, claims, suits, actions, liabilities, damages, costs and expenses (including attorney's fees) arising directly or indirectly out of any claim by the vendor for payments for Equipment which are precluded by the terms and provisions of this Equipment Schedule. 2. LEASE ACCEPANCE DATE: April 1, 2006 1. Executed as of the Lease Acceptance Date. LESSEE: PHC, Inc. By: /s/ Paula C. Wurts Name: Paula C. Wurts Title: CFO - 54 - SOFTWARE RIDER dated: as of April 1, 2006 to : Equipment Schedule No. 1 dated as of April 1, 2006 (the "Equipment Schedule") under : Master Lease No. 16378-00900 dated as of April 1, 2006 (the "Master Lease") between: Banc of America Leasing & Capital, LLC ("Lessor") located at: 2059 Northlake Parkway Suite 400, Tucker, GA 30084 and: PHC, Inc. ("Lessee") located at: 200 Lake Street, Peabody, MA 01960 1. The term "Equipment" includes any computer program or application or the license to use such program or application (hereinafter "Software"), that is referred to in Attachment A or any Certificate of Equipment Acceptance hereunder or financed from the proceeds of this Lease. 2. Lessee hereby grants Lessor a security interest in such Software as security for the due and timely compliance by Lessee with all its obligations under the Lease. If Lessee returns the Equipment pursuant to a so-called "Return Option" (if any) set forth in the Equipment Schedule, or if the Equipment Schedule is terminated by Lessor as a result of an Event of Default or otherwise in terms of the Master Lease, Lessee shall promptly upon receipt of Lessor's written demand to do so, discontinue any use of the Software and return all copies in its possession of any item or medium on which such Software is stored, together with any operating manuals or other materials supplied therewith, and will delete or destroy any other copy of such Software which may be stored on or used by any computer or other electronic device in Lessee's possession or control, and Lessee shall, in that event, assure Lessor in writing that all Software has been destroyed and that Lessee is not using the Software after termination. LESSOR: BANC OF AMERICA LEASING & CAPITAL, LLC LESSEE: PHC, Inc. By: ____________________________ By: ____________________ Name: ____________________________ Name: __________________ Title: ____________________________ Title:__________________ - 55 - CERTIFICATE OF INCUMBENCY RE: Master Lease No. 16378-00900 dated as of April 1, 2006 and all Equipment Schedules thereto between Banc of America Leasing & Capital, LLC, as Lessor located at 2059 Northlake Parkway, Suite 400, Tucker, GA 30084 and PHC, Inc. (the "Company"), as Lessee located at 200 Lake Street, Peabody, MA 01960 I hereby certify that I am the duly elected, qualified and presently serving Secretary or Assistant Secretary of the Company. I further certify that as of and since the date first set forth above: (a) each of the persons listed below was duly elected to, and holds the corporate office set forth opposite his or her name; (b) the signature appearing opposite the name of such officer is the genuine signature of such officer; and (c) such person has the power and authority to execute any and all documents on behalf of the Company relating to the above referenced transaction and to bind the Company to perform in accordance with the terms thereof. NAME OF OFFICER OFFICE SIGNATURE OF OFFICER __________________________ ____________________ __________________________ __________________________ ____________________ __________________________ __________________________ ____________________ __________________________ IN WITNESS WHEREOF, I have hereto set my hand as Secretary or Assistant Secretary of the Company this _____day of _____, 20___. Affix corporate seal Secretary or Assistant Secretary ________________ If the Secretary or Assistant Secretary is a signatory on any of the documents referred to above, another officer of the Company must countersign below. Officer's Countersignature: _______________________ Title: ___________________ - 56 - MEDICAL INFORMATION TECHNOLOGY, INC. AMENDMENT entered into this _____ day of _____________, 2006 by and between MEDICAL INFORMATION TECHNOLOGY, INC. ("MEDITECH") and PHC, Inc. ("Customer") WHEREAS MEDITECH and Customer entered into a Health Care Information System Software Agreement dated ___________, 2006 ("the Agreement") whereby MEDITECH licensed computer programs ("LICENSED SOFTWARE") for use by Customer, and WHEREAS Customer and MEDITECH desire to amend the Agreement, NOW THEREFORE, the parties hereto hereby agree as follows: 1. Article I(C) of the Agreement is deleted in its entirety and substituted in lieu thereof shall be the following: "RESTRICTIONS ON TRANSFER The LICENSED SOFTWARE shall at all times remain the property of MEDITECH and the license of use granted herein to Customer specifically excludes any right of reproduction, sale, lease, sublicense, or other transfer or disposition of the LICENSED SOFTWARE by Customer except as otherwise expressly stated herein. The rights granted hereunder are granted to Customer only and are not assignable to any other person, corporation, or entity except that, subject to the prior written consent of any lessor or lender which leased or financed the line item fee(s) payable with respect to the LICENSED SOFTWARE, upon the transfer by sale, merger, corporate re-organization, or re-organization in bankruptcy of Customer, of substantially all of the assets of Customer to a successor organization, including Customer following its discharge from bankruptcy pursuant to a plan of re-organization, this Agreement and the rights and obligations of Customer hereunder may be assigned to such successor. Customer agrees to notify MEDITECH promptly in writing of the transfer to such successor and the assumption by such successor of Customer's obligations and responsibilities as described in this Agreement. Customer acknowledges that it, and not MEDITECH, is solely responsible for obtaining the written consent described herein of any lessor or lender which leased or financed the line item fee(s) payable with respect to the LICENSED SOFTWARE. Customer agrees to indemnify MEDITECH and hold MEDITECH harmless from any liability which may arise in connection therewith." 2. In all other respects the terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF each party has executed this Amendment as a sealed instrument this _____day of ________, 2006. CUSTOMER PHC, Inc. By __________________________ Title __________________________ ================================================ MEDITECH Medical Information Technology, Inc. By _____________________________ Title _____________________________ - 57 - (logo) Banc of America Leasing & Capital LLC Healthcare Finance 2059 Northlake Parkway Suite 400 Tucker, GA 3008 April 1, 2006 Lawrence A. Polimeno Vice Chairman Medical Information Technology, Inc. Meditech Circle Westwood, Massachusetts 02090 Dear Mr. Polimeno, Re: Banc of America Leasing & Capital, LLC Lease with PHC, Inc. ("Lessee"): Master Lease No. 16378-00900 and Equipment Schedule No. 1 thereunder (hereinafter the "Lease") This letter is to record and confirm the agreement between Banc of America Leasing & Capital, LLC ("BALC") and Medical Information Technology, Inc. ("Meditech") concerning BALC's rights in relation to the "Licensed Software" as such term is defined in the Health Care Information System Software Agreement between Meditech and Lessee dated December 30, 2004 (hereinafter the "SSA"). 1. The intention of the parties hereto is that BALC or its assigns, having entered into the Leases with the Lessee to finance the full license fees and other amounts payable to Meditech under the SSA for perpetual licenses for the Licensed Software, and having paid such fees to Meditech, should be and will be furnished with every opportunity to recover the amounts so financed and paid, without competition from Meditech. Such opportunity shall include the right to transfer rights of use in the Licensed Software and certain other rights and benefits under the SSA to third parties only in the circumstances more fully described below. 2. If BALC or its assigns become aware that the whole or any portion of Lessee's business enterprise or assets which uses or involves the use of the Licensed Software, has been or may be transferred to any third party (hereinafter a "Successor Party") for any reason, including but not limited to any bankruptcy proceeding or plan of reorganization in bankruptcy, agreement, or judicial proceeding, Meditech will upon a written request from BALC or its assigns to do so, agree, free of any charge payable to Meditech, to issue to the Successor Party a perpetual license to use such Licensed Software upon terms no less favorable to the Successor Party than were granted to Lessee under the SSA, or will consent to the transfer to the Successor Party of the perpetual licenses granted to Lessee under the SSA and all other rights and benefits under the SSA, subject, however, to payment by Successor Party to BALC or its assigns, in cash or upon agreed extended payment terms, of such principal amount as may be agreed between BALC or its assigns and Successor Party; provided that such principal amount shall not exceed the net book value of the Lease as reflected in the books of account of BALC or, if BALC has assigned its rights under the Lease to a third-party, in the books of such third-party. Extended payment terms may include the assumption by Successor Party of Lessee's remaining obligations with respect to the payment of amounts due under the Lease or Leases, or some other amount agreed to by BALC. Meditech undertakes to cooperate in good faith with BALC or its assigns to facilitate the granting or transfer of perpetual licenses, and will refrain from any acts or omissions, direct or indirect, which might interfere with BALC's or its assign's ability to achieve the purposes of this letter agreement. The term "Successor Party" shall for the purposes of this letter agreement include the Lessee in bankruptcy (as debtor in possession or otherwise), Lessee's trustee or other representative in bankruptcy, and Lessee upon discharge from bankruptcy. - 58 - 3. If BALC elects to exercise its rights under a Lease to demand that Lessee promptly discontinue its use of the Licensed Software after termination of a Lease and destroy all tangible and intangible items constituting such Licensed Software, Meditech shall comply with the provisions of paragraph 5 below as if the Lessee was a Successor Party. 4. The right to receive the balance of any prepaid support services originally financed under the Lease, shall, to the extent not yet performed by Meditech, also be transferred to the Successor Party. If the successor party wishes to renew or upgrade such software support services, the Successor Party may contact Meditech directly for such upgrades or renewals. 5. Without limiting the generality of the foregoing, for so long as BALC or its assigns have not yet recovered the whole of the net book value of the Leases, Meditech shall not directly or indirectly enter into negotiations or participate in communications with any party or category of parties which BALC in good faith believes is an actual or potential Successor Party, and has identified in a written notice addressed to Meditech, concerning any proposal, arrangement, or contract, involving the granting of a license, perpetual or otherwise, to a Successor Party, to use the Licensed Software or any software performing functions substantially similar to those hitherto performed by the Licensed Software for the Lessee, except in furtherance of the objectives set forth in this letter agreement for the benefit of BALC or its assigns. BALC shall inform Meditech in writing when it has completed recovery of the whole of the net book value of the Leases. 6. To the extent contemplated by, and subject to the provisions of, this letter agreement, the licenses granted in terms of the SSA with respect to the Licensed Software, and the rights and benefits of Lessee thereunder, shall be deemed transferable, but only to the extent provided for in the SSA. 7. Meditech hereby consents to the Lessee granting to BALC a security interest in all Lessee's rights in the Licensed Software and the licenses thereto. Please execute both originals of this letter agreement in the space provided below, and return one original to us, retaining the other for your records. Very truly yours, P. Wesley Yount, III Principal Agreed and Confirmed: Lawrence A. Polimeno for Medical Information Technology, Inc. Acknowledged and Confirmed: for PHC, Inc. - 59 - -----END PRIVACY-ENHANCED MESSAGE-----