Exhibit 10.31
SECURED PROMISSORY NOTE
$500,000.00 April 30, 2004
Note B Phoenix, Arizona
FOR VALUE RECEIVED, PHC, Inc., a Massachusetts corporation ("PHC") agrees
and promises to pay to the order of Louis C. Kirby ("Kirby"), Carol A. Colombo
("Colombo") and Anthony A. Bonacci ("Bonacci"), or their heirs, successors and
assigns (Kirby, Colombo and Bonacci may be collectively referred to herein as
"Lenders" or individually as a "Lender"), the principal sum of $500,000 with
interest accruing on a daily basis on the unpaid principal balance from time to
time outstanding from the date hereof at the rate of six percent (6%) per annum,
compounded annually (the "Note Rate"), interest to be calculated on a 360-day
year, both principal and interest being payable to Lender at Lenders' respective
accounts at 1st National Bank of Arizona, 7150 East Camelback Road, Ste. 275,
Scottsdale, AZ 85251, Attention: Mr. Joe Botero, or at such other address as
Lender may designate by notice from time to time, without presentment for
payment, diligence, grace, exhibition of this Note, protest, or special notice
of any kind, all of which are hereby expressly waived. For purposes of this
Note, PHC shall be referred to as "Debtor." The unpaid balance of this Note at
any time shall be the then current Remaining Note Principal (as defined herein),
plus interest accrued thereon and costs, expenses and fees chargeable hereunder,
which balance may be endorsed hereon from time to time by the holder hereof. The
term of this Note will be five (5) years, commencing on the date of execution of
this Note. All payments due under this Note will be paid by Debtor to each
Lender pro-rata, calculated by multiplying the applicable payment amount by each
Lender's Percentage Interest.
1. Definitions.
1.1 Generally. All capitalized terms not defined herein shall have the
meanings set forth in that certain Membership Purchase Agreement (the
"Purchase Agreement") between PHC, Pivotal Research Centers, L.L.C.
("Pivotal"), and Lenders of even date herewith.
1.2 "EBITDA" for any applicable period means the earnings of the Pivotal
Business before interest, taxes, depreciation or amortization, determined
in accordance with GAAP. For purposes of determining the EBITDA of the
Pivotal Business, all costs attributable to the Non-Pivotal Business shall
not be included regardless where such cost is incurred.
1.3 "Adjusted EBITDA" means an amount equal to the sum (without
duplication) of (i) all bonuses paid to employees of Pivotal (including but
not limited to Michael J. Colombo and Louis C. Kirby), plus (ii) the EBITDA
generated by the Pivotal Business during the applicable Note Adjustment
Period, plus (iii) the sum of all principal and interest payments, if any,
made by the Pivotal Business to repay any portion of the Acquisition
Financing, the Line of Credit, and the Notes, plus (iv) any corporate level
overhead charges assessed against the Pivotal Business by PHC in violation
of the provisions of Section 3.10 of the Purchase Agreement.
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1.4 "Base Amount" means $780,000 (U.S.).
1.5 "Note Adjustment Amount" means an amount equal to the Adjusted EBITDA
of the Pivotal Business at the conclusion of the applicable Note Adjustment
Period minus the Base Amount, provided however, that if the Note Adjustment
Amount is a negative number, then the procedures set forth in Section
2.4.1(c), as applicable, of this Note shall be applied to determine the
Note Adjustment Amount.
1.6 "Note Adjusted Interest" means, in the case of any Determination Date
where a Note Adjustment Amount is a negative number, the lesser amount of
Interest that would have otherwise been due and payable under this Note
during the applicable Note Adjustment Period if the Principal was reduced
by an amount equal to the Note Adjustment Amount. In the case of any
Determination Date where a Note Adjustment Amount is a positive number,
"Note Adjusted Interest" means the greater amount of Interest that would
have otherwise been due and payable under this Note during the applicable
Note Adjustment Period if the Principal was increased by an amount equal to
the Note Adjustment Amount.
1.7 "Note Adjustment Period" means the period commencing on January 1, 2006
and ending on December 31, 2006.
1.8 "Note Interest Adjustment Amount" means (a) in the case the Note
Adjusted Interest for the Note Adjustment Period is a positive number, an
amount equal to the net interest payments made by Debtor to Sellers
pursuant to this Note during the Note Adjustment Period, plus the Note
Adjusted Interest, or (b) in the case the Note Adjusted Interest for the
Note Adjustment Period is a negative number, an amount equal to the net
interest payments made by Debtor to Sellers pursuant to this Note during
the applicable Note Adjustment Period, minus the Note Adjusted Interest.
1.9 "Remaining Note Principal" means, on a given date, an amount equal to
the principal of this Note minus any principal payments made by Debtor to
Sellers pursuant to this Note prior to such date, plus any Note Adjustment
Amounts and Note Interest Adjustment Amounts determined pursuant to
Sections 1.7 and 1.8 hereof prior to such date.
2. Payments. Debtor shall make payments under this Note as follows:
2.1 Interest Accrual. Interest shall begin to accrue on the principal
balance of this Note from the date of execution of this Note. All interest
that accrues from the date of execution of this Note until December 31,
2006 shall be added to the then outstanding principal balance of this Note
on the date the Quarterly Installment (as defined below) would otherwise
have been due, as set forth below.
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2.2 Quarterly Installments of Principal and Interest. Commencing on January
1, 2007 and on the first day of each quarterly period thereafter (March,
June, September, December) through and including December 1, 2008, Debtor
shall make quarterly installment payments of principal and interest to
Lender with such installments based on the Remaining Note Principal
outstanding at the beginning of such quarter amortized in quarterly
installments over the remaining term (the "Quarterly Installments"). The
annual principal adjustments described in Section 1.5 of this Note shall
adjust the principal balance of this Note, if at all, on February 1 of the
year in which such adjustment occurs.
2.3 Maturity. Anything in this Note to the contrary notwithstanding, absent
earlier acceleration upon an Event of Default, all then outstanding
principal and accrued and unpaid interest and all other amounts due under
this Note shall be due and payable to Lender in full on December 31, 2008
(the "Maturity Date").
2.4 One Annual Principal Adjustment. The principal balance of this Note
shall be adjusted on February 1, 2006 (the "Determination Date") in the
manner described below. Debtor shall be responsible for calculating the
Note Adjustment Amount for the Note Adjustment Period, all of which
calculations shall be made in good faith, in accordance with the
requirements set forth in this Note, and utilizing commercially reasonable
standards of care. Debtor shall provide Lenders with written notice of its
findings and reasonable financial support for its calculations on or before
the applicable Determination Date.
2.4.1 Adjustment:
(a) Positive Adjustment. If the Pivotal Business for the Note
Adjustment Period generates a positive Note Adjustment Amount,
the Remaining Note Principal shall be increased in an amount
equal to the Note Adjustment Amount plus an amount equal to the
Note Interest Adjustment Amount, and Debtor shall make all
payments under this Note subsequent to Determination Date in
accordance with such adjusted Remaining Note Principal. So for
example, if the Adjusted EBITDA for Note Adjustment Period equals
$850,000, then the Remaining Note Principal shall be increased by
$70,000 ($850,000 - $780,000 = $70,000).
(b) Negative Adjustment. If the Pivotal Business generates an
Adjusted EBITDA of less than the Base Amount during the Note
Adjustment Period, then, subject to the provisions of Section
2.4.1(c) below, the Remaining Note Principal shall be decreased
by an amount equal to the Note Adjustment Amount minus an amount
equal to the Note Interest Adjustment Amount, and Debtor shall
make all payments under this Note subsequent to Determination
Date in accordance with such adjusted Remaining Note Principal.
So for example, if the Adjusted EBITDA for Note Adjustment Period
equals $700,000, then the Remaining Note Principal shall be
decreased by $80,000 ($700,000 - $780,000 = ($80,000)).
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(c) Adjustment Review. If, in the case of a Note Adjustment
Amount to which Section 2.4.1(b) applies, such Note Adjustment
Amount is equal to or greater than $50,000, then the CEO of the
Pivotal Business shall meet with the CEO of PHC and, in good
faith, determine the amount of salary related expenses borne by
the Pivotal Business that reasonably could have been allocated to
activities other than the Pivotal Business (e.g., a percentage of
the salaries of employees that were spending a portion of their
time supporting the development of Debtor's other clinical
research sites and operations) (hereinafter referred to as the
"Estimated Allocation") and the principal balance of the Note
shall be reduced by an amount equal to the Base Amount minus the
Adjusted EBITDA plus the Estimated Allocation, if any.
Notwithstanding anything herein to the contrary, if after the
Estimated Allocation is added to the Adjusted EBITDA the result
is that there exists an overage that under normal circumstances
would result in a positive adjustment to the face value of this
Note, then the principal balance of this Note will not be
adjusted and no overage adjustment will be made except to satisfy
any shortfalls in any prior or any future years. Notwithstanding
anything in this Note to the contrary, if the Pivotal Business
generates an Adjusted EBITDA of less than the Base Amount during
the above referenced period, and if Debtor has increased the
salary or salaries of any employees of the Pivotal Business by an
amount that exceeds the standard salary increase, then the
Adjusted EBITDA for such period shall be increased by an amount
equal to the salary increases actually granted by Debtor to the
employees of the Pivotal Business minus standard salary increase.
2.4.2 "Freeze" of Remaining Principal. In the event (i) Debtor
breaches its obligation to maintain the Line of Credit as set forth in
Section 3.5 of the Purchase Agreement, (ii) Debtor terminates an
Executive without Cause, as defined in the applicable Employment
Agreement, or (iii) an Executive terminates his employment with Debtor
for Good Reason, as defined in the applicable Employment Agreement,
then, in such event, the Remaining Principal shall, at Lender's
option, no longer be subject to adjustment pursuant to this Section
2.4 (a "freeze") provided that Lender provides to Debtor written
notice, within thirty (30) days of the first to occur of items (i),
(ii) or (iii) above, of the Lender's desire to freeze the Remaining
Principal (the "Election Term"). If an election is made under this
Section 2.4.2 to freeze the Remaining Principal, then the date upon
which such Remaining Principal shall be deemed to have been frozen on
the first to occur of items (i), (ii) or (iii) above. Notwithstanding
the foregoing, Lender shall not be entitled to accelerate payment
under this Note based solely on the occurrence of items (ii) or (iii)
above.
2.4.3 Adjustments to Reflect Actual Collections. If the actual cash
collections of the Pivotal Business during the Note Adjustment Period
shall be less than the EBITDA of the Pivotal Business utilized for
purposes of determining principal adjustments under this Note for the
Note Adjustment Period, then Adjusted EBITDA for the next year's
earn-out calculation will be reduced by an amount equal to the
shortfall.
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3. Application. All payments received by Lender under this Note shall be applied
as follows: (a) first, to any amounts due under this Note, other than interest
and principal accrued or outstanding under this Note; (b) second, to accrued and
unpaid interest under this Note; and (c) third, to the outstanding principal
balance of this Note.
4. Prepayment. Debtor may prepay the principal balance of this Note in whole or
in part at any time.
5. Related Documents. The transaction evidenced by this Note is also evidenced
and secured by: (a) the Security Agreement; (b) the Financing Statements; and
(c) the Pledge Agreement.
6. Additional Indebtedness. Debtor shall not incur any material indebtedness
related to the Pivotal Business except the indebtedness resulting from the
Acquisition Financing or the Line of Credit.
7. Compliance with Covenants. Debtor will provide the Line of Credit to the
Pivotal Business in the manner described in the Purchase Agreement. Debtor's
breach of that obligation under the Purchase Agreement, and Debtor's failure to
cure such breach within the Cure Period specified in the Purchase Agreement,
shall be deemed an Event of Default under the terms of this Note.
8. Prohibition on PHC's Corporate Overhead Charges. PHC will not impose any
corporate level overhead charges or expenses upon the Pivotal Business as
provided in Section 3.10 of the Purchase Agreement. If, for any reason, the
Pivotal Business pays any PHC corporate level overhead charge on the Pivotal
Business in violation of Section 3.10 of the Purchase Agreement, then
notwithstanding anything to the contrary in this Note, the Adjusted EBITDA for
the period during which such charges are paid shall be increased by an amount
equal to the corporate level overhead charges paid by the Pivotal Business as
determined in accordance with the Purchase Agreement.
9. Default.
9.1 Events of Default. The existence of any one or more of the following
shall constitute an "Event of Default" under this Note:
9.1.1 Non-Payment. Debtor's failure to make any payment to Lender
under this or any of the other Notes, including, without limitation,
any Quarterly Installment or Annual Installment, as applicable, on or
before the date such payment is due; or
9.1.2 Non-Performance. Debtor's failure to comply timely and fully
with (i) any other provision of this Note or any of the other Notes
(other than those described in Section 9.1.1 above) within ten (10)
calendar days after Lender's delivery of written notice of
non-performance, or, with respect to Section 9 of this Note, within
the cure period specified in the Purchase Agreement.
9.1.4 Bankruptcy; Insolvency. (a) Debtor making a general assignment
for the benefit of creditors; (b) the filing by Debtor of a voluntary
petition or application for a custodian, as defined by the United
States Bankruptcy Code, or for the appointment of a receiver; (c) the
filing against Debtor of an involuntary petition or case under any
state insolvency law of the United States Bankruptcy Code, including,
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without limitation, for the appointment of a receiver, and the
petition or case remains pending for more than 60 days or the court in
which such petition or case is pending approves it or Debtor is
adjudicated a bankrupt or becomes a debtor or debtor in possession in
any such proceeding; or (d) the commencement, under any law relating
to bankruptcy, insolvency, reorganization or relief of debtors, of
proceedings for the relief of Debtor or for the composition, or
arrangement of a substantial portion of the obligations of Debtor or
affecting the property of Debtor.
9.1.5 Assignment; Change in Control. Debtor shall not assign this Note
or its obligations hereunder without the prior written consent of
Lender except in conjunction with a transaction described in
Section10.10 of the Purchase Agreement.
9.2 Default Interest. Upon the occurrence and continuance of an Event of
Default, at the option of Lender without notice to Debtor, all amounts then
unpaid under this Note and the Transaction Documents shall bear default
interest at the rate of 15% per annum (the "Default Interest Rate")
commencing on the initial due date of the failed payment or performance
constituting the Event of Default. Interest at the Default Interest Rate
shall continue for so long as the Event of Default shall remain uncured and
shall be payable monthly on the same day that the Quarterly Installments
are due under Section 2.2, or at the Maturity Date, including any maturity
as the result of the acceleration of this Note.
9.3 Acceleration. In addition to all other rights and remedies Lender may
have if an Event of Default shall occur and (i) shall not have been cured
within the applicable cure period or, (ii) if no cure period, shall
continue for a period of 10 calendar days, Lender, at its option without
further notice to Debtor, may declare immediately due and payable the
Remaining Note Principal and interest accrued thereon together with all
other sums owed by Debtor under this Note and any other Notes. Lender shall
not be entitled to exercise its right to accelerate payment of this Note,
as provided in this Section 9.3, during any period when Kirby or Michael J.
Colombo are not in compliance with their obligations under Section 3 of the
applicable Employment Agreement, or Kirby, Colombo and Bonacci are not in
compliance with their obligations under Article IV of the Purchase
Agreement.
10. Remedies Cumulative. The remedies provided in this Note and the other Notes
shall be cumulative and concurrent and may be pursued singly, successively or
together, at the sole discretion of affected party, and may be exercised as
often as occasion therefore shall occur. The exercise or the failure to exercise
any such right or remedy shall in no event be construed as a waiver or release
thereof.
11. Enforcement Costs. If Lender brings suit on any of the Notes or employs an
attorney or incurs expenses to interpret or enforce this Note or otherwise to
compel payment of any amounts due under this Note or to defend the priority of
any of the collateral evidenced by the Pledge Agreement or the Security
Agreement, or to preserve and enforce its rights in connection with any
bankruptcy or other proceeding, Debtor shall pay all reasonable attorneys' fees,
costs and expenses actually incurred by Lender as a result thereof.. Lender
shall be entitled to enforce this Note in any court of competent jurisdiction
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and shall not be bound by the arbitration provisions set forth in the Purchase
Agreement.
12. Maximum Rate of Interest. The undersigned acknowledges that the undersigned
has agreed to the rate of interest represented by the Note Rate and the Default
Interest Rate (as applicable). Any provision in this Note to the contrary
notwithstanding, the total liability for payments of interest and payments in
the nature of interest, including, without limitation, all charges, fees or any
sums that may at any time be deemed to be interest by a court of competent
jurisdiction, shall not exceed the amount Lender may lawfully collect. If the
total liability for payments of interest and payments in the nature of interest,
including, without limitation, all charges, fees or other sums that may at any
time be deemed to be interest, shall, for any reason whatsoever, result in an
effective rate of interest that for any month or other interest payment period
exceeds the amount Lender may lawfully collect, all sums in excess of those
lawfully collectible as interest for the period in question automatically shall,
without further notice to Debtor, be applied as a reduction of the then
outstanding principal balance of this Note or any other amounts due under this
Note (other than interest) immediately upon receipt of such sums by Lender, with
the same force and effect as if Debtor had specifically designated such excess
sums to be so applied to the reduction of such principal balance or such other
amounts due; provided, however, that Lender may elect, at any time and from time
to time by notice in writing to Debtor, to waive, reduce or limit the collection
of any sums (or to refund to Debtor any sums collected) in excess of those
lawfully collectible as interest rather than accept such sums on prepayment of
the principal balance of this Note or as payment of such other amounts.
13. Notices. All notices or other communications hereunder shall be made in
accordance with Section 10.6 of the Purchase Agreement.
14. Waiver of Notice. Debtor hereby waives diligence, grace, demand, presentment
for payment, protest, notice of protest, notice of dishonor, notice of demand,
notice of nonpayment, exercise of any option hereunder, any homestead or
exemption rights and any release or discharge arising from any extension or
extensions of time of payment of this Note any other cause of release or
discharge arising from any extension or extension of time of payment of this
Note, or any other cause of release or discharge other than actual payment in
full hereof.
15. No Waiver by Lender. Lender shall not be deemed, by an act of omission or
commission, to have waived any of its rights or remedies under this Note unless
such waiver is in writing and signed by Lender, and then only to the extent
specifically set forth in such writing. The acceptance by Lender of any payment
hereunder that is less than payment in full of all amounts due and payable at
the time of such payment shall not constitute a waiver of the right to exercise
any of Lender's remedies under this Note at that time or at any subsequent time
or nullify any prior exercise of any such remedies without the express written
consent of Lender, except as and to the extent otherwise provided by law. A
waiver with reference to one event shall not be construed as continuing or as a
bar to or waiver of any right or remedy as to a subsequent event.
16. Transfer by Lender. The term "Lender," as used in this Note, as far as
covenants or obligations on the part of Lender are concerned, shall include
Lender, and any heirs, successors, assigns or future holders. Except as
otherwise provided herein or in the Purchase Agreement, Lender may transfer all
or part of its interest in this Note or any of the other Transaction Documents
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without the consent of Debtor and such act or subsequent act shall not be deemed
in violation on Lender's part of any of the terms and conditions of this Note or
the other Transaction Documents. Upon any transfer by Lender, at Lender's
option, Lender may surrender this Note to Debtor for issuance to transferee of a
new instrument in replacement of this Note. In the event of any surrender of
this Note to Debtor for reissuance or replacement as provided in the immediately
preceding sentence, Debtor shall, contemporaneously with such surrender, reissue
the Note acknowledging the transferee as the new "Lender" hereunder or, if
requested by Lender, execute and deliver to the transferee a replacement Note
identical to this Note except identifying the transferee as the Lender
hereunder, and Debtor's failure to do so shall be an Event of Default under this
Note.
17. Severability. If any term or provision of this Note shall, to any extent, be
determined by a court of competent jurisdiction to be invalid or unenforceable,
the remainder of this Note shall not be affected thereby, but such term or
provision shall be reduced or otherwise modified by such court or authority only
to the minimum extent necessary to make it valid and enforceable, and each term
and provision of this Note shall be valid and enforceable to the fullest extent
permitted by law. If any term or provision cannot be reduced or modified to make
it reasonable and permit its enforcement, it shall be severed from this Note and
the remaining terms shall be interpreted in such a way as to give maximum
validity and enforceability to this Note. It is the intention of the parties
hereto that if any provision of this Note is capable of two constructions, one
of which would render the provision void and the other of which would render the
provision valid, then the provision shall have the meaning which renders it
valid.
18. Acknowledgments. Debtor acknowledges that, except as otherwise provided in
Section 10.1 of the Purchase Agreement: (a) with respect to the amounts payable
to Lender under this Note, that Debtor has no offset, defense or counterclaim
with respect thereto, no claim against Lender or with respect to any document
forming part of the transaction in respect of which this Note was made or
forming part of any other transaction under which the undersigned is indebted to
Lender; and (b) all interest imposed under this Note through the date hereof,
and all fees and other charges that have been collected from or imposed with
respect to this Note were and are agreed to, and were properly computed from or
imposed with respect to this Note were and are agreed to, and were properly
computed and collected.
19. Headings and Captions. The headings and captions in this Note are for
convenience of reference only and shall in no way alter or modify the terms of
this Note.
20. Governing Law. This Note and the Transaction Documents shall be governed by,
and construed and enforced in accordance with, the laws of the State of Arizona
except for conflict of Law principles in the event of a conflict between the
defined terms of this Note and those of the Purchase Agreement, in which case
Delaware Law shall govern the interpretation of the defined term.
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21. Time of Essence. Time is of the essence of this Note.
PHC, Inc.
A Massachusetts corporation
By: /s/ Bruce A. Shear
_________________________________
Bruce Shear, President
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STATE OF MASSACHUSETTS)
) ss.
County of Essex )
On this ____ day of February, 2004, before me, the undersigned officer,
personally appeared Bruce Shear, who acknowledged himself to be President of
PHC, Inc., a Massachusetts corporation and that he, in such capacity, being
authorized so to do, executed the foregoing instrument for the purposes therein
contained by signing the name of the company by himself.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Janet Esterkes
Notary Public
My Commission Expires:
March 12, 2010
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