Membership Purchase Agreement

MEMBERSHIP PURCHASE AGREEMENT


BETWEEN


PHC, INC.


AND


PIVOTAL RESEARCH CENTERS, LLC


AND ITS SELLERS


LOUIS C. KIRBY, CAROL A. COLOMBO, AND ANTHONY A. BONACCI


Dated April 30, 2004


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TABLE OF CONTENTS
Page


ARTICLE I DEFINITIONS.....................................................8


1.1 Certain Defined Terms...........................................8
1.2 Other Defined Terms............................................16
1.3 Construction...................................................17


ARTICLE II THE TRANSACTION................................................18


2.1 Purchase and Sale..............................................18
2.2 Prior to Closing...............................................18
2.3 Purchase Price.................................................19
2.4 Purchase Price Adjustment......................................19
2.5 Allocations of Purchase Price..................................20
2.6 Closing........................................................20


ARTICLE III COVENANTS OF BUYER.............................................20


3.1 Collection of Accounts Receivable of Buyer.....................20
3.2 Public Registration of Closing Stock...........................20
3.3 Security for Payment of Notes..................................21
3.4 Buyer's Working Capital Commitment.............................21
3.5 Buyer's Working Capital Commitment.............................21
3.6 Kirby Guaranty Leasehold Agreements............................21
3.7 Compliance with Pharmaceutical Contracts.......................22
3.8 Continuing Legal Status of Pivotal.............................22
3.9 Compliance with Leasehold Agreements...........................22
3.10 No Corporate Overhead Charges..................................22
3.11 Prohibition on Assignments, Transfers..........................22
3.12 Prohibition on Material Indebtedness...........................23


ARTICLE IV COVENANTS OF SEller.............................................23


4.1 Covenant Not to Compete or Interfere With Business.............23
4.2 Termination of Covenant........................................24


ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLERS......................24


5.1 Pivotal Organization...........................................24
5.2 Power and Authority............................................24
5.3 Capitalization.................................................25
5.4 Subsidiaries...................................................25
5.5 No Conflict....................................................25
5.6 Licenses.......................................................25
5.7 Contracts......................................................26
5.8 Equipment and Other Property...................................27
5.9 Real Property..................................................27
5.10 Intellectual Property Rights...................................28
5.11 Employee Benefit Matters.......................................28
5.12 Labor Matters..................................................30
5.13 Tax Matters....................................................30
5.14 Environmental Matters..........................................32
5.15 Insurance......................................................33
5.16 Customers, Distributors and Suppliers..........................33
5.17 Affiliate Transactions.........................................33
5.18 Liability......................................................33
5.19 Full Disclosure................................................34
5.20 Financial Statements...........................................34
5.21 No Changes.....................................................34
5.22 Contracts......................................................36
5.23 Litigation and Legal Proceedings...............................36
5.24 Approvals; Consents............................................36
5.25 Compliance with Law............................................37
5.26 Title to Transferred Interest..................................37
5.27 Finders........................................................37
5.28 Securities Disclosure..........................................37
5.30 Disclosure.....................................................37


-- 21 -- ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER......................37


6.1 Organization.................................................37
6.2 Power and Authority..........................................38
6.3 Authorized Closing Stock.....................................38
6.4 Finders......................................................38
6.5 Approvals; Consents..........................................38
6.6 Compliance with Other Instruments; Law.......................38
6.7 Investment Representations...................................38
6.8 SEC Filings..................................................39


ARTICLE VII CONDITIONS TO CLOSING........................................39


7.1 Conditions to Obligations of the Sellers.....................39
7.2 Conditions to Obligations of the Buyer.......................40
7.3 Concurrent Conditions........................................40


ARTICLE VIII SURVIVAL AND INDEMNIFICATION.................................41


8.1 Survival.....................................................41
8.2 Indemnification..............................................41
8.3 Limitation of Liability and Termination of Indemnification...42
8.4 Adjustment of Purchase Price.................................43
8.5 Claims Resulting from Breach of Representation or Warranty...43
8.6 Mitigation...................................................43


ARTICLE IX TAX COVENANTS AND RELATED MATTERS............................43


9.1 Returns......................................................43
9.2 Cooperation..................................................43
9.3 Allocation of Taxes..........................................43


ARTICLE X MISCELLANEOUS................................................43


10.1 Right of Set-Off.............................................43
10.2 Breach or Failure to Perform.................................44
10.3 Entire Agreement; No Third-Party Beneficiaries...............44
10.4 Public Announcement..........................................44
10.5 Expenses.....................................................44
10.6 Notices......................................................44
10.7 Waivers and Amendments.......................................45
10.8 Governing Law; Severability..................................45
10.9 Headings.....................................................45
10.10 Assignment...................................................45
10.11 Binding Effect...............................................45
10.12 Arbitration of Disputes......................................46
10.13 Counterparts.................................................46
10.14 Termination of Certain Agreements............................46


-- 22 -- EXHIBITS


EXHIBIT Recital B - Seller's Membership Interests EXHIBIT 1.1A - Colombo Employment Agreement EXHIBIT 1.1B - Kirby Employment Agreement EXHIBIT 1.1C - Pivotal LLC Agreement EXHIBIT 2.2(a) - Closing Certificate EXHIBIT 2.3(d)(i) - Note A EXHIBIT 2.3(d)(ii) - Note B EXHIBIT 2.3(d)(iii) - Note C EXHIBIT 2.4(b) - PTO Policy EXHIBIT 2.6(b) - Assignment Agreement EXHIBIT 3.11 - Form of Guaranty EXHIBIT 7.1(b) - Buyer's Opinion of Counsel EXHIBIT 7.1(h) - Pledge Agreement EXHIBIT 7.1(i) - Security Agreement EXHIBIT 7.1(j) - Financing Statement EXHIBIT 7.2(b) - Sellers' Opinion of Counsel


SCHEDULES


SCHEDULE 1.1A - Key Employee SCHEDULE 2.2(a) - Reserve Account SCHEDULE 2.5 - Fixed Assets SCHEDULE 3.6 - Kirby Guaranty Leasehold Agreement SCHEDULE 3.9 - Leasehold Agreements SCHEDULE 3.10 - Charges for Legal and Accounting Expenses SCHEDULE 5.20(c) - Encumbrances on Accounts and Notes Receivables
(Interim Financial Statements) SCHEDULE 5.21(b) - Changes to Employee Compensation and Benefits SCHEDULE 5.21(c) - Encumbrances on Assets SCHEDULE 5.22 - Pharmaceutical Contracts SCHEDULE 5.28 - Securities Disclosures SCHEDULE 6.6 - Defaults or Violation Resulting from
Transaction Documents


DISCLOSURE SCHEDULE Section 2.1 - Membership Interests Section 2.2(b) - Bank Accounts Section 2.2(c) - Accounts Receivable Section 5.3 - Members of Pivotal Section 5.5 - Conflicts Section 5.6 - Licenses Section 5.7 - Material Contracts Section 5.8 - Equipment Section 5.9(a) - Leased Real Property Section 5.9(b) - Improvements Not in Good Condition Section 5.9(c) - Insufficient Utilities and Services on Leased
Real Property Section 5.10 - Intellectual Property Section 5.11(a) - Employee Plans Section 5.11(c)(iv) - Termination for Cause Section 5.12 - Labor Agreements Section 5.13 - Taxes Section 5.14 - Environmental Matters Section 5.15(a) - Insurance Policies Section 5.15(b) - Invalid Insurance Policies Section 5.15(c) - Cancelled Pharmaceutical Companies and
Suppliers Section 5.17 - Affiliate Insurance Policies


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Section 5.16 - 10 Largest Customer Transactions Section 5.16 - 10 Largest Customer Transactions Section 5.16 - 10 Largest Customer Transactions Section 5.20(a) - Financial Statements Section 5.20(b) - GAAP Liabilities Section 5.22 - Pharmaceutical Contract Violations Section 5.23 - Litigation Section 5.24 - Consents and Approvals Section 5.25 - Non-Compliance with Laws Section 5.29 - Pre-Closing Conditions Section 6.7 - Investment Representations


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MEMBERSHIP PURCHASE AGREEMENT


February ___, 2003


The parties to this Membership Purchase Agreement (the "Agreement") are PHC, Inc., a Massachusetts corporation ("PHC" or "Buyer"), Pivotal Research Centers, L.L.C., an Arizona limited liability company ("Pivotal"), Louis C. Kirby ("Kirby"), Anthony A. Bonacci ("Bonacci"), and Carol A. Colombo ("Colombo") (Kirby, Bonacci and Colombo may be collectively referred to herein as the "Sellers" and Kirby and Michael J. Colombo may be collectively referred to herein as the "Executives" or individually, as the case may be, as an "Executive").


RECITALS


A. WHEREAS, Pivotal is in the business of providing clinical research
services to Pharmaceutical Companies (as defined below) and their
designated contract research organizations. Pivotal's offices and
research facilities are located at 13128 N. 94th Drive, Suite 200,
Peoria, Arizona (the "Peoria Location"), and 1220 S. Alma School Road,
Suite 206, Mesa, Arizona; (the "Mesa Location," and together with the
Peoria Location, and any Successor Location (as defined below) the
"Locations");


B. WHEREAS, as of the date hereof, each of the Sellers is a Member of
Pivotal and owns of record and beneficially a Membership Interest in
Pivotal set forth next to such Seller's name on Exhibit Recital B
hereto;


C. WHEREAS, subject to such terms and conditions as are specified herein,
each of the Sellers desires to sell all of such Seller's Membership
Interest;


D. WHEREAS, neither party hereto would enter into this Agreement without
the Executives and the Buyer entering into the Employment Agreements
(defined below) and as such those agreements constitute material
inducements to all parties to enter into this Agreement; and


E. WHEREAS, subject to the terms and conditions as are specified herein
Buyer desires to purchase the Membership Interests.


AGREEMENT


Now, therefore, with reference to the foregoing recitals, all of which are incorporated herein by this reference, in consideration of the premises and of the mutual agreements and covenants hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:


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ARTICLE I


DEFINITIONS


1.1 Certain Defined Terms. As used in this Agreement, the following terms have the following meanings:


"Accredited Investor" means a natural person whose Net Worth, or joint Net Worth with such natural person's spouse, exceeds $1,000,000 as of the date of this Agreement.


"Act" means the Arizona limited liability company act.


"Action" means any claim, action, suit, arbitration or proceeding by or before any Governmental Authority or arbitrator.


"Acquisition Financing" means the financing obtained by Buyer to pay the Closing Cash Consideration of this Agreement.


"Affiliate" means, when used with respect to a specified Person, another Person that, either directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a specified Person.


"Assets" mean all of Pivotal's right, title and interest in and to all properties, assets and rights of any kind, whether tangible or intangible, real or personal, owned by Pivotal, or in which Pivotal has any interest whatsoever.


"Audited Financial Statements" means the audited balance sheet of Pivotal for the twelve month periods ending June 30, 2002 and June 30, 2003, and the related audited statements of income, cash flow and Members' capital for the twelve months ended June 30, 2002 and June 30, 2003, respectively, together with the notes thereto and the report of Pivotal's independent auditors thereon.


"Benefit Arrangement" means any employment, consulting, severance or other similar contract, arrangement or policy (written or oral) and each plan, arrangement, program, agreement or commitment (written or oral) providing for insurance coverage (including, without limitation, any self insurance arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health or accident benefits (including, without limitation, any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Internal Revenue Code providing for the same or other benefits) or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (i) is not a Welfare Plan, Pension Plan or Multi-employer Plan, (ii) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by Pivotal or any ERISA Affiliate or under which Pivotal or any ERISA Affiliate may incur any liability, and (ii) covers any employee or former employee of Pivotal or any ERISA Affiliate (with respect to their relationship with any such entity).


"Board of Directors" means the board of managers of Pivotal as constituted pursuant to the Pivotal LLC Agreement.


"Books and Records" means all books of account and other financial records pertaining to Pivotal.


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"Business Day" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in Washington, DC.


"Capitalized Lease Liabilities" means, without duplication, all monetary obligations of Pivotal under any leasing or similar arrangement which, in accordance with GAAP, would be classified as a capitalized lease, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty.


"Clinical Research Services" means clinical research services and clinical research operations including, but not limited to, any such activities conducted by any of Buyer, Pivotal, PPR or any Subsidiary or Affiliate of any of the foregoing.


"Closing Stock Price" means the lower of a number equal to the closing price of PHC Stock as reported by the NASDAQ Bulletin Board on the day (i) immediately preceding the Closing Date, or (ii) immediately preceding the Buyer's authorized release of a public statement describing the Buyer' acquisition of Pivotal.


"Colombo Employment Agreement" means the employment agreement between Pivotal and Michael J. Colombo in the form attached hereto as Exhibit 1.1A.


"Contract" means any agreement, contract, lease, note, loan, evidence of Liabilities, purchase order, letter of credit, franchise agreement, undertaking, covenant not to compete, employment agreement, license, instrument, obligation, commitment, purchase and sale order, quotation or other executory commitment, including, but not limited to, Pharmaceutical Contracts, to which Pivotal is a party or which related to Pivotal's businesses or any of its assets or properties, whether oral or written, express or implied, and which pursuant to its terms has not expired, terminated or been fully performed by the parties thereto.


"Disclosure Schedule" means the disclosure schedule attached hereto.


"Discounted Closing Stock Price" means the Closing Stock Price multiplied by .75.


"Employee Plans" means all Benefit Arrangements, Multi-employer Plans, Pension Plans and Welfare Plans.


"Employment Agreements" means the Colombo Employment Agreement and the Kirby Employment Agreement, collectively.


"Encumbrance" means any claim, lien, pledge, option, charge, easement, security interest, deed of trust, mortgage, right-of-way, encroachment, building or use restriction, encumbrance or other right of third parties, whether voluntarily incurred or arising by operation of law, and includes, without limitation, any agreement to give any of the foregoing in the future, and any contingent or conditional sale agreement or other title retention agreement or lease in the nature thereof.


"Equity Securities" of any Person means (i) shares of capital stock, limited liability company interests or other equity securities of such Person, including, with respect to Pivotal, the Membership Interests, (ii) subscriptions, calls, warrants, options or commitments of any kind or character relating to, or entitling any Person to purchase or otherwise acquire, any capital stock, limited liability company interests or other equity securities of such Person, (iii) securities convertible into or exercisable or exchangeable


-- 27 -- for shares of capital stock, limited liability company interests or other equity securities of such Person, and (iv) equity equivalents, interests in the ownership, or earnings of, or equity appreciation, phantom stock or other similar rights of, or with respect to, such Person.


"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.


"ERISA Affiliate" means any entity which is (or at any relevant time was) a member of a "controlled group of corporations" with, under "common control" with, or a member of a "affiliated service group" with, or otherwise required to be aggregated with, the company or any of its subsidiaries as set forth in Section 414(b), (c), (m) or (o) of the Internal Revenue Code.


"Facility" means any real property or facility owned, leased, operated or used at any time by Pivotal or any of their respective Affiliates or by a predecessor of Pivotal or any of such predecessor's respective Affiliates including, but not limited to, the Locations.


"Financing Statement" means a financing statement filed in accordance with the Uniform Commercial Code as enacted in the State of Arizona in the form attached hereto as Exhibit 7.1(j).


"Fixed Assets" has the meaning set forth in Section 2.5 and Schedule 2.5.


"GAAP" means United States generally accepted accounting principles in effect from time to time applied consistently throughout the period involved.


"Governmental Authority" means any government, any governmental entity, department, commission, board, agency or instrumentality, and any court, tribunal, or judicial or arbitral body, whether federal, state, local or foreign.


"Governmental Order" means any order, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.


"Handling of Substances" means the production, use, generation, storage, treatment, recycling, disposal, discharge, release or other handling or disposition of Substances.


"Improvements" means any buildings, facilities, other structures and improvements, building systems and fixtures located on or under any real property owned or leased by Pivotal.


"Intellectual Property Rights" means all (i) domestic and foreign registrations of trademarks, service marks, logos, corporate names, protected models, designs, created works, trade names or other trade rights of Pivotal, (ii) pending applications by for any such registrations, (iii) rights in or to patents, copyrights and pending applications therefore of Pivotal, (iv) of Pivotal's rights to other trademarks; service marks, logos, corporate names, protected models, designs, created works, trade names and other trade rights and all other trade secrets, designs, plans, specifications, technology, know-how, methods, designs, concepts and other proprietary rights, whether or not registered, (v) rights under any licenses of Pivotal to use any of the foregoing, (vi) standard operating procedures developed by Pivotal and existing prior to the Closing which constitute trade secrets, including, but not limited to, those standard operating procedures set forth in Pivotal's "Standard Operating Procedures Manual," and (vii) databases constituting proprietary information or trade secrets developed by Pivotal, including, but not limited to, Pivotal's patient database in existence as of the Closing..


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"Interim Financial Statements" means the unaudited financial statements of Pivotal as of July 30, 2003, August 30, 2003, September 30, 2003, October 30, 2003, November 30, 2003, and December 30, 2003 and the related unaudited statements of income, cash flows and Members' capital of Pivotal for the one month periods then ended.


"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended.


"IRS" means the United States Internal Revenue Service.


"Key Employee" means the Pivotal employees named in the attached Schedule 1.1A.


"Kirby Employment Agreement" means the employment between Pivotal and Kirby in the form attached hereto as Exhibit 1.1B.


"Law" means any federal, state, local or foreign statute, law, ordinance, regulation, rule, code, order or rule of common law.


"Liabilities" means (i) indebtedness of Pivotal for borrowed money to any Person, (ii) obligations of Pivotal evidenced by bonds, notes, debentures, or similar instruments, (iii) obligations of Pivotal under capitalized leases, (iv) obligations of Pivotal under conditional sale, title retention or similar agreements or arrangements creating an obligation of Pivotal with respect to the deferred purchase price of property (other than customary trade credit), (v) interest rate and currency obligation swaps, hedges or similar arrangements (other than interest rate caps, the cost of which have been paid in full prior to the date hereof) (vi) accrued benefits of Pivotal employees as of Closing including, but not limited to, accrued vacation, pre-paid benefits and expenses for which adequate provisions have not been made pursuant to the Reserve Account requirements set forth in Section 2.2(a) of this Agreement which shall not include PTO which is subject to the provisions of Section 2.4(b), and (vii) all obligations of Pivotal to guarantee any of the foregoing types of obligations on behalf of any Person other than Pivotal.


"Licenses" means all of the licenses, permits and other governmental authorizations required for the operation of the business of Pivotal and including, without limitation, any and all activities of Pivotal in connection with, related, or pertaining thereto.


"Line of Credit" means the line of credit financing provided by Buyer's lender to Pivotal in an amount not less than $1,000,000.


"Loan Document" means a document evidencing Acquisition Financing or the Line of Credit.


"Loss Contract" means any Contract for which Pivotal has accrued a loss on its financial statements or which Pivotal reasonably expects, based on Pivotal's knowl ...